Thursday, January 9, 2014

Revisiting CEO Pay in the U.S.

The growth of CEO and executive compensation (including the value of stock options granted to an executive) overall was a major factor driving the doubling of the income shares of the top 1.0 percent and top 0.1 percent of households from 1979 to 2007. Average CEO compensation was $14.1 million in 2012, up 37.4 percent since 2009.

From 1978 to 2012, CEO compensation (measured with options realized) increased about 875 percent, a rise more than double stock market growth --- and substantially greater than the painfully slow 5.4 percent growth in a typical worker’s compensation over the same period.

Using the same measure of options-realized CEO pay, the CEO-to-worker compensation ratio was:

  • 20.1-to-1 in 1965
  • 29.0-to-1 in 1978
  • 122.6-to-1 in 1995
  • peaked at 383.4-to-1 in 2000
  • and was 272.9-to-1 in 2012 --- still far higher than it was in the 1960s, 1970s, 1980s, or 1990s.

Measured with options granted, CEOs earned:

  • 18.3 times more than typical workers in 1965
  • 26.5 times more in 1978
  • 136.8-to-1 in 1995
  • peaked at 411.3-to-1 in 2000
  • In 2012, CEO pay was 202.3 times more than typical worker pay, far higher than it was in the 1960s, 1970s, 1980s, or 1990s.

Over the last three decades, CEO compensation grew far faster than that of other highly paid workers, those earning more than 99.9 percent of other wage earners.

Not to mention their tax breaks: Once their stock-option grants are realized after one year (usually millions of dollars worth), they cash out with a long-term capital gain and taxed at 23.8% (starting in 2013), while the top marginal tax rate is 39.6% on regular wages over $400,000 (for say, a neurosurgeon).

And regular wages are taxed for Social Security up to the cap of $113,000 --- meaning, 95% of all wage earners are taxed on 100% of their wages for Social Security --- whereas a CEO's capital gains are taxed $0 for Social Security.

But with their additional tax deductions and other tax exemptions, CEOs could pay even less than the statutory rate of 23.8% on their adjusted gross income. When the tax on capital gains was 20%, Mitt Romney only paid an effective tax of 13%. And there's' still the unanswered question: How can he legally have a $100 million IRA account in an offshore tax haven?

Mitt Romney

Mitt Romney's 47%

The Urban Institute-Brookings Tax Policy Center had estimated that 46 percent of households owed no federal income tax. But in fact, when ALL taxes are considered (not just federal), the share of taxes that each fifth of households pays is similar to its share of the nation’s total income.

Of those who did not pay federal income taxes:

  • Approximately 61 percent were very low-income working people, but who pay payroll taxes on 100% of their earnings (for Social Security and Medicare).
  • An additional 22 percent of people were people aged 65 or older, whose Social Security benefits were not subjected to taxation because of their limited income.
  • The remaining 17 percent included students, people with disabilities or illnesses, the long-term unemployed, and other's with very low taxable incomes.

Data from the Institute on Taxation and Economic Policy (ITEP) showed that of the total income:

  • The bottom fifth of households received 3.4 percent of income and paid 2.1 percent of taxes.
  • The middle fifth of households received 11.4 percent of income and paid 10.3 percent of taxes.
  • The top 1 percent of households received 21.0 percent of income and paid 21.6 percent of taxes.

The Fox Guarding the Hen House?

Millionaires occupy the majority of seats in Congress for the first time since ethics laws mandated personal financial disclosures. Out of 534 sitting members of Congress, 268 have an average net worth of more than $1 million.

Multi-millionaires write the tax laws that keeps the capital gains tax rate low, and sets the $113,700 cap for Social Security taxes when their salaries are $174,000.

A senior policy analyst at the think tank Demos pointed to the repeated success in cutting capital gains taxes versus the difficulty in raising the federal minimum wage. "If you think about who is impacted by the minimum wage, and the sheer number of people who are impacted by the minimum wage versus capital gains, it just shows that the affluent and money is just dominating our policy."

The tax system (as a whole) is only very mildly progressive when including the CEOs windfall from capital gains. Yet Congress, especially Republicans, refuses to reform the tax code to help pay down the government debt so we can stop borrowing money from China.

And this is made even worse when those same CEOs offshore our jobs to places like China, hoard their profits in foreign bank accounts, hide their money in offshore tax havens, support the TPP trade agreement, advocate for more H-1B visas and contribute to the campaigns of politicians who would weaken the labor laws, vote against raising the minimum wage, promote right-to-work laws (dismantling labor unions) and raising the age to 70 for retirement, while at the same time, cutting Social Security and Medicare for everybody else --- all while they bask in their untold wealth.

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