Do companies pay their CEOs more than they pay in taxes?

By Felix Salmon
August 31, 2011
news that 25 of the 100 highest paid US CEOs earned more last year than their companies paid in federal income tax.

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You might well have seen, this morning, the news that 25 of the 100 highest paid US CEOs earned more last year than their companies paid in federal income tax. The Reuters version of the story was linked to by the WSJ and retweeted by David Leonhardt; the NYT version already has 120 comments. Both versions, it seems, were based on embargoed copies of this report from the Institute for Policy Studies; because the reporters were given a copy of the report before it went up online, they were unable to link to it from their stories.

But if you do manage to find the IPS website and follow the links to download the full 46-page report, you’ll see that there’s less to it than meets the eye. Certainly it doesn’t come close to demonstrating that its title — “The Massive CEO Rewards for Tax Dodging” is justified. Yes, CEOs get paid vast sums of money. And yes, a lot of corporations pay very little in taxes. But what the report doesn’t do is demonstrate that CEOs who reduce their corporate tax rates get paid more. This kind of thing, from the NYT story, notwithstanding:

The authors of the study, which examined the regulatory filings of the 100 companies with the best-paid chief executives, said that their findings suggested that current United States policy was rewarding tax avoidance rather than innovation.

There are lots of ways that the authors of the study could have tried to back up that assertion. For instance, they could have taken a set of CEOs and split them into two groups: those who are paid more than their companies pay in taxes in Group A, and those who are paid less than their companies pay in taxes in Group B. Then they could have compared whether CEO salaries in Group A were higher than CEO salaries in Group B.

But they didn’t do that.

Instead, they did this:

Of last year’s 100 highest-paid corporate chief executives in the United States, 25 took home more in CEO pay than their company paid in 2010 federal income taxes.

These 25 CEOs averaged $16.7 million, well above last year’s $10.8 million average for S&P 500 CEOs.

Do you see what they did there? The initial set of CEO was the 100 highest-paid CEOs in the country. They then took 25 of those CEOs, and instead of comparing their pay to the pay of the other 75 CEOs in the group, they compared their pay to the average pay for a CEO in the S&P 500. This proves nothing: any subset of the 100 highest-paid CEOs in the country is going to have higher average pay than S&P 500 CEOs in general.

As for the central conceit of the paper — the one which made the Reuters and NYT headlines — that’s pretty silly too. 25 CEOs make more than their companies pay in taxes? Wow! Except, it turns out that only five of those 25 companies are paying any taxes at all, by IPS methodology. The lowest-paid janitor, at those 25 companies, makes more than the company pays in taxes. The driving force behind the IPS result is entirely a function of how IPS calculates the corporate effective tax rate, and the ease with which that can go negative. It has nothing at all to do with CEO pay. (The IPS ignores deferred taxes, which is justifiable; it ignores taxes paid to foreign governments, which is less so, in an era of global corporations operating in dozens or even hundreds of tax jurisdictions.)

This is one good reason, then, for every news organization to link to reports they’re writing about — doing so gives their readers the opportunity to see for themselves whether the report stands up to scrutiny. After all, the world of embargoed reports is clever that way. If you’re a think tank, you send them out to lots of journalists. Some will look at them and see little news there; they will ignore the report. Others will buy it, and write the report up. So the only stories you see about the report are from journalists who buy into its thesis. That’s a bias right there. And always linking to the report is one good way of helping readers and news organizations overcome that bias.

18 comments

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Thank god someone read the actual underlying study and instead of just parroting the headline like the rest of the media, looked at how ridiculous it actually is. This frustrated me all morning, thanks.

Posted by StoneStAdvisors | Report as abusive

And also, for all the snarky comments, the fact you link to the sources are why your blog is worth coming back to.

I suspect the IPS produced the dishonest report for its sponsors and the journalists didn’t bother reading the report but rather cut and pasted from the press release or opening blurb.

Posted by Danny_Black | Report as abusive

I suspect the IPS was more interested in highlighting how little tax companies actually pay in the US and used salaries as a familiar landmark for readers. from what I know of the IPS they are hardly a right wing think tank, but nonetheless, the point they make is a valid one. Corporations do pay too little tax, and do spend too much money on lobbying.

Posted by FifthDecade | Report as abusive

This is the kind of insipid research that gives lefty think-tanks like the IPS a bad name. Of what possible relevance is it to tax policy that corporate CEOs are paid more than is paid in taxes?

Pay is supposedly a demand/supply market; taxes are computed based on profits, excise charges, regulatory issues, etc. If profits are low, taxes will be low, too. But that doesn’t mean the CEO’s actions are worthless or even worth less.

I spend more money on my pets’ veterinary care than I spend on health club memberships. Or on my clothes, for that matter, in any single year. That just means I have pets. It doesn’t put a value on them.

A ≠ B. Congratulations, Dr. Watson.

Posted by Publius | Report as abusive

Lordy, wasn’t it an awful report? I went and read it (for a possible write up elsewhere) and was struck by the way they don’t actually include the calculation of the taxes paid. For example, “taxes paid this year” is usually, for a corporation, the taxes paid this year on the profits made last year.

Did they account for this (just as one example)? I’ve no idea for the report doesn’t tell us.

Tax losses in previous years? Pay as in pay or pay as in options cashed in that year which may have come from long term incentive plans?

As a piece of economic research the IPS have just shown themselves very good at hyperbolic political propaganda.

Nothin’ else.

Posted by TimWorstall | Report as abusive

Although you should be congratulated for actually reading the report, perhaps this kind of study is too important to simply poo poo as exaggeration. The comparisons were exaggerated but they surely didn’t have to be. Your point about the janitor (and Buffet’s about his secretary) do more good in hitting home.

If a company spends more lobbying than they did on taxes and also has overpaid CEOs (no I’m not jealous, they are simply paid too much) and even during a recession raises and bonuses were maintained, there is something terribly wrong with that picture.

IPS is distorting the picture and that really is too bad, because there are many very valid points to be made for tax reform to close loopholes, maintain and add jobs in America and for eliminating corporate tax credits and deductions with a fair and absolute tax rate.

I am thinking, given the push by Republicans to lower the Corporate tax rates (to make more jobs of course, being the lobbyists have stated that’s the reason, uhhuh) that this was a badly worded sound bite to push back, that gave results as intended given the comments.

Too bad they didn’t just use the stats correctly to make the point, but then… maybe they should have used pretty pictures, to obscure the data, as the republicans have been doing.

http://www.gop.gov/resources/library/doc uments/jobs/theplan.pdf

http://economix.blogs.nytimes.com/2011/0 5/31/are-taxes-in-the-u-s-high-or-low/

http://www.oecd.org/document/35/0,3746,e n_2649_37427_46661795_1_1_1_37427,00.htm l

http://www.taxpolicycenter.org/taxfacts/ displayafact.cfm?Docid=263&Topic2id=70

Posted by hsvkitty | Report as abusive

That’s such a obviously flawed report, and it’s good to see it taken down. But of course CEOs are rewarded for tax avoidance, all else equal. This “research” is just a terrible way to try to demonstrate that.

Posted by sdc085 | Report as abusive

“Wow! Except, it turns out that only five of those 25 companies are paying any taxes at all”

The fact that you see this as a winning argument is really part of the problem.

Look you are right that the fact that for some cherrypicked subset, one number is higher then another really doesn’t mean a thing. But the fact of the matter is that the top 1% controls an absurd portion of the nations wealth – and for every Gates, Jobs, or Buffet there is creating value, there is a Nardelli or Fiorina destroying it. CEO pay is too high, and if we are not going to tax corporate profits (the vast majority of which flow to the managerial/investor class) then we need lower CEO pay and higher capital gains taxes, lest we become some sort of Mexican style pleutocracy.

Posted by atworkforu | Report as abusive

Wow I didn’t know that The Institute for Policy Studies still exists. It is a left wing think tank. Not a think tank accused of liberal bias because it doesn’t take orders from the Koch brothers, not a liberal think tank, a left wing think tank. Note how the analysis is up to AEI and Heritage levels of seriousness.

I only remember the IPS for two reasons
1) Allende’s ambassador to Washington then defense minister (some guys get all the cushy jobs) Orlando Letelier worked there until he was blown up by Pinochet’s agent.
2) the cofounder Marcus Raskin is the father of this guy I knew in high school and college (Jamin Raskin a Maryland state senator last seen trying to get a medical marijuana bill passed — really medical not like the California pot for all law). That makes Marcus Raskin the father in law of a member of the Fed board of governors.

Posted by robertwaldmann | Report as abusive

But there is something in the study. One good way to avoid paying income tax is to have no income (it works for corporations too). On average the 25 work for (hah who am I kidding command is more like it) corporations that are less profitable than the S&P average. So why are they compensated in the top 100 ? My guess is some of the corporations are really profitable and don’t pay taxes because of special industry specific tax breaks, but also that CEOs of larger corporations are paid more even if the corporations underperform.

Posted by robertwaldmann | Report as abusive

@atworkforu

CEO pay may well be too high.
Unfortunately the report in question presents no evidence that it is.
That is the point Felix is making.

Posted by TinyTim1 | Report as abusive

The report was truly a mess. They confuse tax benefits for refunds, when the two are only orthogonally related to one another; elsewhere they claim that lobbying expenses are deductible, which is false. As a tax lawyer, the report was like nails on a chalkboard.

Posted by jpe12 | Report as abusive

For some time there’s been this unholy ring of support for ever-higher CEO salaries, whether or not the companies they are in charge of do well or not. Golden handshakes, parachutes, and taps in the executive bathroom mock Adam Smith’s economics. Seven figure pay packages for executives who are released early from their contracts because they failed to perform are just one example.

Merchant banks push for CEOs who, because of which Business School and Professor they had, are favourable to mergers – which is where the banks make big money. Business School graduates and Professors slip in and out of the Merchant banks and the Corporations, the remuneration committees are largely made up of the same type of people who, while voting on remuneration for CEO X, are also supporting their own future pay claims.

When anyone suggests a CEO pay reduction, the groupthink mentality reverts to the bankers’ favourite “But if we don’t pay the highest salaries people will move elsewhere!” That’s a bluff that really needs calling, because at the moment, shareholder interests fold almost instantaneously. In banking, would people really move elsewhere? What, to another bank in trouble? They’re all in trouble. They all need to save costs. But the CEO cadre have the shareholders in a state of permanent fear.

As for non-Finance CEOs: do they really believe that there are none amongst their underlings competent people who would take over their jobs for less salary?

Posted by FifthDecade | Report as abusive

hsvkitty, I think it was poo pooed as BS, the sort of fake “research” with a nice sound bite for people to quote without bothering to check the report.

FifthDecade, there is a famous bit in Adam Smith about collusion but hey facts, who cares, right?

Posted by Danny_Black | Report as abusive

gustafus, I promise you I won’t be laughing, but as people go over the edge and with loss of job, family, self-esteeem and then health, the mind is not far behind. There are way too many guns in the USA to not have extreme violence be part of a revolt. People react badly when they have nothing left to lose … so your prediction is sadly all too likely.

Felix said, ” There are lots of ways that the authors of the study could have tried to back up that assertion. For instance, they could have taken a set of CEOs and split them into two groups: those who are paid more than their companies pay in taxes in Group A, and those who are paid less than their companies pay in taxes in Group B. Then they could have compared whether CEO salaries in Group A were higher than CEO salaries in Group B.”

There are some people who would rather have those figures to make the claim of the title. (Like the readers here, tax lawyers and Corporations) However, the people are very aware CEOs are overcompensated. Most are aware that although the tax rate for Corporations is 35%, the Corporations use tax shelters and havens and phony overseas PO boxes as ‘headquarters’ to avoid taxes.

The bulk of the story hit home as it was intended and like it or not, there was too much truth in it for the made up spin parts to fail. I do hope someone does the work and comparisons though! Corporations don’t have to reveal what they actually pay and you can be darn sure they won’t be making that big reveal to back up their whining that the report got it wrong…

Posted by hsvkitty | Report as abusive

To me, the most maddening part of this is that mainstream media, like Reuters, TIME, The New York Times and The Wall Street Journal give space to reporting on IPS’ so-called studies. It’s so predictable that they come out with a paper around Labor Day each year with an inflammatory title to further a populist agenda (“rich and successful people are pure EVIL!”). Their reports are filled with strong hyperbole and weak support. Felix unravels some of their shoddy analysis, but read the whole report and you’ll come across some even more laughable IPS conclusions–like CEOs who went to state universities are particularly bad people because they now run companies that seemingly pay low taxes to the U.S. government. IPS papers are like Michael Moore movies–they may have legitimate points to make, but they use such amateur methodologies to prove them, only because their story is juicier that way. High on entertainment value, low on integrity.

Posted by GMAFB | Report as abusive

hsvkitty, it is called an annual report. Of course if you had more than two brain cells to rub together you’d already know that.

Posted by Danny_Black | Report as abusive

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Posted by traducere romana daneza | Report as abusive