It seems vice presidential contender Paul Ryan needs some help identifying the most extreme examples of tax privilege. He has repeatedly promised to close enough loopholes that benefit the rich to pay for the massive tax cuts in his budget plan. But when it comes to the specifics, the Wisconsin congressman goes all fuzzy.
A new Institute for Policy Studies report provides a helpful guide to four tax loopholes that should be at the top of anybody's kill list. These are the loopholes that are the most direct enablers of bloated CEO pay.
1) The "lower your tax bill by overpaying your CEO" loophole
The tax code currently places no real limit on how much "performance-based" compensation corporations can deduct from their taxes. The more a company pays their CEO, the less they pay in taxes. Ordinary taxpayers wind up picking up the bill. Oracle CEO Larry Ellison was the largest beneficiary of this loophole last year. The business software king raked in $63 million in stock options and $13 million in non-equity incentive pay, for a total of $76 million in fully deductible "performance-based" pay.
2) The "dancing all the way to the country club" loophole
The majority of CEOs at large companies now legally shield unlimited amounts of compensation from taxes through special deferred accounts their employers set up. Meanwhile, the rest of us face strict limits on how much income we can put in their retirement nest eggs via 401(k) plans. The cap maxes out at $22,000 per year for workers over 50. The top beneficiary of this perk last year was Wal-Mart CEO Michael Duke, who socked away $17 million in his deferred compensation account, 774 times the amount that a Wal-Mart employee of Duke's age could set aside tax-free.
3) The "why hedge fund managers pay a lower tax rate than their secretaries" loophole
Hedge and private equity fund managers pay taxes at a 15 percent capital gains rate on the profit share -- "carried interest" -- they get paid to manage investment funds, rather than the 35 percent rate they would pay under normal tax schedules. The biggest winner from this loophole last year was Ray Dalio, of the Bridgewater Associates hedge fund. He raked in $3 billion (yes, billion, not million), according to Forbes, which calculated that if Dalio had paid ordinary income tax rates, he would have contributed an extra $450 million to the Treasury.
4) The "show one set of books to shareholders, another to the IRS" loophole
Under current rules, companies can lower their tax bill by claiming deductions for options that are much higher than the option value they report in their financial statements. This tax incentive encourages corporate boards to hand executives huge stock option windfalls and costs the Treasury an estimated $2.5 billion per year. Apple was the biggest winner from this loophole last year, enjoying a $260 million subsidy based on a $743 million deduction.
These four "executive-friendly" loopholes cost taxpayers an estimated $14.4 billion per year -- $46 for every American man, woman, and child. That amount could help make up for the tax-slashing Rep. Ryan wants to do (including bringing the top marginal rate down from 35 to 25 percent).
A better approach would be to use the extra revenue to protect Medicare and education. For example, $14.4 billion could cover the annual cost of hiring 211,732 elementary-school teachers.
Conservatives like to argue that raising taxes will just lead to more wasteful government spending. What's really wasteful are giant tax breaks for CEOs and hedge fund billionaires. It's nice that Ryan pays lip service to closing loopholes for the rich. But until he identifies specific perks to be eliminated, it will be hard to take him seriously.
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