Do CEOs Get Paid for Taking Big Risks? The Big Ones Don’t

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2016-10-06 – The New York Times revelation of Donald Trump’s $915 million tax loss from 1995 is not only a problem for his campaign, it ought to be a problem for the entire Republican narrative about heroic business people.

Before we get into the reason for this, I want to make a distinction that is rarely made when discussing business and business incentives. In my mind, there is a world of difference between a Mom and Pop business (even a large one) and a publicly-held business.

For the most part, the Moms and Pops are the entrepreneurs that Republicans rightfully laud. They had an idea. They risked all that they had. They worked hard. And they succeeded. (The only notable exception might be inherited businesses.)

Publicly-held businesses are not like this. CEOs have usually stepped into a job they did not start. They may be workaholics, but they usually don’t have much on the line after they’ve earned their first few million. Sure, they can lose their job—but they have no worries about ending up on welfare. They just step into another cushy job. Sure, their stock can go down—but it’s not the same as needing a paycheck to get your next meal.

No, the people at risk are a company’s employees. And its stockholders. And its creditors.

And the government.

That net operating loss carryover (3 years back, 15 years forward) that you’ve heard about in connection with Trumps 1995 return means that the government took the hit for roughly a third of his $915 million loss. We don’t know the details, but if Trump paid taxes in 1992-1994, the U.S. treasury sent him a check for as much as $300 million or more.

My biggest tax refund paid for a modest vacation.

We don’t know if this happened. If he didn’t pay taxes in those years, he could use the loss to shelter income for up to 15 years after 1995. The cost to the government would have been somewhere in the same range. When you hear about big companies that don’t pay taxes, this is one of the ways. They have a “loss” and they use the loss to shelter other income.

You and I can’t do this. Heck, most Mom and Pops can’t do this. Why? Because when you and I have a loss, we’re out of the game. Our decisions put us at risk. But high-rollers like Trump don’t take risks with their own money (or, if they do, they have a huge cushion so they don’t worry about it).

When the so-called pro-business party argues its case, they like to make you think that they are doing it for the small entrepreneur. The truth is, they are doing it for guys like Trump.

And these are the kinds of fake risks they take to earn their multi-million dollar pay packages.

 

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2 responses to “Do CEOs Get Paid for Taking Big Risks? The Big Ones Don’t

    • Hi Ken– I’m not proposing anything, but just pointing out that the risks borne by CEOs in large businesses are not as frightening as we’re led to believe. NOLs certainly have a place for at least two reasons. One is that tax accounting based on a single tax year creates distortions. More important is that NOLs support a legitimate public purpose, which is to mitigate risk. I’m just saying that, if your risk is mitigated, be truthful about it.

      Making tax proposals is hugely complex, so I wouldn’t do that in a blog. If I were going to do this, though, I would look for ways to differentiate Moms and Pops from corporations that are more like a polity than a merely entrepreneurial project. Pols often wave the interests of small business in our face in support of benefits that mainly go to the bigger guys. It’s dishonest, but easy to do because we don’t have good terminology of good legal categories for these very different types of enterprise.

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