Banks Get Tax Deductions for Paying Out Huge Bonuses to Execs

Banks Get Tax Deductions for Paying Out Huge Bonuses to Execs


By: Mark Karlin
Date: 2016-09-01

The Institute for Policy Studies in Washington, DC released a report yesterday that details how taxpayers are subsidizing banks and massive CEO bonuses. The 34-page "Executive Excess 2016: The Wall Street CEO Bonus Loophole" confirms that Wall Street financial firms and their executives make out like bandits at the expense of everyday taxpaying Americans:

The more U.S. corporations hand out in CEO bonuses, the less they pay in taxes. This is the result of a loophole that allows firms to write off unlimited amounts of executive pay from their federal taxes, as long as it is in the form of so-called "performance-based" compensation.

Wall Street banks [only temporarily] lost this lucrative CEO pay subsidy when they received taxpayer-funded bailouts in the wake of the 2008 crash, but only until they repaid the funds. Many of them rushed to do so, borrowing in the private market in order to escape this and other public bailout-related pay controls. While homeowners and shareholders were still suffering, the banks were free once again to dole out massive bonuses and write off the entire cost, leaving ordinary taxpayers to make up the difference....

After getting out from under the bailout limits on deducting executive pay, the top 20 U.S. banks paid out more than $2 billion in fully deductible performance bonuses to their top five executives between 2012 and 2015. At a 35 percent corporate tax rate, this translates into a taxpayer subsidy worth more than $725 million, or $1.7 million per executive per year. That $725 million could’ve covered the cost of hiring 9,000 elementary school teachers or creating 13,000 infrastructure jobs for a year.

"Taxpayers should not have to subsidize excessive CEO bonuses at any corporation," lead report author Sarah Anderson, director of the institute's Global Economy Project, noted in an email announcing the findings. "But such subsidies are particularly troubling when they prop up a pay system that encourages the reckless behavior which caused one devastating national crisis -- and could cause more in the future."

The advocacy organization Take On Wall Street, a project of the Communication Workers of America, urges an end to tax exemptions for bank CEOs' "performance-based" bonuses:

While companies squeeze every penny they can get out of workers’ pay, a few top executives receive massive bonuses. What’s worse, if these massive bonuses are linked to "performance," corporations can deduct the massive payments as an expense on their federal taxes. This loophole encourages inflated payments, usually in stock shares, and increases the CEO-to-worker pay gap.

Take On Wall Street also cites three key reasons that the tax-deductible bonuses should be eliminated:

  1. CEOs push for risky policies that drive up short-term profits in order to get a bigger This drive for immediate profit led Wall Street banks to make huge financial gambles, contributing to the massive crisis in 2008.

  2. By eliminating the tax deductibility of multimillion-dollar "performance bonuses" paid to corporate CEOs, we can take a major step towards encouraging more modest executive pay.

  3. Closing the loophole can raise real money—estimated at as much as $50 billion over the next decade that could allow all students to refinance their student loans, helping end the cycle of student debt.

The first point should be a central concern in avoiding an economic meltdown such as the one in 2008. If bank CEOs are looking to boost profits and stock prices, they are more likely to take greater risks. So not only is the performance-pay loophole payed for, in part, by taxpayers, the way it is structured poses perils for the economy.

In a 2013 Forbes column on performance pay, Rick Wartzman warns of companies -- in general -- utilizing massive bonuses as incentives:

How is "performance" being defined? Linking a CEO’s pay to a company’s bottom line or the trajectory of its shares is, arguably, better than having no measure in place at all. Still, as has become abundantly apparent in recent years, this approach carries its own risks, especially if it prompts executives to think too much about goosing earnings in the short term at the expense of the long-term health of the enterprise.

"You have to produce results in the short term," [Peter] Drucker [has] asserted. "But you also have to produce results in the long term. And the long term is not simply the adding up of short terms."

This fear is compounded when applied to companies in the financial area, because the very stability of our economy is at stake.

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