No, Taxpayers Are Not Subsidizing Banker Bonuses

If I were to make a list of the most abused words in the English language, “subsidize” would almost certainly make my top 10.

Here’s Merriam-Webster: “SUBSIDIZE: to aid or promote (as a private enterprise) with public money.” When the government takes money from some people and gives it to others — say, solar and wind companies — it’s subsidizing those others. “Subsidize,” then, is just a fancy word for redistributing wealth.  

But according to some commentators, when the government takes less of someone’s wealth, it is giving him a subsidy.

Exhibit A: “This simple cartoon shows how US taxpayers help make rich bankers even richer.” That’s from Vox, and if you think they’re referring to bank bailouts — which most certainly were a subsidy—well, you’re giving them too much credit.

From 2012 to 2015 [Wells Fargo CEO John Stumpf’s], salary was $2.8 million a year. But Wells Fargo also gave him $155 million in stock options and bonuses that were tied to the company’s performance.

The reason Wells Fargo paid him this way is because the government doesn’t tax performance-based pay for Stumpf, or any other top bank executive in America.

Unlike regular salaries — where the government takes out taxes to pay for Medicare, Social Security, and all other sorts of things — US tax code lets banks deduct the big bonuses they give to their executives.

That means taxpayers essentially subsidized $54 million of his pay.

Scott Greenberg from the Tax Foundation explains why this is factually wrong. To wit: Under the U.S. tax code, households are generally required to pay individual income taxes on the value of the stock options and bonuses that they receive. This means that Mr. Stumpf was likely required to pay an individual income tax rate of up to 39.6% on the performance-based pay that he received from Wells Fargo.” (There’s much more that’s good in Greenberg’s article, so do read the whole thing.)

What Vox is presumably referring to, Greenberg goes on to say, is the fact that corporations can deduct performance pay from their taxable income, the same way they can deduct — again, contrary to Vox — compensation paid to other employees. Like every other business, corporations are taxed on their profits, i.e., what they make after their expenses are subtracted from their revenues.

So where’s the subsidy? Back to Vox:

We’ve long known that bank executives get massive bonuses. But a new report from the Institute for Policy Studies shows just how much money Americans lose out on because of this policy, which allows banks to write off certain kinds of executive compensation.

From 2012 to 2015, the top five executives at the 20 largest US banks earned about $2 billion in performance-based pay that their companies could deduct.

The report found that it caused the the [sic] federal government to lose more than $725 million in revenue from 2012 to 2015 — enough money to hire 9,000 elementary school teachers.

Get that? The government is “subsidizing” bankers at the expense of Americans (presumably Vox doesn’t count bankers as Americans) because if it took more money from bankers it could give away more money to taxpayers.

By that logic, a thief is subsidizing you whenever he doesn’t take your wallet.

What this really illustrates is that, far from being opposed to subsidies, the critics of CEO pay are angry because — as Yaron and I argue in Equal Is Unfair — they object to high pay for CEO as such, and want to see a massive increase in how much wealth is seized from affluent Americans and redistributed to less affluent Americans.

But since open wealth confiscation tends to leave a bad taste in the mouths of most Americans, critics of CEO pay try to paint their vendetta as a crusade for justice. After all, if CEOs (bankers, no less!) are getting richer through special favors from the government, then even the most devoted advocate of laissez-faire will want to see the practice end.

This is why Vox focuses specifically on bankers, even though their argument would apply equally to all corporate executives. There is a case that some bankers have gotten rich through special favors from the government, including, as Vox notes, the bailouts that followed the financial crisis. That arguably doesn’t apply to Wells Fargo, though, which was basically forced to take TARP money against its will, and promptly repaid it.

Setting aside Wells Fargo, however, the solution to cronyism is never to give the government more power to control American businesses, but to limit its already immense power so that it no longer acts as the great dispenser of special privileges. No subsidies for anyone: rich, poor, or anywhere in between. That should be the goal.

Such an agenda, however, would not achieve the goals of critics of CEO pay: to penalize the successful for being successful.

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