FORBES
Taxes
Richest 400 Earn More, Pay Lower Tax Rate
Janet Novack, 01.29.09, 5:00 PM ET
WASHINGTON, D.C.--The 400 highest-earning taxpayers in the U.S. reported a record $105 billion in total adjusted gross income in 2006, but they paid just $18 billion in tax, new Internal Revenue Service figures show. That works out to an average federal income tax bite of 17%--the lowest rate paid by the richest 400 during the 15-year period covered by the IRS statistics. The average federal tax bite on the top 400 was 30% in 1995 and 23% in 2002.
The new numbers are sure to add fuel to the debate over whether the Bush-era rate cuts for the wealthy, now set to expire Dec. 31, 2010, should be ended or extended.
The current top rate on long-term capital gains is 15%, and the top rate on ordinary income such as interest and salary is 35%. President Barack Obama and congressional Democrats favor moving those rates back to their Clinton-era levels of 20% and 39.6%, although the perilous state of the economy seems likely to delay any rate hike until 2010 or 2011.
The top 400 earners in 2006 reported an average adjusted gross income of $263 million, up 23% from $214 million in 2005. Even adjusted for inflation, the 2006 number set a new high. Calculated in 1990 dollars, it was $68 million, up from $25 million in 1996. In 2006, the minimum income needed to make the top 400 was $111 million, also a record in both nominal and inflation-adjusted dollars.
The IRS report demonstrates how valuable the low capital gains rate has been to the richest of the rich. In 2006, the top 400 realized $66 billion, or 63% of all their income, in net capital gains.
By contrast, Americans overall reported less than 10% of their adjusted gross income as coming from capital gains. The richest 400 reported 1.3% of all adjusted gross income but booked 8.5% of all net capital gains.
The result: the top 5% of earners--those with an adjusted gross income of $153,542 or more--now pay a higher effective tax rate than the top 400.
In 2006, the top 5% paid an average of 21% of their adjusted gross income to Uncle Sam in income taxes. The top 1%, with an income of $388,806 or more, paid an average of 23%.
Social Security and Medicare taxes, which are insignificant to the richest 400, further raised the rate on the merely well paid. Indeed, investor Warren Buffett, the second-richest American, has decried the fact that he pays a lower percentage of his income in federal tax than do the folks who work for him in Berkshire Hathaway's home office.
The IRS points out that its 400 highest earners aren't the same folks from year to year. They also aren't the same individuals who appear on the net-worth based Forbes 400, although there is likely considerable overlap. (Making the Forbes 2006 list took a net worth of $1 billion.) IRS officials have acknowledged, however, that they picked the 400 number because of the Forbes list.
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STEVE LOPEZ / POINTS WEST
Income Gap More Like a Chasm
Steve LopezPoints WestApril 12, 2006In the last week I've written about the quick recovery of an illegal immigrant who was shot in the chest while landscaping a yard in Inglewood, and a U.S.-born high-rise security guard who makes so little money she can only afford a phone booth-size room in downtown Los Angeles. Some readers saw an obvious connection:The illegal immigrant and thousands like him have depressed wages for legal blue-collar residents like her. There's certainly some truth in that. If you've got an illegal workforce willing to work for peanuts, and employers happy to exploit their desperation, wages at the bottom end are likely to stay low.But let's forget illegal immigration for a moment, because if you ask me, we've got other economic problems in Southern California, and here's a thumbnail sketch:Despite a relatively healthy economy on paper, middle-income jobs are as scarce as intelligent screenplays, and that has more to do with the death of manufacturing than the influx of illegal immigrants. Meanwhile, you've got to be Eli Broad to afford a house in this cuckoo real estate market, and thousands of kids can't get through high school, let alone move on to a college and university system that isn't what it used to be.What this means is that we've got $20-million houses offering spectacular views down the hill and into the Third World. If not for the fact that it takes forever to get anywhere on the bus, we'd have a revolution on our hands. So the question I've been asking public officials and civic leaders is what we can do about the income gap that runs like a fault line through the land, dividing the haves from the help.I want to stand up and clap when Jack Kyser of the Los Angeles County Economic Development Corp. lays some of the blame on the big-box planning model. He says we do not need — repeat, IX-NAY— any more Targets and Kmarts, or any other Coliseum-size discount joints.Not only do those places devour what little land is still available, but the jobs they provide are lousy, and it's not as if consumers have nowhere else to turn for tube socks and toilet paper. City officials would be smarter, Kyser says, if they used scarce land to build jobs in expected growth industries like technology, international trade and engineering.Kent Wong of UCLA's Center for Labor Research agrees that we need to keep trying to replace the kinds of jobs that were lost in Southern California when aerospace and manufacturing went belly up. But he also knows that the service economy is here to stay, and that means we have to find ways to elevate the standard of living for bellhops, janitors, security guards, nannies, maids, construction workers and waiters."We have a situation like we did in the 1930s, when auto manufacturing, mining and steel work were poverty jobs," Wong said. Unionization moved those workers into the middle class, he says, and it can push service employees in the same direction.Los Angeles County has 55,000 security guards, said Bruce Stenslie of the Los Angeles Workforce Investment Board."If you could move them from $8.50 an hour to $10.50, $11, $12, with health benefits," as Local 1877 of the Service Employees International Union is trying to do with security guards, "you'd have an enormous impact on the economy," he said.If you hear a sucking sound, it's mass hyperventilating by the fat and happy building and business owners who employ the security guards. But before you shed too many tears for the captains of industry, consider the billions of dollars in corporate welfare shelled out each year across the land, not to mention congressional largesse on offshore flimflam and other tax shelters and loopholes.Beyond that, a living wage translates into more people contributing and fewer people on the dole.Mayor Antonio Villaraigosa's office estimated Tuesday that if security guards were better trained — as they should be in the post-9/11 era — and were paid even as much as unionized janitors, it could pump $100 million a year into South Los Angeles, where many security officers live.So why can't the leaders of Greater Los Angeles work together on some of these ideas?Because it would break the long and proud tradition of self-interest and isolation.Dan Flaming of the Economic Roundtable said the public entities involved — transit, port, even economic development agencies — are incapable of "chewing gum and walking at the same time."..................................................................................................................................................................................
DYNAMIC OF THE MEXICAN INVASION..... DOWNWARD PRESSURE ON WAGESHe recommended, among other things, a crackdown on "predatory work conditions," putting city and county prosecutors to work collecting back wages from underground employers and enforcing labor laws.
......................................................................................................................................................................................And, as Los Angeles City Council President Eric Garcetti said, we need to be thinking not just about today's labor force, but about the next generation of workers."We don't have a jobs gap," he said. "We have a skills gap."
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CEO pay in US continues its relentless climb in 2005
by Joe Kay 12 April 2006
Few things expose the real character of American society and politics more clearly than the extraordinary and ever-increasing level of inequality, the accumulation of vast, almost incomprehensible, sums of wealth in the hands of relatively small group of people. The United States is a country in which the entire corporate and political structure is dominated by one overarching drive: the personal enrichment of a narrow oligarchy.
A glimpse of this state of affairs can be found in several recent surveys of compensation for chief executive officers at major US corporations. These CEOs are a subset of the wealthiest layer of the American population, and they perform a critical function—they ensure that the corporations they manage are operated in the interests of the major investors that compose the American ruling elite. For this service they are handsomely rewarded.
The reports only measure CEO compensation, neglecting other sources of wealth accumulation such as individual investment portfolios. Nevertheless, the figures reveal that a truly staggering level of social resources is being channeled into the pockets of these individuals.
USA Today published its annual report on CEO pay April 10, based on data collected by eComp Data Services. The analysis included a chart of the compensation doled out to chief executives at 240 of the country’s largest companies, where total compensation included direct salary, bonuses, incentives, gains from exercised stock options, and the value of newly issued stock options. Not all top companies are included in the survey. The Wall Street Journal and the New York Times published separate analyses of the figures.
The newspaper found that six of these CEOs took home over $100 million in 2005. At the top of the list was Richard Fairbank, the chairman and CEO of Capital One Financial, which recently announced plans for an acquisition of North Fork Bancorporation, part of a general consolidation in the banking sector. Fairbank exercised stock options that brought him nearly $250 million, giving him a total compensation of $280 million. “His personal haul,” USA Today noted, “exceeded the annual profits of more than 550 Fortune 1000 companies, including Goodyear Tire & Rubber, Reebok and Pier 1.”
Capital One’s acquisition of North Fork created a stir of controversy last month when it was revealed that the head of North Fork, John Kanas, will get a $135 million payout if the deal goes through, including $44 million to reimburse Kanas for personal income taxes. All told, top executives at North Fork will receive in the neighborhood of $350 million as a result of being bought up by Capital One.
The other executives at large companies breaking the $100 million mark were KB Home’s Bruch Karatz ($164 million), Cendant’s Harry Silverman ($133 million), Lehman Brothers’ R.S. Fuld Jr. ($119 million), Genentech’s Arthur Levinson ($109 million) and Occidental Petroleum’s Ray Irani ($106 million).
KB Home is a home building company and Cendant is a real estate services company. Both companies have benefited from the housing market bubble. Lehman Brothers is an investment bank, whose earnings like many of the top investment banks have been up as a consequence of intensified merger activity, including the Capital One deal and the rapid consolidation of the telecommunications sector—a process that has resulted in the wiping out of thousands of jobs. Irani’s earnings at Occidental reflect the extraordinarily high compensation handed out to executives at oil and energy companies.
Nine more chief executives among the companies surveyed received over $50 million last year, while 131 received over $10 million. All told, the 240 executives included in the USA Today summary of large companies took home a total of over $4.5 billion dollars.
The paper noted that “median 2005 pay among chief executives running most of the nation’s 100 largest companies soared 25 percent to $17.9 million, dwarfing the 3.1 percent average gain by typical American workers.”
A few of the top earners were not included among the largest companies. These included the CEO of Analog Devices, Jerald Fishman, “who cashed out $144.7 million from his deferred compensation plan and made another $4.3 million in salary, bonus and options gains,” the newspaper reported. Perhaps the executive with the highest income was Google’s head of global sales, Omid Korestani, who exercised stock options giving him a massive $288 million.
In general, stock options have become an increasingly lucrative means by which executives have enriched themselves. A stock option allows the recipient to buy a stock at some preset price at a future date of his choosing (after a set period has elapsed). If the actual value of the stock at the time is above the preset price, the stock can be bought at the lower price and sold at the higher to yield a quick profit. The aim of this form of compensation is quite simple: it creates a personal incentive for executives to boost the short-term value of their company’s stock.
A previous study from the Wall Street Journal, published March 15, found that executives at the 150 biggest companies in Silicon Valley (California’s technology center) took home $1.55 billion by exercising stock options in 2004, up 50 percent from 2003 and 177 percent from 2002. The 2005 figure is even higher, and represents a recovery after a sharp drop in stock option compensation following the stock market collapse in 2001.
In its study using slightly different figures, the New York Times found that mean CEO pay at 200 large companies increased 27 percent in 2005, to $11.3 million. The Times noted that CEO pay at big companies is more than 170 times average worker pay. In fact, this is a major underestimation. Based on Bureau of Labor Statistics data indicating an average salary of about $28,000 for a production worker, these CEOs earn on the order of 400 times the pay of ordinary Americans.
While pay for CEOs is rising by double-digit percentage points every year, wages for average workers are falling behind inflation, meaning that real wages are declining. The argument is often advanced that companies cannot afford to pay high wages or benefits to workers—who can be replaced with workers in lower wage countries—even as tens of millions of dollars are routinely doled out to top executives, whose skills are supposedly irreplaceable. Treasury Secretary John Snow recently explicitly defended the pay of CEOs on the basis that their salaries were the product of efficient market forces of supply and demand. “In an aggregate sense,” he said in an interview with the Wall Street Journal published March 20, “it reflects the marginal productivity of CEOs.”
What is really involved, however, is not differential compensation based on the value added to the company, but rather a massive transfer of wealth from the bulk of the population into the hands of the ruling elite. To keep investors happy, executives oversee job cuts and cost reductions, and if they are successful, stock prices soar and the executives themselves reap the rewards.
The extraordinary rise in CEO pay is part of a long-term trend in which management of major US companies has been increasingly subordinated to the immediate financial interests of Wall Street and the major investors. When profit rates in the United States began to decline in the 1970s, an attempt was made to counteract this tendency with CEOs tasked with pushing through job, wage and benefit costs in order to boost earnings. The trend continues today with individuals such as Delphi’s CEO Robert Miller, who was hired explicitly to implement massive cuts in labor costs to the detriment of tens of thousands of workers.
Of course, the link between stock price and CEO pay is not always exact, with some executives receiving large bonuses while their company’s stock flounders. The Wall Street Journal reported on March 18 that many companies backdate their stock option grants, so that the preset price for purchasing stock is lower than it would be otherwise, artificially increasing the payoff to executives. At the top of American corporations, there is a whole network of intersecting interests, in which members of company boards, who often are associated with other companies, and outside compensation consultants reward executives in exchange for particular benefits.
The focus on stock values and short-term earnings has created a situation in which the actions of executives often undermine the companies they oversee. A recent article, (“Value Destruction and Financial Reporting Decisions” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=871215) academics John Graham, Campbell Harvey and Shiva Rajgopal interviewed chief financial officers at major American companies and found that “the majority of firms are willing to sacrifice long-run economic value in order to deliver short-run earnings. Companies do this in response to intense pressure from the market to meet expectations, and to avoid the severe negative market reaction to not delivering.”
Tying executive pay to stock values has also created an incentive to manipulate accounting books to obscure financial difficulties. Companies like Enron, WorldCom, Tyco and others that have collapsed into bankruptcy after accounting scandals in recent years are hardly unique. The executives at these companies made millions, and so long as the company stock price was soaring, the political and media establishment lauded them. Several now find themselves on the docket, but only after a lot of very wealthy people lost a lot of money.
The controlling interest of this very small layer of the population is the principal driving force behind government policies, both domestic and foreign. A recent analysis by the New York Times found that the Bush administration’s tax cuts on investment income will hand back an average of $500,000—more than most people will earn in 10 years—to individuals with incomes of $10 million or more.
An insight into the criminality and arrogance with which the US government carries out wars, assaults democratic rights and rips up the social gains of workers can only be gained through an understanding of the motivations and interests of America’s
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