Democrats introduce legislation to end tax breaks for multimillion-dollar CEO bonuses

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A group of Democrats in Congress introduced a bill Tuesday to stop unlimited tax write-offs for performance-based executive pay.

Senators Jack Reed, D-R.I., and Richard Blumenthal, D-Conn., along with Rep. Lloyd Doggett, D-Texas, are introducing the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act. The legislation would prevent publicly traded corporations from deducting the cost of multimillion-dollar bonuses from their corporate tax bills.

Under current tax law, when a publicly traded corporation calculates its taxable income, it is typically allowed to deduct the cost of compensation from its revenues, up to a limit of $1 million for the company’s most senior executives. However, many public corporations are able to avoid those limits and deduct executive compensation over that amount if it is considered performance-based compensation. For example, if a CEO receives $1 million in cash compensation and $14 million in performance-based compensation, the company’s taxable income would decline $15 million that year. With the current corporate tax rate at 35 percent, the company would thus receive a tax reduction of $5.25 million.

The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act would limit public corporations to a single $1 million per employee deduction.

“We need to prioritize tax breaks that grow our economy and strengthen the middle class,” Reed said in a statement. “This bill would eliminate some of the inequity in the tax code. Again, companies are free to pay their executives as much as they want. But the American taxpayer shouldn’t help foot the bill for a CEO’s multimillion-dollar bonus. The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act puts an end to this give-away and will restore fairness to the tax code and ensure corporations, not taxpayers, are the ones who pay for multi-million dollar bonuses.”

Over a 10-year window, Congress’s Joint Committee on Taxation has estimated this bill would save taxpayers over $50 billion.

“It is unconscionable that American taxpayers subsidize tens of billions of dollars in corporate bonuses while middle-class wages stagnate and income inequality rises,” Blumenthal said in a statement. “We should be investing in working families, not using taxpayer dollars for tax breaks to corporations that overpay their executives. Corporations should be free to pay their executives whatever they wish, but not at the expense of American taxpayers.”

The bill specifically would broaden the scope of corporations subject to Section 162(m) from “publically held corporations that issue any class of common equity securities registered under section 12 of the Securities Exchange Act of 1934 (the ’34 Act)” to: “any corporation that qualifies as an issuer whose securities are registered under section 12 of the ‘34 Act or that is required to file reports under section 15(d) of the ‘34 Act.” This change would encompass all corporations that file periodic reports, such as quarterly and annual filings, with the Securities and Exchange Commission. It would also broaden the number of employees from: “the CEO and the 3 highest compensated officers” to: “all current and former employees.” It would also eliminate the exception for commission-based remuneration and for performance-based compensation.

“Our tax code has a perverse incentive for companies: the more you pay your executives, the less you’ll pay in taxes,” said Doggett. “It is wrong to compel working families and small businesses to foot part of the bill for lavish executive bonuses. This bill lets companies like Wells Fargo know that they can choose to hand their CEO $155 million as they pay billions in penalties for wrongdoing, but don’t expect the American taxpayer to pick up part of the tab.”

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Finance, investment and tax-related legislation Tax Corporate taxes