The Omnibus Revenue Reconciliation Bill of 1993, H.R. 2264, 103d Cong., 1st Sess. (1993) imposed a 10% surtax on any annual salary in excess of $250,000 and prohibited publicly held corporations from deducting executive compensation in excess of $1 million per annum unrelated to performance. Promoting passage of the legislation, President Clinton stated that “the tax code should no longer subsidize excessive pay of chief executives and other high executives.” David E. Rosenbaum, Business Leaders Urged by Clinton to Back Tax Plan , N.Y. Times , Feb. 12, 1993, at A1. Interestingly, however, the bill was carefully crafted to protect the Friends of Bill in Hollywood and other blue state elite enclaves:
It somehow caught our eye that Barbra Streisand will pick up $20 million for two days' work at the MGM Grand Casino in Las Vegas. We've never objected to anyone collecting what the market thinks she or he is worth, but we do recall that Ms. Streisand is a certified Friend of Bill. And we somehow doubt this will provoke a denunciation of "greed" of the sort the President and his wife have leveled at doctors, insurers and drug manufacturers. Indeed, Ms. Streisand and similarly situated FOBs enjoy a privileged position under the new tax code Mr. Clinton has imposed as penance for the Greed Decade.
Certainly $20 million in loot qualifies her as "rich," and thus she'll be called upon to pay her "fair share." But at least MGM Grand Inc. gets to deduct her compensation as an ordinary business expense, taking her $20 million off its gross receipts before paying taxes on whatever net is left. That's presumably because in the moral universe of the Clinton tax code, warbling tunes for Vegas high rollers qualifies as work of redeeming social value.
For certain more suspect lines of employment, pay can no longer be deducted as an ordinary cost of business, at least if over a year it adds up to 1/20th of what Ms. Streisand takes for a couple hours of work. MGM Grand can deduct whatever it decides to pay her, but it can't deduct more than $1 million of whatever it pays its top five executives.
As it happens, these folks don't make anything like what Ms. Streisand does. President and CEO Bob Maxey has base pay of $525,000 a year, and Chairman Fred Benninger gets $610,000. You could argue that it's different because they set their own salaries, but they don't. They report to a board dominated by majority shareholder Kirk Kerkorian, not known as a blushing-violet negotiator.
What Mr. Clinton's tax law really means is that Mr. Kerkorian can be more generous with Ms. Streisand than with Mr. Maxey or Mr. Benninger. Or if you turn it around with a few envelope-back calculations, Ms. Streisand gets a lower true tax rate on what Mr. Kerkorian has to shell out. ...
We're not sure we understand the morality here. What we do understand is that a lot of Hollywood celebrities, and far fewer chief executives, are certifiable FOBs.
The FOB Loophole, Wall St. J., Oct. 14, 1993, at A16.
So why not extend the nondeductibility of non-incentive compensation over $1,000,000 to all forms of compensation, including that of Hollywood Friends of Bill and Barak? After all, to paraphrase Bill, why the tax code any longer subsidize excessive pay of actors and the like?