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6 IRET Congressional Advisory 1 (1992)

handle is hein.taxfoundation/iretcgadv0006 and id is 1 raw text is: June 3, 1992 No. 6 LIMITING DEDUCTIONS FOR EXECUTIVE COMPENSATION: ANOTHER EXERCISE IN THE POLITICS OF ENVY To finance an additional 20 or 26 weeks of unemployment compensation benefits, the House Ways and Means Committee proposes a couple of stiff tax increases on upper-income individuals and on corporations with highly-paid executives. The first of the proposed revenue raisers would extend for two years the present-law personal exemption phaseout for individuals with adjusted gross incomes above specified amounts. The other revenue gainer would disallow the deduction of executive compensation in excess of $1 million. The only conceivable justification for these revenue raisers is that the people stuck with the additional taxes have no effective way of opposing them. Neither of the proposed tax hikes meets any test of efficiency or fairness. By no stretch of the imagination can the taxpayers who would be called upon to pony up the additional taxes be held accountable for the unemployment for which the additional benefits are to be paid, nor will any of them benefit from the payment of the additional unemployment compensation. These taxpayers are the designated goats only because they are politically impotent. The proposed tax hikes invoke the worst of all of the recent trends in tax policy. They combine the soak-the-rich politics of envy with the anti-big business bias that has infected nearly all tax legislation beginning with the Tax Reform Act of 1986. The phase-out of the personal exemption was enacted as one of the revenue raisers in the infamous Omnibus Budget Reconciliation Act of 1990. As has so often been the case in recent years, the only conceivable rationale for the phase- out is that it produces a significant amount of additional revenue from people who can't organize as a pressure group to protest such outrageously discriminatory tax provisions. Extending the phase-out for two years beyond its scheduled termination in taxable year 1995 relies on the same sort of unprincipled soak-the-rich mind set. That mind set also produced the second revenue raiser in the unemployment compensation extension bill. A majority of the Ways and Means Committee members obviously feels that any executive's compensation in excess of $1 million is not a legitimate business expense and should not therefore be entitled to the same tax treatment as other employees' compensation or other expenses of doing business. The legislation does not affect the deductibility of salaries paid to other employees who may earn over $1 million annually, such as professional athletes, television news anchors, and movie stars. The implication is that Ways and Means Committee members know better than the stock holders and boards of directors of American companies what business executives are worth. How the figure of $1 million was arrived at is not explained and why it might be OK for a business to pay non-executive employees more than a million but not executives is also not explained. No matter what rationale the Ways and Means Committee staff comes up with, this proposal is an attempt to place arbitrary controls Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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