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News from EPI Corporate tax deductions for executive pay cost U.S. $7 billion in lost revenue in 2010

For Immediate Release: Tuesday, August 14, 2012
Contact: Phoebe Silag or Karen Conner, 202-775-8810

Corporate tax deductions for executive pay cost U.S. $7 billion in lost revenue in 2010

A new report released today by the Economic Policy Institute, Taxes and executive compensation by Temple University accounting professor Steven Balsam, provides estimates of the tax deductions and lost tax revenue associated with the executive compensation of publicly held companies. The study estimates that tax-deductible executive compensation cost the federal treasury $7 billion in revenue in 2010 and $30.4 billion over the years 2007-10.

Section 162(m) of the Internal Revenue Code, adopted in 1993 to discourage excessive executive pay, limits the deduction for executive compensation at publicly traded corporations to $1 million in compensation per covered executive. An exception to the provision, however, allows corporations to deduct qualified performance-based compensation. The exception has a major weakness in that, while it requires that shareholders approve the performance-based compensation to preserve deductibility, corporations are only required to provide shareholders with general information. Thus shareholders are asked to, and usually do, approve plans without knowing the potential payouts from the plan or whether the performance conditions are challenging.

Consequently, in 2010 publicly traded corporations deducted an estimated $27.8 billion of executive compensation. Over the 2007-2010 period, they deducted an estimated $121.5 billion. More than half of these deductions can be attributed to the performance-based compensation exception.

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Steven Balsam is Professor of Accounting and Senior Merves Research Fellow at the Fox School of Business at Temple University. He has written several books on executive compensation including Executive Compensation: An Introduction to Practice and Theory, as well as published in the top academic and practitioner journals in Accounting. Professor Balsam is also a member of the editorial boards of the Journal of Accounting and Public Policy and The International Journal of Accounting. He has been widely quoted in the media and has given expert witness testimony on executive compensation to the United States Senate Committee on Finance.

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