Two rather disturbing studies on corporate America were published last week. As individual investors scramble to finish their tax returns, both are timely and particularly hard to swallow.
On the one hand, the General Accounting Office (GAO) just released a survey looking at reported tax liabilities of U.S. and foreign-owned corporations. While the study was intended to shed light on whether foreign companies pay less taxes than U.S. companies (they do), to me, the real insight was in the absolute levels of reported corporate tax liabilities.
Corporations don't pay taxes, even in good years. The report focused on 1996 to 2000 -- years in which the economy was booming. In 2000, for example, the GAO found that of the 1.3 million U.S.-controlled companies it analyzed, 63% had zero tax liability, and 31% had some liability but that liability was less than 5% of income. Only 6% of companies had a tax liability of more than 5% of pre-tax income.
In the other study released last week, The New York Times, in a special report on executive pay, reported that CEOs got hefty raises last year, at least in terms of cash compensation. For the 180 CEOs who had held the same job since 2002, cash compensation rose to an average of $3 million. As the Times notes, that is a 14.4% increase, which is "well below the average return to investors in their companies (34%) but considerably higher than the increase in wages for most American workers (2%)." The study did note that the value of options grants to CEOs dropped in 2003, resulting in an overall decrease in compensation when options are included.
Five companies paid their CEOs bonuses of more than $10 million last year: Bear Stearns (NYSE:BSC), Cendant (NYSE:CD), Citigroup (NYSE:C), Lennar (NYSE:LEN), and Merrill Lynch (NYSE:MER). Two of the five, Bear Stearns and Citigroup, underperformed the S&P 500 in terms of returns to shareholders in 2003.
There are, of course, exceptions on both fronts. The Times study highlighted Motley Fool Stock Advisor recommendation Costco (NASDAQ:COST) as a company that pays its CEO more reasonably than most. On taxes, Berkshire Hathaway (NYSE:BRK.A) CEO Warren Buffett noted in his annual report that his corporation will pay $3.3 billion in taxes in 2003, or about 28% of earnings before interest and taxes (EBIT). In addition, Buffett was paid a modest $308,000 last year.
Radical change is needed in both compensation and taxes. Corporate income taxes in 2003 accounted for 7% of all federal tax receipts, down from a peak of 32% in 1952. At the same time, CEO compensation remains at ridiculous levels. These trends are unsustainable and -- to the millions of individual investors who are writing checks to the IRS this month for their share of the fiscal burden -- quite simply unfair.
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Fool contributor Salim Haji lives in Denver, Colo., and he owns shares of Berkshire Hathaway and Costco.
