In the very popular non-qualified employee stock compensation plans,
when a company employee exercises a stock option, the US corporation
generally, and in a very largesse manner, receives a US federal income tax
deduction for the excess of the market price of the stock at the
exercise date over the exercise price. For common stocks that have
increased substantially in price, the US federal income tax deduction that
the corporation receives can be frankly obscene in amount.
To
the extent that this excess is greater than the amount of compensation
expense already recorded by the corporation, the federal income tax
benefit the corporation receives from this excess is recorded by the
corporation as a direct credit to Additional Paid-in Capital in the
Stockholders Equity section of the balance sheet, thereby bypassing the
income statement.
Some people call this excess tax benefit a windfall tax benefit to the corporation.
Frankly,
I think the entire federal income tax deduction the corporation gets
from stock option exercises by employees is a corporate tax loophole.
This tax deduction is being triggered by an increase in the stock price.
Existing stockholders do get dilution from the stock value being
transferred to these stock option holders, but from a tax standpoint,
the corporation hasn’t paid anything for that value accruing to the
employee due to the stock price appreciating.
But after giving
due consideration to the economic damage to Big Corps, my proposal here
is to not remove this entire corporate tax loophole, but instead just
the loophole related to the excess, or windfall, tax benefit explained
earlier.
If the entire corporate tax loophole was closed, Big Corps would be receiving substantial hits to their earnings each year.
However,
there is no income tax expense charge to the income statement from
disallowing the US federal income tax deduction by the corporation from
just this excess or windfall benefit to the corporation, since under US
generally accepted accounting principles, this excess benefit presently
doesn’t get reflected in the income statement, but instead goes directly
to Stockholders’ Equity on the balance sheet.
If the Big Corp
tax loophole were closed disallowing the entire corporate federal income
tax deduction the Big Corp receives for the excess of market price over
exercise price at exercise date, then my best hunch is that the
additional tax revenue raised by the US Government over the next 10
years would be much more than $500 bil.
The reason for this being so large is that any
fair CBO scoring of tax revenue raised by the US Government has to
factor in reasonable increases in the stock market over the next ten
years. Further, during the Obama Administration, the stock market has already more than doubled since early March 2009, and thus there are many stock options outstanding now
where the current stock market price is substantially above the
locked-in exercise price.
But my recommendation would be to just
close a portion of this Big Corp tax loophole…just the portion of the
Big Corp federal income tax deduction related to excess, or windfall,
tax benefits. Given the devastating US Debt level, it is only fair that
this Big Corp tax loophole be closed.
My hunch is that the
additional tax raised over the next 10 years from closing just this
portion of this Big Corp tax loophole, related to this excess, or
windfall, tax benefit, would be somewhere between $100 bil and $300 bil,
depending upon what assumed stock price increases that the CBO uses in
doing its scoring.
All of the money raised from closing this abusive corporate tax loophole, should be used to reduce US Debt.
