Expand the Limit on the Deductibility of Executive Compensation

Under current law, public companies face the Section 162(m) limitation, which disallows deductions for compensation in excess of $1 million for covered employees, including the CEO and other C-suite officials.

This option expands the 162(m) limitation to compensation in excess of $1 million for any employee. In practice, the limitation raises the marginal tax rate on (highly compensated) labor, thus reducing labor supply. Notably, the $1 million threshold is not indexed for inflation, meaning over time the limitation would become more economically significant.

On a conventional basis, this option would decrease the primary deficit by $377.5 billion over the budget window. Long-run GDP and GNP would fall by 0.1 percent. On a dynamic basis, the primary deficit would decrease by $254.2 billion from 2027 through 2036, $123.3 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 174.0 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.2 percent. The top quintile of taxpayers would experience a 0.3 percent decrease, whereas the bottom quintile would experience no change. On a long-run dynamic basis, taxpayers would see a 0.3 percent decrease on average.