Limiting Tax Deductibility of Executive Compensation (Rep. Barbara Lee)

The financial crisis has brought bailouts of the banks, the auto companies and the single largest $170 billion bailout of the world’s largest insurance company, AIG. While the banks and the car companies have had to agree to reasonable restraints on their executive compensation, AIG continues to pay out huge bonuses to the very division that drove the entire company into ruin.

It doesn’t make sense that the heads of the financial firms that have relied on tax payer dollars to keep their companies afloat continue to receive perks and bonuses on the backs of hard working Americans. It is time that we start reinvesting our resources in the people of this country to provide pathways out of poverty and get people back to work.

To this end, I reintroduced the Income Equity Act last week which would limit the tax deductibility of executive compensation packages.  The tax code already limits the deductibility of wage income at $1 million, which is exactly why complex compensation packages of stock options, housing allowances, cars and drivers and private planes have risen dramatically. This legislation would close the loophole that allows companies to abuse the tax system and forces taxpayers to subsidize these excessive forms of compensation.

Additionally, it includes a broader definition of executive compensation and limits the deductibility of that compensation to the greater of $500,000 or 25 times the pay of the lowest wage worker. This would discourage the skyrocketing pay at the top and encourage companies to raise the pay of workers at the bottom.

This crisis has made some things crystal clear, markets don’t regulate themselves and we need to end taxpayer subsidies of out of control executive compensation packages.

Let’s be clear, limiting the tax deductibility of these out of control pay packages does not stop any company from compensating their executives any amount they choose, it simply limits their tax deductibility. We shouldn’t be allowing excessive compensation, which we define as 25 times that of the lowest paid workers at the company, to be deducted. American taxpayers should not be bearing the burden of excessive pay packages.