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CEOs win, IRS loses

By Kay Bell · Bankrate.com
Thursday, September 1, 2011
Posted: 1 pm ET

When it comes to tax reform, the consensus on Capitol Hill is that our corporate taxation system should be dealt with first. And most lawmakers seem to think that the 35 percent top business tax rate is too high.

Relatively high American corporate taxes, however, don't appear to be getting in the way of executive compensation.

The Institute for Policy Studies, or IPS, a Washington, D.C., think tank that leans to the left side of the political spectrum, has issued a report with the hot-button finding that a lot of big U.S. companies pay their chief executive officer more than they pay in taxes.

According to Executive Excess 2011, the top 10 U.S. companies that hand out more in CEO pay than they hand over to the IRS are International Paper Company, Prudential Financial, General Electric, Verizon, Bank of New York Mellon, Boeing, Marsh & McLennan, Stanley Black & Decker, Chesapeake Energy and eBay.

The report notes that the 25 firms that paid their CEOs more than Uncle Sam last year reported average global profits of $1.9 billion.

It gets better. Eighteen of the 25 firms last year operated subsidiaries in offshore tax haven jurisdictions. All told, says IPS, the companies operated 556 subsidiaries in more tax-favorable foreign locales.

Will a change in the corporate tax system get all these firms to move their workers back inside U.S. borders? Probably not. Companies look at a lot more than taxes, such as worker salaries and regulatory red tape, when it comes to locating facilities.

Will a change in the corporate tax system prompt big business to revise its corporate pay scale? Probably not. Remember how Wall Street firms continued to pay out huge bonuses in 2008 after receiving federal bailout money? The standard argument is that companies have to pay a lot to keep the best on board. Of course, if the best put your business in a position to need bailing out, how good are they really? And who would want them? But I digress.

There's also a tax reason for such high compensation. Companies count the value of the stock options granted to executives as an expense at the time the options are granted. But the firms don't take the deduction for executive stock options on their tax returns until their executives exercise the options, usually years later. The amount of compensation the executive receives on the exercise date is often substantially more than the book expense of the options that was originally estimated. Because the tax deduction is based on the trading price of the stock on the actual exercise date, the tax deduction is often much more than the book expense that was recorded by the companies.

In the wake of IPS's findings, Congress has decided it wants to get in on the finger wagging.

Rep. Elijah Cummings, D-Md., ranking member of the Committee on Oversight and Government Reform, has written committee chairman Rep. Darrell Issa, R-Calif., asking that the panel "examine the extent to which the problems in CEO compensation that led to the economic crisis continue to exist today."

Cummings also wants to know "why CEO pay and corporate profits are skyrocketing while worker pay stagnates and unemployment remains unacceptably high."

And to the tax point, Cummings wonders about "the extent to which our tax code may be encouraging these growing disparities."

The House committee may well hold a hearing, but don't expect any revelations or reversals in executive pay or, for now, the corporate tax code. Congress tackled executive pay back in 2009, again with Cummings in the forefront, and look at how much that slowed down the pay rate.

But it should make for an entertaining couple of hours on Capitol Hill.

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