Taxpayers in the United States are subsidizing the salaries of country's top business executives to the tune of US$ 20 billion a year, according to a report by the Washington-based Institute for Policy Studies (IPS).

The report "Executive Excess 2008: How Average Taxpayers Subsidize Runaway Pay," presents the result of IPS' 15th Annual CEO Compensation Survey, which highlights five major tax and accounting loopholes it argued were directing taxpayer dollars to fund excessive executive pay.

The largest of these tax loopholes, the so-called stock option accounting double standard, cost taxpayers US$ 10 billion last year, according to IPS. The tax rule allows companies to account for stock option expenses on their financial sheets when they grant the options, but then claim the tax deduction when the CEO actually cashes out the options, often years later when their worth has usually increased. The result is tax deductions that are much higher than the original expenses.

Another major loophole is the unlimited tax deductibility of executive pay, which allows companies to deduct executive pay from their income taxes as a business expense so long as the pay is ‘reasonable'. The IRS has failed to define reasonable, and a 1993 attempt by then President Clinton to cap these deductions at US$ 1 million failed.

According to the study, the US$ 20 billion estimate "understates the true extent of the current taxpayer subsidy for executive excess," because it excludes many subsidies that indirectly affect pay. In particular, the study points to the many types of corporate welfare which help inflate corporate profits, thereby increasing performance-based executive pay.

IPS researchers found that the exploitation of these loopholes to increase executive pay is a recent phenomena beginning in the 1980s. They theorize that this trend is a result of the concentration of economic power in executive hands due in part to the dramatic fall in union membership and influence which has occurred over the last half century.

The full IPS report is available from the IPS by clicking here.