Death, Taxes, CEO Pay, and Other "Certainties"

"In this world nothing can be said to be certain, except death and taxes."

There is, incidentally, some uncertainty about the origin of that quote, which is widely attributed to Benjamin Franklin. However, most of us are familiar with the saying and the inevitability of those two things, neither of which is generally greeted with enthusiasm.

However, in corporate America, this well-worn rule doesn't quite apply like it does to the rest of us. And unless some biotech company has come up with a real blockbuster product I'm unaware of, we're not talking about the certainty of death here.

The Institute for Policy Studies released a report this week that weighed CEO pay against corporate tax obligations. At many companies, the only certainty other than workers' mortality is that CEOs get paid a heck of a lot in salary and goodies -- more than those corporations pay in federal taxes, in fact.

What would Ben Franklin say?
According to IPS's "The CEO Hands in Uncle Sam's Pocket," our collective tax dollars are helping to subsidize skyrocketing levels of CEO pay. The authors contend that the tax code, in effect, encourages corporate managements to "game the system," and that in some cases, tax rules actually incentivize insane CEO-to-worker pay ratios.

This is the second year IPS has looked at this particular aspect of the CEO pay issue, which it has tracked for 19 years. Of the 100 highest-paid CEOs in America in 2011, 26 enjoyed pay packages that were actually higher than the amounts their companies shelled out in taxes. That's up from 25 last year. Seven of these companies made the list both years.

Citigroup (NYSE: C  ) and AIG (NYSE: AIG  ) were among the companies highlighted -- which seems perverse, as both received taxpayer-funded bailouts that pulled their bacon out of the fire during the financial crisis.

According to IPS, in 2011 Citigroup CEO Vikram Pandit received $14.9 million in compensation, and the financial company received a $144 million tax refund. AIG's chief, Robert Benmosche, took home $13.9 million in pay, while the company received a $208 million refund.

Chesapeake Energy (NYSE: CHK  ) , which has been subject to a barrage of well-deserved scrutiny in the last year, also made the list for the exorbitant pay awarded to scandal-laden CEO Aubrey McClendon in 2011. In fact, Chesapeake Energy was featured on the list for 2010 and 2011. Last year, McClendon was rewarded with a handsome $17.9 million in pay, and the company paid out $13 million to the IRS. (Incidentally, it reported $2.8 billion in profit.)

Abbott Labs (NYSE: ABT  ) also made the list. IPS called it out for having 64 tax havens in 16 countries while issuing the reminder that drug companies are particularly adept at abusing tax havens. CEO Miles White collected $19 million in total pay, while the company actually received a $586 million refund from the tax man.

Booms, busts, and byzantine rules
Yesterday, Reuters reported that many of the companies being called out by IPS disputed the report's findings. Abbott Labs made the most dramatic response, calling the report's findings "a blatant misrepresentation of the facts." A spokesman countered that Abbott actually shelled out $700 million to the IRS last year, and that the results the report cited were due to a "non-cash accounting adjustment."

The tax code, of course, is a labyrinth. The report outlines why corporations and their CEOs often get off pretty easy when it comes to lightening up their bank accounts for the tax man, given the legality of tax havens, subsidies, and little tricks and loopholes like "unlimited deferred compensation."

Since the financial crisis and the bursting of the housing bubble, tax revenues have absolutely taken a hit. The ripple effects include mass layoffs of public workers across the country, including teachers and employees charged with public safety. Although the public sector needs to reform the way it budgets its monies (and also should have learned some lessons about the boom-and-bust cycle of economies), it's difficult to deny that putting masses of Americans out of work all at once isn't beneficial to our economic well-being.

Regardless of the political arguments, the bottom-line result is that far less discretionary income will be circulating through our marketplace. In the near term, that's a reality we will all face, both as citizens and as investors. Less discretionary income means less revenue for many publicly traded companies, which could wipe out many of the weaker ones.

Meanwhile, even those who don't particularly appreciate the certainty of taxation should at least agree that one sector of America shouldn't be shielded from it. What's with all that cushy welfare for corporate America, anyway?

The search for certainty
Ben Franklin was absolutely right that certainty is scarce in this world, and these days that's more obvious than ever as economic insecurity rears its head both here and abroad.

One thing is for certain, though: Austerity and frugality shouldn't be demanded for some and not for others, and rules shouldn't favor the few over everybody else. Unless I missed something, death, high tax rates for some and big breaks for others, and insanely high CEO pay aren't the only things in this world that are "certain."

Issues like taxation and austerity are in the spotlight as the presidential election looms. If you're looking for some related investment ideas, our analysts have identified some stocks that could benefit from the election's results. Click here for your free report.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Citigroup, Abbott Labs, and Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of AIG. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (4) | Recommend This Article (11)

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  • Report this Comment On August 18, 2012, at 10:48 PM, Mrdcmills wrote:

    Fairtax.org

    If we spent as much time building a better tire as we do figuring taxes, paying lawyers, and hunting deductions imagine where we could be. As a CHK owner I can see Mr. McClendon appears to be overpaid. As for taxes, businesses don't pay taxes. They collect them. The customer pays the taxes.

  • Report this Comment On August 20, 2012, at 11:18 AM, Darwood11 wrote:

    @Mrdcmills

    "As for taxes, businesses don't pay taxes."

    When I read statements such as this, I shudder. I should be insulted and here is why.

    I've been a principal in two "C" corporations for a combined 30+ years.

    During my tenure, which continues at one, we paid federal corporate and state income taxes for many of those years. Not all, because the "businesses" I've been involved in were and continue to be tightly linked to industry and manufacturing in the U.S. Some years, there were deep recessions. In the 1980s there were several. Under those situations, our revenues and net income dropped as the health of American industry faltered.

    I might also add that we've never sought nor been given government assistance via subsidies or loans.

    We have used the U.S. tax code to our advantage, in particular purchasing capital goods when there were tax incentives to do so in any given year.

    In a country in which about half the people don't pay federal income taxes, I think statements such as "business doesn't pay taxes...." to be disingenuous at best. and deceptive at worst.

  • Report this Comment On August 20, 2012, at 12:38 PM, Darwood11 wrote:

    Alyce;

    I appreciate your articles, and that includes this one. Ir's my opinion, based on decades of real world experience, that the source of these problems include the U.S. tax code.

    However, when you make certain broad brush-stroke statements in your articles I take exception. For example: "At many companies, the only certainty other than workers' mortality is that CEOs get paid a heck of a lot in salary and goodies -- more than those corporations pay in federal taxes, in fact."

    "At many companies..." Is a nice attention grabber and I am of the opinion, unfit hyperbole.

    "Many" is usually defined as "a multitude" or "a majority." But in this case, it seems that is untrue.

    I went to the source you linked to and here is what I found:

    "Of last year’s 100 highest-paid U.S. corporate chief executives, 26 took home more in CEO pay than their companies paid in federal income taxes..."

    So, if I understand it correctly, it seems that there is a documented issue with 26 of the largest corporations in the U.S. However, at least one of those corporations has taken issue with the data published by the IPS.

    So, what multitude are we talking about? The "Fortune 500" or the S&P 500 or the Wilshire 750? Certainly not the entire corporate world in the U.S., because according to U.S. Census data, there are about 4 million corporations in the U.S. and other data indicates that about 20,000 are traded, with about 1/3 on the gray market. So "many" would require further definition.

    Returning to the IPS. I read this year's IPS source document and I agree with some of it and I disagree with some of it.

    For example, the statement at the website of the source document that "CEOs have benefited enormously from the Bush tax cuts for upper-income taxpayers." Bingo!

    Ok, here is what is also so. According to the credible sources, just about the entire middle class benefited from the Bush era tax cuts, and the 2001 and 2003 tax revisions lowered the marginal tax rate for just about all taxpayers. Anyone who doubts this may have the opportunity to see the consequences of reversal, should it occur in 2013.

    What is true is that higher income taxpayers benefited more than lower income taxpayers. Lower income taxpayers did not benefit as much as the "high rollers" and those low enough to reach the "earned income tax credit" benefited the most. How so? They were given a refund that returned all or part of the social security tax. No one else got that benefit. I know, the argument is "those others didn't need it." My point in stating this is simple. When we go down the road of arguing what is fair or unfair, the real issue seems to become that what is "fair" is to raise the income level of everyone by taxing the "rich."

    Here is the bottom line.

    Until there is broad revision to the tax code, real as well as perceived "unfairness" in this area will continue.

    Even the IPS admits that " Our nation’s tax code has become a powerful enabler of bloated CEO pay. Some tax rules on the books today essentially encourage corporations to compensate their executives at unconscionably higher multiples of what their average workers are paid."

    So if anyone takes issue with the one raised by the title of this article, I suggest they take it up with their Congressmen and Congresswomen, as well as the President. In fact, that is my number one issue with President Obama. He didn't deal with the enablers in our economy, and that includes the tax code. He took a politically expedient path.

    But perhaps the problem is that no one, and that includes the author, has absolutely any faith in our government and its willingness or ability to fix the tax code. Bashing our favorite candidate as being either the source of the problem or the enabler will merely provide the impression that we are in favor of the "other" candidate. So let's bash those evil corporations.

    Meanwhile our incomprehensible and enabling tax code continues to benefit those who can afford to take advantage of it. Make no mistake, most "smaller" businesses have no use for the plethora of lawyers and accountants we have to hire to keep our noses clean and to "render to Ceasar that which is demanded by Ceasar."

    In fact, many of my business compatriots have, over the decades, take the position that our tax code is designed to support a growing cadre of bureaucrats, lawyers and accountants. In other words, enable the "service economy." We business people pay for this both directly and indirectly, because we hire these people to keep our noses clean, and that is money that for most of us could be better spent, elsewhere. It really shouldn't be that difficult. In fact, the most difficult calculation for most small corporations is the depreciation table for assets and tracking those. Payroll taxes? Simple. So why does even the smallest C corporation need an accountant and a lawyer on retainer? Some of the readers here know the answer and if they don't they should consider starting a real company, with an office, employees, health insurance, a 401(k) and so on. Then they too will know what it takes.

    One who commented here obviously has never done this. Perhaps I'm incorrect and "many" readers (26) have no idea how a "real" company (not a bedroom sole proprietorship) really operates. I'd like to think otherwise.

  • Report this Comment On August 20, 2012, at 1:45 PM, mdk0611 wrote:

    IPS makes it sound like those CEO's get their compensation tax free. Do you realize that the marginal rates on that compensation is likely to be higher than the rate the corporation would pay if the money was retained and taxable to the corporation?

    Why?

    Because in additon to the 35% top marginal tax rate, the salary is also subject the the Medicare portion of the FICA tax, 1.45% by the CEO and matched by the corporation.

    I'm fine with a debate about whether a CEO has earned the level of compensation he/she is paid. But to dress this up as some sort tax dodge is both deceptive and ridiculous.

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