Fast Food Giants Use Loopholes to Avoid Taxes on CEO Pay

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This post first appeared in OtherWords.


Burger King
A Burger King worker cleans up at a Burger King restaurant in Sunnyvale, Calif. The fast food chain is operated by Yum Brands, whose CEO, David Novak, received a $94 million payout for 2011 and 2012. Of that, $33 million was subsidized by taxpayers. (AP Photo/Paul Sakuma)

The fast food industry is notorious for handing out lean paychecks to their burger flippers and fat ones to their CEOs. What’s less well-known is that taxpayers are actually subsidizing fast food incomes at both the bottom — and top — of the industry.

Take, for example, Yum Brands, which operates the Taco Bell, KFC and Pizza Hut chains. Wages for the corporation’s nearly 380,000 US workers are so low that many of them have to turn to taxpayer-funded anti-poverty programs just to get by. The National Employment Law Project estimates that Yum Brands’ workers draw nearly $650 million in Medicaid and other public assistance annually.

Meanwhile, at the top end of the company’s pay ladder, CEO David Novak pocketed $94 million over the years 2011 and 2012 in stock options gains, bonuses and other so-called “performance pay.” That was a nice windfall for him, but a big burden for the rest of us taxpayers.

Under the current tax code, corporations can deduct unlimited amounts of such “performance pay” from their federal income taxes. In other words, the more corporations pay their CEO, the lower their tax burden. Novak’s $94 million payout, for example, lowered YUM’s IRS bill by $33 million. Guess who makes up the difference?

Combined, these firms’ CEOs pocketed more than $183 million in fully deductible “performance pay” in 2011 and 2012, lowering their companies’ IRS bills by an estimated $64 million. To put that figure in perspective, it would be enough to cover the average cost of food stamps for 40,000 American families for a year. My new Institute for Policy Studies report calculates the cost to taxpayers of this “performance pay” loophole at all of the top six publicly held fast food chains — McDonald’s, Yum, Wendy’s, Burger King, Domino’s and Dunkin’ Brands.

After Yum, McDonald’s received the second-largest government handout for their executive pay. James Skinner, as CEO in 2011 and the first half of 2012, pocketed $31 million in exercised stock options and other fully deductible “performance pay.” Incoming CEO Donald Thompson took in $10 million in performance pay in his first six months on the job. Skinner and Thompson’s combined performance pay translates into a $14 million taxpayer subsidy for McDonald’s.

What makes all this even more galling is that these fast food giants are pocketing massive taxpayer subsidies for their CEO pay while fighting to keep their workers’ wages at rock bottom. All of the big fast food corporations are members of the National Restaurant Association, which is aggressively working to block a raise in the federal minimum wage to a level that would let millions of fast food workers make ends meet without public support.

There’s an easy solution to the perverse “performance pay” loophole. A bill introduced by Senators Jack Reed (D-RI) and Richard Blumenthal (D-CT) would simply set a firm $1 million cap for executive pay deductions — with no exceptions. Corporations could still pay their CEOs whatever they choose, but at least taxpayers wouldn’t be subsidizing anything above $1 million. The Joint Committee on Taxation estimates this legislation would generate more than $50 billion over 10 years.

It makes no sense for employees of highly profitable giant corporations to have to rely on government assistance for basic needs. It makes even less sense for ordinary taxpayers to subsidize the CEOs who are benefiting most from the fast food industry’s low-road business model.

With Congress again mulling deficit-reduction strategies, it’s high time that Washington stopped letting fast food giants gorge on both of these absurd subsidies.

Sarah Anderson, OtherWords blogger
Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies and is the author of the new report Fast Food CEOs Rake in Taxpayer-Funded Pay.
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  • http://seattleteamgear.com/ K Brown

    Of course, when the corporations bought and paid for our government this is what we have. The masses footing the bill don’t want it changed because they live for looking down their noses at the working poor as if they are better than them. Until we can find our own self worth without having to have someone to look down upon, nothing will change. We will continue to worship the rich and torment the poor and it makes me ashamed. It is unbelievable to me that people can’t see that as the bottom rises, everyone rises, that we would ALL benefit.

  • GG Johnson

    What is the bill number so we can contact our representatives to support it!??!!! Complete your article – or is this written to merely incite anger?

  • Celeste Rothstein

    S. 1476, the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act

  • Diana Reichardt

    I really hope the bill passes but I am sure Republicans will step in and save the day for their billionaire buddies. Boy I am so fed up with politicians.

  • Anonymous

    What bull!! The tax code lets EVERY employer deduct wages paid to EVERY employee. What this article is really saying is that nobody should be able to earn a lot of money. That concept works well in North Korea, doesn’t it?

  • JonThomas

    Depends. Each person’s exact tax rate, and amount owed is dependent upon each person’s individual situation.

    Much depends on the type of income and applicable deductions.

    For example… if the performance pay takes the form of stock options, and the individual winds up exercising it as Long Term Capital Gains, the tax responsibility is lower than either the individual rate, or the corporate rate.

    To me it’s an great example of how complicated and convoluted the tax code is, and how much it is skewed in favor of powerful.interest groups.

  • Anonymous

    They’re “earning” it?
    They’re so genius? They made the business?
    They build the cars and lay the roads that bring in the customers?
    They police the area to keep it safe for themselves and their customers?
    They print the money and keep the environment clean?

    False dichotomies always a failure (i.e. “It’s either this or that” [here or North Korea]), avoid them.

  • Anonymous

    Both the CEO and the Corporation have an incredible amount of loopholes, accountants and legal teams at their disposal to enable them to game the system.

    This is “unfettered capitalism” and unbridled greed.

  • JonThomas

    Yes, wages are deductible. However, when excessive wages are paid to CEO’s, and the profit’s which make that possible are made on the back’s of under-paid employees, then said employees have at least one thing in common with the people of N. Korea… They should find every way possible to change the dynamic.

    In the case of N. Korea, they have to stand against powerful political forces. In the case of low wage workers in the U.S., they have to stand against powerful political forces… not to mention standing against apologists which would defend abusive practices.

    What this article is saying is that corporations use the tax code in their favor, while simultaneously exploiting U.S. citizens.

    The responsible act would be to help people understand their personal value, and empower consumers in refusing to support low wage businesses.

  • geetar

    Agreed – the only way out is economic – we need to vote with our dollars & support the myriad of burgeoning businesses (worker owned – co-ops, local banks etc) that have a more sustainable profit model. Crowdfunding is a game changer – we can now capitalize these businesses & starve the tape worm that is the power elite.

  • Anonymous

    And shareholders? Your North Korea example is rather stupid kind of like the crap one expects from Fixed News.

  • Anonymous

    This brings the term ‘entitlements’ to mind for me.

  • Angela Adams

    I say it’s time to stop frequenting fast food places. They can’t get performance bonuses if their profits decrease. Hit them where it hurts & help the small business owners!

  • http://economicmythsandlies.com/ economicmythsandlies

    All politicians will step in for them. Keep thinking the democrats are any better about putting people on Wall Street over the common man. Now go back to your awesome koolaid concoction.

  • Lori

    In addition to the 1 million dollar cap, perhaps the way to best address this inequity and to get the restaurant industry behind a rise in the minimum wage, would be to allow them to deduct “performance pay” for the regular employee rather than the CEO’s.

  • Anonymous

    I suggest more than a $1 million cap on performance income. I suggest a $150,000 income cap for all workers. Income beyond that would be taxed at 100%

    If your job is so unpleasant that you need to lavishly bribed to do it, then it should probably be redesigned. For most folks, getting to drive the train and blow the whistle suffices.

    The savings in executive salaries should create sufficient resources to bring up minimum pay to $50,000: the threshold of reasonable livability, by my calculation.

  • Anonymous

    Not that much, ram. If a CEO will hang on to the option for two years before exercising them, they are taxed as straight capital gains at 15%.

  • Edward Moriarty

    And all their food is no good anyway. Wake up USA_Stay away

  • Sun

    This article is pure baloney. Of course compensation is deductible – it is taxed at the individual level. The level of spin that liberals come up with is purely amazing.

  • Sun

    they already do dummy.

  • JonThomas

    I’m sorry, but your statement… “Of course compensation is deductible – it is taxed at the individual level”… is not correct.

    Much of ‘Performance Pay’ is offered as Stock Options. If the recipient waits a time period before availing themselves of such options (as is most often the case,) because of tax code which favors upper class citizens, the Options can be claimed as “Long Term Capital Gains.”

    “Long Term Capital Gains” are taxed at a flat 15%. This is lower than both the U.S. Individual tax rate, and the U.S. Corporate tax rate. This is not spin, this is FACT!

    I’m not sure where you have learned about this subject, but either you aren’t being told the full story, or it seems that you are trying to do a bit of spinning yourself.

    Education is the key. Listening to short, unverifiable rhetoric used as dispersion only leads to embarrassment. Please check your facts and join the side of those who, instead of ignoble propaganda, are trying to spread truth.

  • Sun

    You are right, education is key. You clearly don’t understand how stock options work for employee compensation. A stock option only qualifies for long term capital gains if 1) the exercise price is above the fair market value, which means that the present value at grant is zero, 2) it is exercised after 1 year 3) the stock is held for an additional year 4) and it does not exceed 100,000 in a calendar year. This is known as a qualified stock option.
    Most stock options are granted in the money which is known as a Non-qualified stock option and the difference between fair market value and strike price is taxed at ordinary income.
    In case you don’t believe me,see next post which requires moderation for links to sources.

  • JonThomas

    Sam, please stop cloaking the issue in false complications…

    Here is an accepted expert’s link that offers a clear, concise description which needs no ‘moderation’…

    https://turbotax.intuit.com/tax-tools/tax-tips/Investments-and-Taxes/Guide-to-Short-term-vs-Long-term-Capital-Gains-Taxes–Brokerage-Accounts–etc–/INF22384.html

    An extremely applicable section from the linked guide is…

    “Long-term capital gains”

    “If you can manage to hold your assets for longer than a year, you can benefit from a reduced tax rate on your profits. For 2013, the long-term capital gains tax rates are 0, 15, and 20 percent for most taxpayers. If your ordinary tax rate is already less than 15 percent, you could qualify for the zero percent long-term capital gains rate. For high-income taxpayers, the capital gains rate could save as much as 19.6 percent off the ordinary income rate.”

    That link provides a description that isn’t hidden behind double talk and excuses!

    WE ARE SO TIRED OF FALSE EXCUSES PROVIDED BY TYRANNICAL APOLOGISTS!

    YOU RELY ON PEOPLE WHO ARE OVER-WHELMED AND NOT ABLE TO TAKE THE TIME TO FIND THE TRUTH! TOO BAD THE INFORMATION IS SO EASILY OBTAINED IN THIS CASE!

    Please, please just stop the obfuscations!

  • Sun

    Your link applies to stocks, not stock OPTIONS.
    I tried to post a link earlier to 1-4 but the comment system said it needed to be moderated. Google: “Qualified vs Non-qualified Stock Options diffen” and the first link clarifies the information of Non-qualified Stock Options vs Qualified Stock Option. You are incorrect and you need to correct this.

  • JonThomas

    Ok, while it is good to see people taking an interest, this is getting old… I’ll lay it out one more time WITH ANOTHER LINK!

    http://www.investopedia.com/articles/optioninvestor/07/esoabout.asp

    From the linked page…

    *** “Non-qualified stock options differ from incentive stock options in two ways. First, NSOs are offered to non-executive employees and outside directors or consultants. By contrast, ISOs are strictly reserved for employees (more specifically, executives) of the company. Secondly, nonqualified options do not receive special federal tax treatment, while incentive stock options are given favorable tax treatment because they meet specific statutory rules described by the Internal Revenue Code (more on this favorable tax treatment is provided below).” ***

    In the considered topic, we are primarily concerned with PERFORMANCE related pay offered to executives as Incentive based pay. As pointed out by the researched information, stock OPTIONS offered as Performance Pay to executives are ISO’s (incentive stock options.)

    Again from the researched, linked material…

    *** “Incentive stock options (ISO) receive special tax treatment:

    The grant is not a taxable transaction.

    No taxable events are reported at exercise; however, the bargain element of an incentive stock option may trigger alternative minimum tax (AMT).

    The first taxable event occurs at the sale. If the shares are sold immediately after they are exercised, the bargain element is treated as ordinary income.

    The gain on the contract will be treated as a long-term capital gain if the following rule is honored: the stocks have to be held for 12 months after exercise and should not be sold until two years after the grant date. For example, suppose that Stock A is granted on January 1, 2007 (100% vested). The executive exercises the options on June 1, 2008. Should he or she wish to report the gain on the contract as a long-term capital gain, the stock cannot be sold before June 1, 2009.” ***

    So… Incentive Stock Options, when exercised according to the tax code as Long term Capital Gains, offer tax rates lower than the U.S. Individual rate, AND the U.S. Corporate Rate.

    Is this now clear enough? Again, PLEASE STOP TRYING TO OBFUSCATE. If you were unaware, then please do more research… this is too important a subject for people to be twisting.

    The focus of this article (and the subsequent discussions,) is CEO (Executive) Performance Pay. As I stated, and provided in the researched and posted links, when Performance Pay is offered in the form of Stock Options (ISO,) and the rules written by powerful interest groups (designed to favor wealthier individuals) are followed, then the tax rates paid on Performance Pay is often much lower than what would be paid if the Pay was claimed at the U.S. Individual Tax rate, or the U.S. Corporate rate!

  • Sun

    lol, now it shows up.

  • JonThomas

    Yield? To what? The words you put in my fingertips?

    The fact is that ISO’s provide tax benefits that are beyond the reach of the average American worker… especially so for the average American fast food employee.

    As I pointed out before you started twisting and turning to save face, your original comment….

    “…compensation is deductible – it is taxed at the individual level.”

    You, yourself, have proven as false! Thank you for making my point… I accept your apology.

    I had no original claim in this discussion beyond letting you know you were wrong. Both you, and I, proved my point.

    Perhaps the most egregious aspect, besides the generalized Performance Pay tax loophole arguments made in the article by the author, is that even if there is a cap on the Long-term Capital Gains rate for ISO’s set at $100,000 (this of course ignores all other deductions and loopholes,) that cap, just on the stock options aspect of Performance Pay, is more than 5 times the amount that the average fast food restaurant worker makes in a year!

    It is obvious from just our discussion that the tax code favors the wealthiest of citizens and is so complicated, that just to navigate and realize benefits, it requires expensive tax law firms which are FAR beyond the financial reach of the average American worker.

    The wealthier the individual, and the larger the corporation, the more the tax code allows for benefits which, as the author of this article pointed out, amount to subsidies for the wealthiest at the expense of their own employees!

    So, while you hemmed and hawed, and acted unwisely, you wound up proving my point- and the Author’s assertions – correct, and, simultaneously, yourself wrong.

    Thanks again!

  • Sun

    Let’s try to stay on topic and recap here: The article issue is that CEOs are getting a tax break for their compensation. CEO compensation, like all compensation, is taxed at the individual level. Therefore, there is no money escaping taxation as a ‘tax break.’

    You made the claim that CEO compensation receives a 15% tax rate through stock options. I proved it was false because CEOs are granted stocks options in the millions which exceeds the 100k limit for a qualified stock option.

    So now that I cornered you, you are drifting the issue to contrast anyone who qualifies for ISO (which by the way is millions of employees in this country) to entry level workers who don’t qualify at the present moment (but might in the future if they climb the corporate ladder). The fact that the CEO makes X dollars and a entry level worker makes Y dollars matters how exactly? A Bugatti Veyron has 10 times the amount of horsepower as a Kia Rio too. They are built with different capabilities.
    Then you drift the issue to the complication of the tax code. Exactly, which is why everyone would benefit from a flat tax with limited deductions.
    Then you mention that the wealthier the individual, the more benefits, but you are missing out a) the AMT which removes deductions b) the wealthiest pay far more taxes and a higher percent of their income than the average worker in this country.
    You are really trying to move the discussion away from the claim I challenged you on, but if we circle back to your first comment replying to my comment, will you acknowledge that CEO compensation does not receive the long term capital gains rate and you are, in fact, wrong?

  • Anonymous

    “Socialism for the rich and free-market capitalism for the poor”