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Does It Matter That Americans Are ‘Subsidizing’ Astronomical CEO Pay?

Lauren Lyster
Daily Ticker

Corporate earnings season is well underway, with heavy hitters Microsoft (MSFT) and Google (GOOG) both set to report after today’s close. So we turn our attention to corporate profits. Specifically, in what ways could so-called "corporate welfare" unfairly be helping to boost those profits?

One tax loophole that political economist Robert Reich, Secretary of Labor in the Clinton Administration, identifies in a Huffington Post column is a tax deduction for executive compensation.

Related: Top CEOs Ranked By Their (Lousy) Stock Performance

Reich writes that “almost everyone knows CEO pay is out of control.” He cites CEO pay rising 16 percent (according to The New York Times) at big companies last year, with the typical CEO making $15.1 million.

Meanwhile, he argues, it’s less well-known that taxpayers are “subsidizing” these sky-high payouts, because corporations can deduct them from their income taxes (in the case of executive pay in excess of $1 million, when tied to performance). He says it ought to be one of the first tax expenditures to go, if Congress takes up tax reform.

It seems like a fair point. But at the same time, you could easily argue those executives pay personal income tax on their compensation - so that money is being taxed.

And Jeff Macke, host of Yahoo! Finance’s Breakout, bemoans the "absurdity of going after this loophole," given the revenues it would produce.

“I could hawk a loogie in the East River and expect the tide to rise – expect that to actually elevate the level of the East River - for all this would do to increase our tax rolls," he argues in the video above. "We have bigger fish to fry."

Macke says the focus should be on corporate repatriation of profits held overseas.

To put it in perspective, Bloomberg reports Apple (AAPL) avoided an almost $9.2 billion tax bill by using debt to finance part of its $55 billion share buyback. They issued bonds to pay for some of it, as opposed to bringing home some of the $100 billion in cash held overseas, which would be taxed at 35%.

That $9.2 billion from one company is almost as much as Macke says we'd recoup in a year from all companies if we closed the CEO pay loophole. (We used back of the envelope calculations, using the Economic Policy Institute estimates in the Reich piece, which get us to $10.6 billion in foregone tax revenue a year.)

Check out the video and let us know what you think.

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