How Should Tax Reform Treat Employee Stock and Options?

The tax treatment of employee stock and options raises a classic Goldilocks problem. We want to tax this compensation neither too much or too little. In a recent policy brief, I consider three questions about how to strike that balance.

Do companies get excessive tax deductions for employee stock and options?

This concern rocketed to prominence in 2012 when Facebook went public. Its employees earned billions from their stock options and restricted stock units. The company, in turn, got billions in tax deductions, reducing its income taxes for years.

Those deductions outraged some observers who asked how Facebook could get billions in tax write-offs when its financial statements showed much lower compensation costs. Lawmakers on both sides of the aisle denounced the “stock option loophole” and proposed limiting these deductions.

While there are good reasons for Congress to worry about companies gaming the tax code, this is not one. The tax deductions that companies receive for employee stock and options are, with few exceptions, just like those for cash wages, salaries, and bonuses. Continue reading “How Should Tax Reform Treat Employee Stock and Options?”

Tax Policy and Investment by Startups and Innovative Firms

Our tax system includes many provisions to boost business investment, particularly by startups and innovative firms. In a new Tax Policy Center study, Joe Rosenberg and I find that those incentives are often blunted by other features of the tax code:

We examine how tax policies alter investment incentives, with a particular focus on startup and innovative businesses. Consistent with prior work, we find that existing policies impose widely varying effective tax rates on investments in different industries and activities, favor debt over equity, and favor pass-through entities over corporations. Targeted tax incentives lower the cost of capital for small businesses, startups, and those that invest in intellectual property. Those advantages are weakened, and in some cases reversed, however, by two factors. First, businesses that invest heavily in new ideas rely more on higher-taxed equity than do firms that focus on tangible investment. Second, startups that initially make losses face limits on their ability to realize the full value of tax deductions and credits. These limits can more than offset the advantage provided by tax incentives. We also examine the effects of potential tax reforms that would reduce the corporate income tax rate and achieve more equal tax treatment across the various forms of business investment.

Financial Answers Made Simple

For the past year, I have been advising a start-up, FedWise LLC, that is working to improve American’s financial literacy. (Full disclosure: I have a small interest in the company.)

FedWise’s vision is simple: to provide helpful, unbiased, reliable information to consumers about financial products and services like mortgages and credit cards.

The company recently launched its first two products.

One is a public website, FinFAQs, where visitors can get answers to specific questions. For example, “What are points?” or “What questions can creditors not legally ask me?“. If you are interested, please try it out. FinFAQs is still young, and the team welcomes feedback on the questions, answers, and interface.

The second, the FedWise Answer Engine, allows financial institutions to offer the Qs and As to consumers on their own websites while receiving sales leads and market intelligence. Several banks and credit unions have already signed up for subscriptions. Perhaps needless to say, FedWise is happy to talk to other institutions that might be interested in offering the service to their customers. For more info, click here.