Friday, September 28, 2007

New Proposed Legislation - Senator Levin's Ending Corporate Favors for Stock Options Act

Thanks to a tip from Victor Fleischer, i just came across the following link to Senator Carl Levin's newly proposed Ending Corporate Favors for Stock Options Act. For better or worse, this bill is an interesting move in the ongoing set of disputes about tax and corporate governance, taxable income vs. accounting income, etc.

At the risk of excessively repeating myself, here is the link again for my recently posted article draft on this general topic.

The first thing the Levin bill does is limit corporate tax deductions for employee stock options (not just for highly paid executives) to the amount being deducted for financial accounting purposes.

On this, I would start by saying that I generally favor mandating greater tax-book conformity, in response to managerial incentive problems involving tax sheltering and earnings management I advocate only partial conformity in my article because I don't want Congress to start mucking around more with the financial accounting definition of income - it's bad enough that they already do things to the tax definition. This is generally consistent with that view, so long as it doesn't lead a subsequent Congress to muck around directly with the financial accounting definition in order to get an indirect tax result. One objection to this proposal, however, is that we already have a form of discipline on the tax end because the employer deduction generally must be coincident with an employee inclusion. I would think it's uncommon for the net of the two to favor the taxpayers, because presumably the company is more likely than the employee to have a low rate (given net operating losses and such). So, if I'm right that there isn't a systemic problem with the tax deduction being claimed, the only rationale here would be to discourage structuring options to have a bigger tax than financial accounting deduction. Arguably defensible under the skeptical view of the social merits of such tax-accounting "arbitrages" that I express in my piece, unless we don't think people are deliberately structuring into the inconsistency.

Second, the Levin bill lets corporations take the tax deduction in the same year it's reported on the company books, apparently even if the employee hasn't included it yet. This I don't like. Companies that don't need to worry as much about reported earnings, e.g., because they're relatively closely held and thus have a well-informed audience for their financial accounting income, now have a license to play tax games. I actually address this sort of problem in my paper, by the way, by limiting reductions of taxable income towards lower financial accounting income to the amount of previous adjustments in the opposite direction. No such control here. I wonder if the provision should have a negative revenue estimate, given this point.

Third (leaving out some miscellaneous stuff), the bill extends current law's $1 million annual limit on deductions for a publicly traded corporation's payments to top executives, so that it extends to stock options as well as straight compensation. But the existing exception to the $1 million limit for "performance-based compensation" remains. He's just moving stock options out of the performance-based box.

Even if you like the $1 million limit, and few people do, this is just silly. All one needs to do to avoid it is have a virtual stock option instead of a literal one. E.g., you have performance-based compensation that pays you off based on the stock price, but it isn't called a stock option despite having identical economics. Outside the rule, presumably?

1 comment:

hedge fund news said...

This sound like a good start, and will simply takes a few reviews and revision prior to its endorsement. Hope that this will benefits the many.