Maybe Congress makes a poor compensation committee. Some years ago, Congress decided that it knew how executives should be compensated better than corporation boards of directors. The Omnibus Budget Reconciliation Act of 1993 limited public company deductions for executive compensation to $1 million per year, per executive, except for “performance based” compensation.
Victor Fleischer says it’s past time to get Congress off the compensation committee in The Executive Paycheck Myth (via the TaxProf):
In my view, the obsession with pay-for-performance is overkill. A risk-averse executive seeking the quiet life — if indeed such a person ever existed — would not climb the corporate ladder today. The labor market for executives already rewards those who act over those who stand on the sidelines. A risk-averse executive will soon find himself out of a job and unable to find a new one.
Yet the tax code operates as if we need a special incentive to encourage risk-taking. Section 162(m) was enacted in 1993. Instead of reining in executive pay, the tax code sprinkles holy water on high-risk, high-reward compensation plans. To qualify for the deduction, companies must use instruments like stock options and performance share plans with asymmetric payout structures — lots of upside, no downside — that encourage excessive risk-taking.
I don’t really think 162(m) was passed to encourage risk taking. If you take the Senate committee report at its word, it was passed to cut executive pay:
Recently, the amount of compensation received by corporate executives has been the subject of scrutiny and criticism. The committee believes that excessive compensation will be reduced if the deduction for compensation (other than performance-based compensation) paid to the top executives of publicly held corporations is limited to $1 million per year.”
Congress arbitrarily decided $1 million was the maximum appropriate pay for running a business with market capitalization in the billions. But it left an out for “performance-based compensation.” Stock options are part of the “performance-based compensation,” so naturally option packages became a big part of executive packages.
Prof. Fleischer makes the case for repeal:
There’s a strong case for simply repealing Section 162(m). We don’t need the tax code to encourage chief executives to give up the quiet life.
Congress might even consider flipping Section 162(m) upside down for investment banks and other large financial institutions where excessive risk-taking creates large social costs.
Would Wall Street executives suddenly become timid and risk-averse, regressing to the fabled quiet life? I doubt it. The forces of the labor market will continue to produce executives who take risks, and boards will probably continue to structure pay that rewards them generously.
Repealing 162(m) would be a good start. A good next step would be to repeal Sec. 409A, a moral-panic set of restrictions enacted as a result of the Enron scandal that now functions mostly as a malpractice trap for attorneys and a potential disaster for employees whose employers inadvertently fail its baroque requirements.
Kevin Williamson, Obamacare Is Dead. But it still walks the earth. Zombies are a bad thing to have around.
Bob Vineyard, The Problem With Obamacare (Insureblog). “OK, in case you missed it, the healthy people are not buying coverage, but the sick ones are.”
Robert D. Flach explains TAX DEDUCTIONS FOR VOLUNTEERS
Jason Dinesen, Taxation of Railroad Retirement Benefits
Paul Neiffer, Social Security Potpourri. ” If you live less than age 80, then starting at age 62 will pay the most. If you live past age 80, then waiting to age 70 is usually the best.”
Russ Fox, Time Running Out on the Miccosukee Tribe’s Battle with the IRS. “Indeed, I’m all for fighting the IRS when they’re (imho) wrong. However, fighting quixotic battles when you are wrong isn’t a good idea.”
Robert Wood, If Clinton Foundation Fails To Amend Its Taxes, ‘What Difference Does It Make?’ “In general, and subject to timing constraints, one can correct tax mistakes by filing amended returns. However, sometimes the IRS views amended tax returns as too little too late.”
Del Wright, Section 6676 – the Problem Penalty (Procedurally Taxing). “Section 6676 provides generally that an erroneous claim for refund on an income tax return is subject to a 20% penalty, based on the ‘excessive amount’ of the penalty, i.e., the amount by which a taxpayer’s claim for refund exceeds the allowable claim.”
Peter Reilly, Taxing The Virtual World. “The actions of third parties creating a secondary market in all those things in contravention of the terms of service turned World of Warcraft into a hybrid economy.”
Jack Townsend, Not Your Ordinary U.S. Taxpayer With Foreign Accounts. “The press release narrative is a bit cryptic, but states the key points — he cheated and lied to his estranged spouse and then to others including a court and federal agents.” When your drive with a carful of cash from Alaska to Panama and back results in a Department of Justice press release, that’s a good sign that it went awry.
Jeremy Scott, A Look Back at the Most Interesting Part of Bowles-Simpson (Tax Analysts Blog).
As a tax reform plan, Bowles-Simpson has been superseded by former House Ways and Means Chair Dave Camp’s H.R. 1, which also hasn’t garnered much support. But Camp didn’t really consider the most interesting part of the 2010 proposal: the elimination of the preference for capital gains.
Unless either ordinary gain rates come way down or corporation double taxation is eliminated, eliminating capital gain preferences strikes me as an awful idea.
Joseph Henchman, Voters in Five States Decide Tax-Related Ballot Initiatives (Tax Policy Blog). Coloradans voted to let the state keep an unexpected Marijuana tax windfall, but Ohio rejected an odd pot legalization scheme.
Howard Gleckman, Tax Reform Is Possible, But It Won’t be Easy (TaxVox). “As Breaux put it,’You’ve got to be able to sell it to members of Congress who don’t know the difference between a balance sheet and a tax return.'” Because that would get you a majority.
TaxProf, The IRS Scandal, Day 910.
Jenice Robinson, Tax Cut Crazy Talk (Tax Justice Blog). To the CTJ folks, that would be pretty much all tax cut talk.
The Critical Question. Are Sellers of Cheap Pizza Tax Scofflaws? (Jim Maule, Going Concern).
News from the Profession. Proposal Would Let Retired CPAs Take Their Three Letters Off Into the Sunset (Caleb Newquist, Going Concern).