When firms pay CEOs more than Uncle Sam, the tax system is broken

Twenty-five of the 100 highest-paid U.S. chief executives pocketed more in pay last year than their companies paid in federal income taxes.

I don’t know about you, but that’s the kind of stat that really gets my bacon sizzling — yet more evidence of how the 1% live in a bizarro parallel universe where the normal rules don’t apply.

A recent report from the left-leaning Institute for Policy Studies found that weak profits weren’t to blame for the 25 companies’ relatively low tax bills. All had more than $1 billion in pretax income, according to regulatory filings.

Yet thanks to a variety of tax breaks and loopholes, each of these companies was able to lavish an average of $20.6 million on its CEO and pay less than that amount to Uncle Sam.

And two of the companies — Citigroup and American International Group — have received billions of dollars in bailout cash from taxpayers.

If these facts don’t make a profound case for corporate tax reform, I don’t know what does.

“Our report details how taxpayers are in effect rewarding corporate executives for gaming the tax system,” said Scott Klinger, a coauthor of the study. “The tax code has become a prime enabler of bloated CEO pay.”

Exhibit A: Boeing’s CEO, James McNerney Jr., received $18.4 million in pay last year while his company enjoyed a tax refund of $605 million, according to the study.

Exhibit B: Citigroup’s CEO, Vikram Pandit, raked in $14.9 million while his company made the most of a $144-million refund.

“We’re trying to counter the idea that America is broke and that we have no choice but to make painful cuts to various programs,” said Sarah Anderson, another author of the study. “We’re actually a very rich nation, but much of this money is going into the pockets of CEOs.”

No one is saying these guys are breaking the law. They’re guilty only of being remarkably adept at finessing a tax system that’s riddled with loopholes.

But Anderson, for one, isn’t willing to let these companies and their bosses off the hook.

“They’re the ones who lobbied hard for these loopholes,” she said. “These loopholes aren’t there by accident.”

And that, to me, is the whole deal here. It’s not that these corporations are simply playing the regulatory hand they’ve been dealt. They’re the ones who rigged the deck so they’d get all the good cards.

Sticking the rest of us with deuces.

The tax breaks cost us at least $14.4 billion a year, the study found. It estimated that this chunk of change could cover the annual cost of hiring 211,732 elementary school teachers or creating 241,593 clean-energy jobs.

Among the loopholes cited in the report, one that jumps out is an exception to the tax rules that allows companies to deduct as much “performance-based” compensation as they can cook up for their CEOs.

The top five corporate users — or abusers — of this particular loophole had a combined $232 million in deductible “performance-based” pay last year. If this deduction was taken away, the combined tax bills for these companies would have jumped $81 million, or an average of more than $16 million per CEO.

The tax code also allows companies to kick almost unlimited sums of CEO pay down the road in the form of deferred compensation, allowing them to put off taxes on money that’s already been earned.

The top five CEO beneficiaries of this loophole deferred a total $48 million in compensation last year, the study found. If they’d actually had to face the music, tax-wise, their combined personal tax bills would have been $17 million higher.

What’s to be done? Obviously any tax system that’s too complicated for ordinary mortals to understand is a tax system that’s easily taken advantage of by armies of corporate lawyers and accountants. Greater simplicity and transparency would be a big first step.

More specifically, Congress should cap the amount of CEO pay that can be deducted from a company’s taxes. Pay the boss as much as you want. But such generosity shouldn’t result in shortchanging the public coffers.

Perhaps when CEO pay stops being deductible, we’d see less of a disparity between what the top guy makes and what ordinary workers pull down. As it stands, CEO pay in the U.S. is 380 times what the average worker makes, according to the AFL-CIO labor union.

There also should be a crackdown on overseas tax havens. Nineteen of the 25 companies that paid their CEOs more than they paid in federal income taxes last year had, on a combined basis, at least 500 subsidiaries in tax-dodging locations such as the Cayman Islands and the Isle of Man.

Sen. Carl Levin (D-Mich.) has introduced legislation that would, among other things, place a company’s total earnings under U.S. tax laws if it’s clear the company is owned and operated by U.S. interests. Levin estimates his bill — S. 2075 — would reduce the deficit by at least $130 billion over 10 years.

To be sure, if a company has legitimate operations abroad, such as factories in China or Vietnam, there’s a case to be made for different tax rates. But a P.O. box in Bermuda shouldn’t count.

And here’s one more idea: Let’s do away with the up-to-15% tax rate for capital gains. The low rate was implemented in 2003 ostensibly to encourage investment in businesses.

The reality, though, is that it allows wealthier people to pay a lower tax rate than others because much of their income is often from investments. This is why Republican presidential candidate Mitt Romney said he has paid in the range of 13% over the last 10 years.

Income is income. It should all be taxed at the same rates.

And something tells me we’d still see plenty of investment in businesses. Where else are you going to stash your cash? A savings account with an interest rate of less than 1%?

I honestly don’t begrudge CEOs their fat paychecks. If a company’s shareholders are cool with it, who am I to complain?

But corporate largesse shouldn’t come at the expense of other taxpayers. Let’s see how generous companies want to be when all those loopholes are closed.

David Lazarus’ column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5 and followed on Twitter @LATlazarus. Send tips or feedback to david.lazarus@latimes.com.