Soft caps.

Yesterday we described how TRA 2014 would lump taxable with tax-exempt employers for deferred compensation limits. Today, the reverse is true.

Currently, certain types of publicly traded employers may deduct up to $1,000,000 of compensation paid to their CEOs and other officers. Tax-exempt employers have only "reasonableness" limits on executive compensation, and the prohibition of private inurement for certain organizations (e.g., hospitals). A deduction cap wouldn't make sense for them, because they are tax-exempt.

But TRA 2014 would provide a new incentive for tax-exempt employers to limit executive compensation. It adds an excise tax of 25% on compensation (including benefits) over $1,000,000 to any of the employers' five highest paid executives each tax year. This tax would be paid by the employer.

Paying an executive more than $1,000,000 will be expensive. The mechanisms vary between taxable and tax-exempt employers, but the overall result — a disincentive to pay more than $1,000,000 in compensation — would be the same.