By: David Callahan
August 20, 2012
Economic inequality is a famously complex phenomenon, but some parts of this trend are quite simple: Like how today's rich are benefiting from a rare confluence of record high compensation and record low taxes.
The most striking example can be found on Wall Street, where hedge fund managers have scored mind-boggling paydays -- three of these guys made over $2 billion last year -- and yet often pay a mere 15 percent tax rate, thanks to the infamous "carried-interest" tax loophole. Twenty years ago, top hedge fund managers didn't make anything like the money they do today and paid significantly higher taxes.
Top CEOs are also profiting handsomely from the combination of high pay and low tax rates, according to a new report by the Institute for Policy Studies.
The report shows how CEO pay has continued to rise as regulatory efforts to control executive compensation have stalled. Meanwhile, the extension of the Bush tax cuts have meant huge savings for CEOs even as their paychecks have gotten ever larger. The authors found that 57 of America's highest paid CEOs saved more than $1 million on their taxes, thanks to the Bush tax cuts. The biggest winner was James Mulva of ConocoPhillips -- who would have owed an extra $6,699,780 in taxes last year if Congress has let the Bush tax cuts for the affluent expire, as President Obama proposed. Four other executives saved over $3 million because of the extension of those tax breaks.
And it's not just low tax rates that benefit top earning CEOs, according to the report. Lax tax rules around deferred compensation have also been a boon for these executives, while their companies have benefited from a host of tax subsidies and are able to deduct the cost of sky-high compensation packages from their tax bill.
"The four most direct tax subsidies for excessive executive pay cost taxpayers an estimated $14.4 billion per year--$46 for every American man, woman, and child. That amount could also cover the annual cost of hiring 211,732 elementary-school teachers or creating 241,593 clean-energy jobs."
Things have gotten so out of whack, the report notes, that 26 CEOs took home more pay than their companies paid in federal income tax.
Various proposals have been introduced in Congress to regulate executive compensation and close gaping tax loopholes, only to go nowhere. Maybe that will change if President Obama wins this fall, given that he has attacked Mitt Romney for benefiting from some of these loopholes and continues to tout the "Buffett Rule" to ensure that the wealthy pay at least 30 percent of their income in taxes.
Inequality is finally on the political agenda. Now we just need Washington to do something about it.