Winning the Class War

Every year around Labor Day, United for a Fair Economy (UFE) issues a report on the excesses of CEO pay.

This year's report -- Executive Excess 2007: The Staggering Social Cost of U.S. Business Leadership -- found that "top executives averaged $10.8 million in total compensation, which is 364 times the pay of the average American worker, a calculation based on data from an Associated Press survey of 386 Fortune 500 companies."

Another key finding: The top 20 equity and hedge fund managers raked in an average of $657.5 million, or 22,255 times the pay of the average worker. Meanwhile, the study notes, workers at the lowest rung of the economic ladder just got their first federal minimum wage hike in a decade. Over that same decade, UFE reports, CEO pay has increased by 45 percent.

None of that is very surprising. What's interesting is the finding that compensation for U.S. business leaders now "wildly dwarfs" the big bucks being paid leaders in other sectors.

The top 20 CEOs of publicly traded corporations last year took home, on average, $36.4 million. That's 38 times more than the top 20 in the nonprofit sector and 204 times more than the 20 highest-paid generals in the military.

Executive Excess aims to dispel the notion that excessive executive pay is a necessary function of modern economies. If that were true, the report's authors argue, "business executives that American executives compete against in the global marketplace would be just as excessively compensated as American executives. They aren't. Top executives of major European corporations ... last year earned three times less than their American counterparts."

Such grotesque pay differentials essentially mean we, as a society, are discouraging needed leadership talent from entering less lucrative fields, such as education, where we could use an infusion of talent.

The thing I like about UFE reports is they always include pragmatic policy proposals. This year's report offers six:

  • 1) Eliminate tax subsidies for excessive CEO pay, which would close a tax loophole that allows corporations to deduct excessive CEO pay packages as a "business expense."

    UFE estimates that by closing that loophole alone there would be $1.4 billion in extra tax revenues -- enough to pay the annual salaries of 29,000 teachers and reduce class sizes in overcrowded schools, the study says.

  • 2) End the preferential tax treatment given to private investment company income.

    That would plug the loophole in the current tax code that allows equity and hedge fund managers to pay taxes at a lower rate than average Americans. Closing that loophole, the Economic Policy Institute estimates, would add $12.6 billion to the federal treasury, which could be used to fully fund a five-year expansion of the public health insurance program for low-income kids.

  • 3) Cap tax-free 'deferred' executive pay.

    Tax-free deferred pay is unlimited for corporate executives but strictly limited by average workers enrolled in standard 401(k) plans.

  • 4) Eliminate the tax reporting loophole on CEO stock options.

    Because corporations are allowed to report one set of executive stock option figures to investors and another to the IRS, it allows corporations to get tax deductions that far exceed companies' reported expenses, according to the U.S. Senate Permanent Subcommittee on Investigations.

  • 5) Link government procurement to executive pay.

    The feds should deny procurement contracts to firms who pay top executives more than 25 times what their lowest-paid workers make. "The federal government currently denies contracts to companies that foster racial and gender inequality. The same principle could be invoked to deny contracts to companies that increase the nation's economic inequality," the study proposes.

  • 6) Increase the top marginal tax rate on high incomes.

    The report notes: "... any move to restore mid-20th century top marginal tax rates would raise substantial revenue for investments in education and other social programs that could significantly broaden economic opportunity."

Indeed, this is class warfare. And as Warren Buffett has noted, his side is winning.

Fellow rat-race runners, arm yourself with information. It won't win the war but like the G.I. Joe cartoons used to say: knowing is half the battle.

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