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How CEOs can reap millions in tax-subsidized bonuses

U.S. job growth slowed in August, and other MoneyWatch headlines 01:07

Top executives at the nation’s 20 biggest banks were awarded nearly $800 million in stock-based performance pay between 2010 and 2015. And taxpayers helped foot the bill for these bonuses even as many of the financial institutions racked up massive fines for misconduct.

That’s according to a report released late this week by the left-leaning Institute for Policy Studies (IPS), which calculated how much taxpayers have been subsidizing executive bonuses at the largest U.S. financial institutions.

The top 20 U.S. banks paid out more than $2 billion in fully deductible performance bonuses to their top five executives over the past four years, the institute found. At a 35 percent corporate tax rate, that equates to a taxpayer subsidy worth more than $725 million, or $1.7 million per executive per year.  

Donald Trump: High CEO salaries are a “total and complete joke” 00:58

Of course, it’s not only bank executives who reap windfalls from a loophole to legislation Congress passed in 1993 that capped the tax deductibility of executive pay at $1 million. The loophole? The law’s cap excludes “performance-based” pay, including stock options. If that loophole were closed, it would save taxpayers $50 billion over 10 years, according to the Joint Committee on Taxation.  

One of the biggest beneficiaries of the tax loophole is Starbucks (SBUX). Its chief executive, Howard Schultz, took home $236 million in exercised stock options and other “performance pay” in 2012 and 2013, according to IPS. 

Both presidential candidates have voiced outrage over the widening gap between what CEOs and their employees make. Republican Donald Trump last summer called soaring executive pay “a total and complete joke,” while adding that he can’t do anything to change it. Democrat Hillary Clinton urged reform of the performance-based tax deductions for top executives, without specifically calling for closing the tax loophole.  

The largest amount of the tax-subsidized bank bonuses went to Wells Fargo (WFC​) CEO John Stumpf, who received more than $155 million in fully deductible performance pay. That works out to $54 million in tax subsidies to Wells Fargo between 2012 and 2015, according to IPS. 

“Wells Fargo is a responsible corporate citizen and believes that it has fulfilled its obligations to federal, state, and local communities where we serve our customers,” the bank said in an emailed statement. “Wells Fargo is one of the largest corporate taxpayers in the U.S. For the time period cited in the report (2012-2015), Wells Fargo paid more than $22 billion in federal corporate income tax.”     

During that time, Stumpf’s bank was fined $10.4 billion for misconduct including defrauding consumers, according to the institute. 

In late August, the Consumer Financial Protection Bureau fined Wells Fargo​ $3.6 million and ordered it to pay $410,000 to thousands of student loan borrowers that the CFPB said had been deceived or treated unfairly.

The consent order with the regulatory agency involved “legacy payment procedures that were retired or improved many years ago, and addresses the impact to a small number of consumers,” the bank said in a statement, which added that Wells Fargo did not concur with the CFPB’s assertions.

Wells Fargo’s income tax bill in 2015 came to $12.6 billion, with $10.8 billion of that figure representing its federal corporation income tax, $1.7 billion its state corporation income tax, and the remainder its foreign corporation income tax, according to the bank. The bank’s effective tax rate for 2015, or total tax expense as a percentage of pre-tax income, was 31.2 percent. In addition, Wells Fargo said it paid more than $2.2 billion last year in other taxes such as payroll, property and transaction taxes.

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