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Wealth

IRS Commissioner Charles Rettig

Photo by USDAgov is marked with CC PDM 1.0

Reprinted with permission from American Independent

A new study has found that the wealthiest one percent of Americans are dodging payment of taxes at a much higher rate than prior research had revealed.

According to the Wall Street Journal, the study, conducted by a team of Internal Revenue Service and academic researchers and economists for a working paper published by the National Bureau of Economic Research, found that the richest one percent of households fail to disclose to the IRS a full 21 percent of their income.

The researchers concluded that the amount of unreported income for the top 0.1% might be as much as twice as high as earlier research had indicated.

The study also uncovered that six of the 21 percentage points were attributable to the use of elaborate techniques to avoid detection, ones that a typical IRS audit might not catch. These include pass-through businesses, through which income is siphoned directly into the business owner's personal accounts and not taxed at the corporate rate, and earnings held in offshore accounts, which an IRS audit only detects about 7% of the time.

The researchers wrote, "From a policy perspective, our results highlight that there is substantial evasion at the top which requires administrative resources to detect and deter. We estimate that 36 percent of federal income taxes unpaid are owed by the top one percent and that collecting all unpaid federal income tax from this group would increase federal revenues by about $175 billion annually."

These patterns were already detectable 20 years ago when the National Tax Journal published a report called "The Distribution of Income Tax Noncompliance." That 2010 report contained the results of analysis of data for the 2001 tax year and showed that although households in the top income bracket accounted for only 44 percent of earned income in 2001, they accounted for 61 percent of income tax evasion.

Conversely, in 2001 the bottom 50 percent of earners represented 14 percent of earned income nationally — but only 12 percent of tax evasion. Despite this discrepancy, a 2019 ProPublica report noted that low-income Americans were still being audited at the same rate as the highest earners.

And Republican tax policy has continued to prop up the wealthiest one percent of Americans, giving them tax cuts and special tax benefits. The Center for American Progress has noted that while today the top marginal tax rate is around 37 percent, that's a steep drop from rates during much of the first four decades after the introduction of the income tax in 1913, when it often rose above 70 percent, hitting 94 percent during World War II and staying at 91 percent for most of the 1950s and early 1960s.

And the Tax Cuts and Jobs Act of 2017, signed into law by Donald Trump, disproportionately benefited wealthy individuals and corporations with enormous tax cuts. The act neither increased worker wages nor helped low-income communities, according to the Economic Policy Institute.

Connie Razza, the Center for Popular Democracy's chief of campaigns and policy, has called the 2017 tax law a scam.

"We have to call Trump's tax plan for what it is, a scam," she said in an Economic Policy Institute press release. "He sold this as a benefit to working people, but the report shows clearly that it only caters to the super-wealthy, historically white, corporate class."

And recently, Republicans have slammed reports of a new tax policy proposed by Biden that would raise taxes on the very wealthy and corporations in order to reduce income inequity and aid post-pandemic economic recovery.

"Democrats said they wouldn't raise taxes," the official account for GOP members of the House Ways and Means Committee tweeted last week. "They didn't keep their promise. Biden is planning to slap American workers and families with the largest tax increase since 1993."

But the economists who produced the National Bureau of Economic Research working paper say rich Americans are withholding too much of their wealth from the IRS.

Daniel Reck of the London School of Economics, the lead author of the study, told the Wall Street Journal, "There is more revenue than you might have thought at the very top. What's needed is a broader strategy that involves increased scrutiny of pass-through businesses [and] investments in the comprehensive audits that the IRS does in its global high-wealth program."

Charles Rettig, the IRS commissioner, was in agreement last week when he said in testimony before the House Ways and Means Oversight Subcommittee that funding to implement such a strategy was needed.

"It is not just a body count of how many people we have in enforcement," he noted, adding that to investigate tax evasion by the wealthy, "We need to have specialized agents."

Congress, too, is making efforts to hold the rich accountable for tax evasion or avoidance.

Last month, Rep. Ro Khanna (D-CA) introduced the Stop Corporations and Higher Earners from Avoiding Taxes and Enforce Rules Strictly Act, or Stop CHEATERS Act, which would $100 billion to the IRS specifically to improve auditing and collection of taxes owed by people and corporations in the top 1% of earners.

"We know our tax system is broken, and it's long past time we start fixing it," Khanna said in a statement. "Wall Street has been able to act like high rolling gamblers with almost zero consequences for far too long. Right now, the wealthiest one percent are responsible for roughly 70 percent of the 'tax gap'—the difference between taxes owed and taxes paid. It's time every American pay their fair share."

Published with permission of The American Independent Foundation.

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Lachlan Murdoch, who was paid $42 million by Fox Corp. in 2020

Reprinted with permission from DCReport

A new study shows that the top five executives of major corporations pocketed 15 to 19 cents of every dollar their companies gained from two recent tax cuts. The paper, by Eric Ohrn at Grinnell College, should be a really big deal.

The basic point is CEOs and other top executives rip off their companies. The officers are not worth the $20 million or more that many of them pocket each year.

This is not a moral judgment about their value to society. It is a simple dollars-and-cents calculation about how much money they produce for shareholders. The piece suggests that it is nothing close to what they pocket.

This is a big deal because it is yet another piece of evidence that executives are able to pocket money that they did nothing to earn.

It is no more desirable to pay a CEO $20 million if someone just as effective can be hired for $2 million than to pay an extra $18 million for rent.
In the case of these tax cuts, company profits increased because of a change in government policy, not because their management had developed new products, increased market share or reduced production costs. Some of them presumably paid for lobbyists to push for the tax breaks, so their contribution to higher profits may not have been exactly nothing.There is much other work along similar lines. An analysis of the pay of oil company CEOs found that they got large increases in compensation when oil prices rose. Since the CEOs were not responsible for the rise in world oil prices, this meant they were getting compensated for factors that had little to do with their work. A more recent study found the same result.Another study found that CEO pay soared in the 1990s because it seemed that corporate boards did not understand the value of the options they were issuing.


A few years ago, Jessica Schieder and I wrote a paper showing that the loss of the tax deduction for CEO pay in the health insurance industry, which was part of the Affordable Care Act, had no impact on CEO pay.

The loss of this deduction effectively raised the cost of CEO pay to firms by more than 50 percent. If CEO pay were closely related to the value they added to the company's bottom line, we should have unambiguously expected to see some decline in CEO pay in the industry relative to other sectors. In a wide variety of specifications, we found no negative effect. Lucian Bebchuk and Jesse Fried's book, Pay Without Performance, presents a wide range of evidence on this issue.

Ripping Off Companies

As can be easily shown the bulk of the upward redistribution from the 1970s was not due to a shift from wages to profits, it was due to an upward redistribution among wage earners. Instead of money going to ordinary workers, it was going to those at the top end of the wage distribution, such as doctors and dentists, STEM [science, technology, engineering and math] workers, and especially to Wall Street traders and top corporate management. If we want to reverse this upward redistribution, then we have to take back the money from those who got it.

If top management actually earned their pay in the sense of increasing profits for the companies they led, then there would be at least some sort of trade-off. Reducing their pay would mean a corresponding loss in profit for these companies. It still might be desirable to see top executives pocket less money, but shareholders would be unhappy since they would have fewer profits.

But if CEOs and other top management are not increasing profits in a way that is commensurate with their pay, their excess pay is a direct drain on the companies that employ them.

From the standpoint of the shareholders, it is no more desirable to pay a CEO $20 million if someone just as effective can be hired for $2 million than to pay an extra $18 million for rent, utilities or any other input. It is money thrown in the garbage.

As I have argued in the past, the excess pay for CEOs is not just an issue because of a relatively small number of very highly paid top executives. It matters because of its impact on pay structures throughout the economy. When the CEO gets paid more, it means more money for those next to the CEO in the corporate hierarchy and even the third-tier corporate executives. That leaves less money for everyone else.

The Ohrn study found that 15 to 19 percent of the benefits of the tax breaks he examined went to the top five executives. If half this amount went to the next 20 or 30 people in the corporate hierarchy, it would imply that between 22 percent and 37 percent of the money gained from a tax break went to 25 of the highest paid people in the corporate hierarchy.

If the CEO is getting $20 million, then the rest of the top five executives are likely making close to $10 million; the next echelon making $1 to $2 million.

If we envision pay structures comparable to what we had in the 1960s and 1970s, CEOs would be getting $2 to $3 million. The next four executives likely would earn $1 to $2 million. The third tier would be paid in the high six figures. With the pay structures from the corporate sector carrying over to other sectors, such as government, universities and non-profits, we would be looking at a very different economy.

Arranging Their Own Pay

If CEOs really don't earn their pay, the obvious question is how do they get away with it? The answer is they largely control the boards of directors that determine their pay.

Top management typically plays a large role in getting people appointed to the board. Once there, the best way to remain on the board is to avoid pissing off your colleagues. More than 99 percent of the directors nominated for re-election by the board win their elections.

Being a corporate director is great work if you can get it.

As Steven Clifford documents in his book, The CEO Pay Machine, which is largely based on his experience at several corporate boards, being a director can pay several hundred thousand dollars a year for 200 to 400 hours of work. Directors typically want to keep their jobs, and the best way to do this is by avoiding asking pesky questions like, "Can we get a CEO who is just as good for half the money?"

While many people seem to recognize that CEOs rip off their companies, they fail to see the obvious implication that shareholders have a direct interest in lowering CEO pay.

For example, a common complaint about share buybacks is that they allow top management to manipulate stock prices to increase the value of their options. (Editor's note: Before 1982, buybacks were illegal, deemed a form of manipulation.)

If this is true, then shareholders should want buybacks to be more tightly restricted, since they are allowing top management to steal from the company. If shareholders actually wanted CEOs to get more money from their options, they would simply give them more options, not allow them to manipulate share prices. Yet, somehow buybacks in their current form are still seen as serving shareholders.

Shareholders Losing Out

As a practical matter, it is easy to show that the last two decades have not been a period of especially high returns for shareholders. This is in spite of the large cut in corporate taxes under the Trump administration.

There seems to be confusion on this point because there has been a large run-up in stock prices over this period. Much of this story is that shareholders are increasingly getting their returns in the form of higher share prices rather than dividends.

Before 1980, dividends were typically three to four percent of the share price, providing close to half of the return to shareholders. In recent years, dividend yields have dropped to not much over one percent, with the rest of the return coming from a rise in share prices. If we only look at the share price, the story looks very good for shareholders, but if we look at the total return, the opposite is the case.

If CEOs really are ripping off the companies they lead, then shareholders should be allies in the effort to contain CEO pay. This would mean that giving shareholders more ability to control corporate boards would result in lower CEO pay.

As with much past work, Ohrn's study found that better corporate governance reduced the portion of the tax breaks the CEO and other top executives were able to pocket.

There are many ways to increase the ability of shareholders to contain CEO pay, but my favorite is to build on the "Say on Pay," provision of the Dodd-Frank financial reform law. This provision required companies to submit their CEO compensation package to an up or down vote of the shareholders every three years. The vote is nonbinding, but it allows for direct input from shareholders. As it is, most pay packages are approved with less than 3% being voted down.

I would take the Say on Pay provision a step further by imposing a serious penalty on corporate boards when a pay package gets voted down. My penalty would be that they lose their own pay if the shareholders vote down the CEO pay package.

While a small share of pay packages get voted down, my guess is that if just one or two corporate boards lost their pay through this route, it would radically transform the way boards view CEO pay. They suddenly would take very seriously the question of whether they could get away with paying their CEO less money.

I also like this approach because it is no more socialistic than the current system of corporate governance. It would be hard to make an argument that giving shareholders more control over CEO pay is a step toward communism.

The basic point here is a simple one: The rules of corporate governance are unavoidably set by the government. There is no single way to structure these rules. As we have now structured them, they make it easy for CEOs to rip off their companies. We can make rules that make it harder for CEOs to take advantage of their employers and easier for shareholders to contain pay.

Progressives should strongly favor mechanisms that contain CEO pay because of the impact that high CEO pay has on wage inequality more generally. And, shareholders should be allies in this effort. There is no reason for us to feel sorry for shareholders, who are the richest people in the country. They can help us contain CEO pay and we should welcome their assistance.