The Incredible, Magically Metamorphosing Taxpayer-Subsidized Executive Perk

By James Kwak

Once upon a time, the story goes, corporate America was fat and happy. Top executives worked in palatial office suites bedecked with flowers, flew everywhere in private jets, and ate every meal at the Four Seasons or Le Bernardin.

Then there was the shareholder value revolution. Michael Jensen and the rest of the Chicago School efficient-market legions showed that shareholder value was the only thing that mattered and stock prices were the only measure of shareholder value. Activist investors demanded an end to executive perks and ushered in the era of pay for performance, in which executives are paid in stock options, so they only make (a lot of) money if shareholders make money. Congress event went along by capping the tax-deductible amount of executives’ base pay, which helped along the shift to stock-based compensation.

We know how one side of this deal has turned out. Executives are paid largely in stock, which has produced a vast increase in total compensation. But pliant boards and captured compensation consultants have figured out all sorts of ways to ensure huge paydays regardless of performance, some illegal (backdated stock options) and others legal (simply repricing options when the stock falls).

What about the other side? Are executive perks—paid for by shareholders, remember—a thing of the past?

Apparently not. It turns out that having the company pay for the private jet—even the private house, in some cases—is too tempting for CEOs to lay off. Not only that, as Steven Davidoff writes, CEOs have figured out a way to get taxpayers to subsidize their royal lifestyles. Ordinarily, if a company pays for an executive’s personal travel on a corporate or other private jet (just like any other personal travel), the value of that travel is counted as income for tax purposes. But:

“If an outside security consultant determines that executives need a private jet and other services for their safety, the Internal Revenue Service cuts corporate chieftains a break. In such cases, the chief executive will pay a reduced tax bill or sometimes no tax at all.

“Even when tax is due, the company sometimes takes care of it.”

Now, I understand that sometimes it makes sense for executives to fly on corporate or chartered jets for business. That’s a tax-deductible business expense. No problem there.

If a company wants to go out of its way to let the CEO take the corporate jet on vacation, that’s income, pure and simple. It might be justified on the grounds that if the company didn’t pay for the jet, then the CEO would demand more compensation in other forms. That’s just a classic corporate governance question.

But in this case, it’s highly likely that the company is paying for the jet because of the tax break. Think about it. If you’re the CEO, which would you rather have, use of the jet or cash? Rationally speaking, you should prefer the cash, since you could (a) fly first-class commercial and pocket the difference or (b) fly NetJets and pocket the difference. This is a case where the executive perk exists because of the arbitrage opportunity created by the tax code: companies have found a way to get taxpayers to pick up part of the tab for their executives’ lifestyles.

This tax season, this seems to me something that all of us could get mad about.

8 responses to “The Incredible, Magically Metamorphosing Taxpayer-Subsidized Executive Perk

  1. Michael M Thomas

    There is also a special deal on private jets that permits tax-free trade-ins. It has something to do with the way the depreciated value of the older aircraft is treated.

  2. Also probably why the heliport on the East River is overflowing with single-passenger commuter copters every morning…the Merritt is just too dangerous for plutocrats.

  3. Not to worry Steve, airspace adjustments were recently put into place to favor the ‘copters in lieue of pedestrian air travel. We don’t want to risk the lives of those job creators do we?

  4. It’s a good thing IRS has auditors and agents trained to ferret out abuses when it comes to the admixing of personal and business expense items on business returns.

    Without these folks, YOU could be underwriting lease payments for a spouse’s luxury auto driven for personal use, the family trip to Disney in Orlando, tuition payments to college. Yes, corporate returns.

    Typically, these are disguised in the books and records, and, obviously, mis-categorized on the return. The income is absent on the W-2, but the deduction is not missing on the return.

    The government taxes these items as a constructive dividend and removes the deduction, upon detection. A 20% accuracy-related penalty may be assessed, as well, depending on the facts and circumstances of the error.

    A good agent is working for the honest taxpayer, by noting and correcting erroneous return entries, which bilk those not fiddling around with sound recording.

    Incidentally, the consultation fee to the security “expert” making a declaration that private jet travel is a “safety” feature for a particular business executive is tax deductible, generally.

    Yes, I am enjoying retirement.

  5. Support the flat tax, abolish the IRS, and anyone who makes a living off of the tax man.

  6. There are excellent reasons why people such as Steve Forbes are enamored with the flat tax.

    I have a better idea. Simplify the Form 1040 to only two lines:

    1. What is your income ___________

    2. Send it in ___________

    Happy April 15th, people.

  7. The whole security justification is preposterous on its face in the vast majority of cases. Almost all corporate executives, including CEOs, are of interest to the general public only in their own inflated imaginations. I like to compare the risk they take by appearing in public on a commercial plane with the risk that all kinds of government officials take who do not have access to private planes. Who do you think is really at more risk from disgruntled members of the public–a generic publicly traded company CEO or a federal judge? How about an assistant DA in LA who works in the Major Crimes unit prosecuting gang murderers on a daily basis? An even starker comparison–the CEO or a social worker who travels through public housing projects on a daily basis doing home visits for foster children? What would the “security consultant” say that she needs for her protection?