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This simple cartoon shows how US taxpayers help make rich bankers even richer

This is John Stumpf, CEO of Wells Fargo.

From 2012 to 2015, his 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.

Taxpayers pay for the compensation of many bank executives

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 federal government to lose more than $725 million in revenue from 2012 to 2015 — enough money to hire 9,000 elementary school teachers.

How did this happen? Why did bonus pay get this special status?

In the early 1990s, Bill Clinton was running for president and trying to rein in high executive pay. At the time, companies could write off all compensation for executives. So he proposed putting a $1 million cap on the deduction, which means companies would be penalized for paying their executives more than $1 million a year.

Clinton's first budget — adopted in 1993 — created section 162(m) of the tax code, which implemented this proposal.

But there was a loophole.

This cap didn't apply to "performance-based" pay, like stock options or certain bonuses.

The hope was to incentivize executives to perform well for the shareholders, since it encouraged companies to pay their executives based on performance.

Tech companies in the early 1990s lobbied hard for the loophole, according to Sarah Anderson, one of the authors of the report. This is because they were often startups without much cash on hand, so they wanted to attract top executives by offering stock options. And they had a lot of sway, because they were seen as the future of the economy.

Clinton’s intentions were good — but didn’t work out as he’d hoped.

Companies didn't lower executive pay.

In fact, they just started to pay their executives differently — and more.

These bonuses were often tied to easy, frequently short-sighted, performance goals.

Anderson points out that it actually incentivized executives to be reckless, because they were trying to optimize their personal bonuses.

This kind of risky behavior is part of what led to the 2008 market crash.

So after the 2008 crisis, this loophole was temporarily closed for banks who took a bailout from the federal government

And, remember, the bailout was at the cost of taxpayers.

But as a condition, banks that took a bailout could only deduct executive compensation up to $500,000, no exceptions. And this rule would apply until they paid off the bailout.

Banks wanted to get out from under these conditions, so many of them borrowed from private companies to pay back the taxpayers. At that point, the cap was lifted.

And maybe banks had learned their lesson, right? After all, it was these executives who led the US into the worst financial crisis in 75 years.

Nope.

Executive pay continued to increase, especially the bonuses — again, at a cost to taxpayers

Let’s rehash

1) This loophole helped bank executives get very wealthy, at the cost of taxpayers.

2) But these bonuses incentivized bank executives to take short-sighted risks. This partially drove us into the financial crash.

3) So US taxpayers had to bail out these companies to help them get back on their feet.

4) These companies got back on their feet — and continued to increase executive compensation, again at a cost to taxpayers.

Not only that, but everyday Americans — who had their assets in property and stocks — were hurt greatly during the crisis, and it took a long time to recover. Meanwhile, these executives were able to "re-amass their fortunes long before shareholders or homeowners," Anderson said.

"That's the perversity of this loophole that really needs to be underscored," she added.

This is one factor that drives the massive American wealth gap

In 1983, the top 1 percent of American households had about $10 million in wealth, and people on the Forbes 400 list had about $700 million in wealth, both in 2013 dollars.

What happened in the next 30 years is astounding:

This is crazy. Why can't we close this loophole?

US lawmakers have closed this loophole before — for health care executives, as part of the 2013 Affordable Care Act.

As for this bank executive loophole? Anderson says there just hasn't been the political will, even though we have enough evidence to say with little doubt that Clinton's idea didn't work. (Even at the time, an expert on executive compensation, Graef Crystal, told Clinton that the idea was "utterly stupid.")

In addition, most Americans — and even most Republicans — believe executives are paid too much:

There have been a few bills in Congress that favor closing this loophole, and former GOP Rep. Dave Camp, who chaired the Ways and Means committee, wrote up a plan to create more stringent caps on executive pay.

The solution most Americans want is to either heavily tax CEO pay over a certain amount, or to set a strict cap on how much CEOs can make, relative to their workers.

As long as this loophole is open, though, it makes sense for banks to continue paying executives these huge sums. There are only so many people in the world who have the skill set to be a CEO of a large bank. So in that limited market, a slightly better CEO will cost a lot more money — but also have good returns, or so the thinking goes. (That said, this doesn’t always hold up.) In any case, the way to create the strongest compensation package, at the smallest cost to the company, is by loading up on bonuses and stock options, since the US tax code makes them deductible.

But for now, taxpayers are still ponying up to help make wealthy bankers even wealthier, because the US tax code encourages it.


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