Taxing Stock Options: Efficiency, Fairness and Revenue Implications.
14 Pages Posted: 22 Nov 2015.
Jack Mintz.
University of Calgary - The School of Public Policy; CESifo (Center for Economic Studies and Ifo Institute)
Ven Balaji Venkatachalam.
University of Calgary - The School of Public Policy.
Date Written: October 7, 2015.
The federal Liberals and the NDP are right about this much: There is a more sensible way to tax the stock options that are granted as compensation by corporations than the approach the federal government takes now. But both parties are wrong about how much revenue an appropriate change in current tax policy will add to the treasury. Far from the half-billion dollars or more that both parties claim they will raise in federal tax revenue by changing the taxation of stock options, the appropriate reform will virtually raise no revenue. It could actually result in marginally lower tax revenue. As it stands, stock options are treated differently than salary and other forms of cash compensation when it comes to taxing an employee or director, in that they are subject to only half taxation, similar to capital gains. They are also treated differently than cash compensation for the corporation granting the options, in that they cannot be deducted from corporate income tax.
Jack Mintz (Contact Author)
University of Calgary - The School of Public Policy ( )
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5.
Ven Balaji Venkatachalam.
University of Calgary - The School of Public Policy ( )
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MEDIA ADVISORY - Jack Mintz to challenge logic of proposed taxes on stock options.
TORONTO , Oct. 5, 2015 /CNW/ - In this federal election campaign, both the federal Liberals and the NDP have proposed new taxation of stock options, often used as a way to provide performance incentives to corporate executives in publicly traded companies. Both parties claim that these new taxes would create significant amounts of federal revenue.
But would they? And what are the unanticipated consequences of new taxes on stock options? Should Canadians care?
Media are invited to join Jack Mintz , President's Fellow at The School of Public Policy, at a media conference in Toronto where he will release a new report on the impact of new taxation of stock options.
Press conference with Jack Mintz on the taxation of stock options.
Wednesday October 7, at 11:00 a. m. ET.
One King West Hotel, Committee Room, 1 King St W, Toronto, ON.
SOURCE The School of Public Policy - University of Calgary.
Reforming stock option taxes won’t bring gov’t more cash.
Staff / October 7, 2015.
Reforming how employee stock options are taxed is a good idea, but it won’t bring in the government revenue the Liberals and NDP promise, says University of Calgary economist Jack Mintz.
Employee stock options are currently taxed like capital gains, so only 50% are eligible for taxation at someone’s marginal rate.
The NDP wants to make all stock options fully taxable, like other forms of income. It would exempt start-up companies, which in their early days sometimes have no other way to pay employees. The party estimates its proposal would bring $500 million into federal coffers.
The Liberals would make any options-based compensation worth more than $100,000 fully taxable. They estimate this would raise government revenue by $560 million.
Mintz and researcher V. Balaji Venkatachalam say that while closing this personal tax loophole is a good idea, it would have to be accompanied by a change to corporate rules.
Right now, companies can’t deduct stock options on their taxes. If the government were to change personal tax rates, it should also allow corporations to deduct the options as they would a regular salary, say the economists. Otherwise, companies would be discouraged from using options as pay.
Once the corporate tax break is factored in, the policy change would actually result in a slight drop in government tax revenue, the economists calculate. The net affect for federal and provincial governments would be a net loss of $12 million.
News from The Globe and Mail.
Taxing option gains won't boost revenue, researcher says.
By JANET MCFARLAND.
00:00 EDT Thursday, October 08, 2015 Page B6.
An NDP campaign pledge to change the tax treatment for stock options would raise no additional revenue and would actually end up being a negative to the government's coffers, according to a new analysis by tax-policy researcher Jack Mintz.
Mr. Mintz, an economist at the University of Calgary's School of Public Policy, said he supports the proposal to fully tax the gains from stock options because it is appropriate policy to treat options like all other forms of employee compensation. But he said he doesn't agree with NDP claims that the change will generate $500-million a year in new federal revenue that can be applied to poverty-reduction programs.
Mr. Mintz believes the change would actually result in a net loss of $12-million a year to federal and provincial government tax revenues if the federal government makes what he argues is a necessary corresponding change to allow companies to write off the cost of stock options as a compensation expense.
"I personally agree with full taxation of stock options with a corporate deduction, and having similar treatment for all types of compensation," he said Wednesday. "But there's no revenue in it."
Under current rules, only 50 per cent of the gains from exercising stock options are subject to tax, which is the same favourable capital-gains tax rate paid by investors when they sell shares. The NDP has called the tax treatment a "loophole" that benefits CEOs and the wealthiest Canadians, saying they would change the rules to ensure the gains are fully taxed. The party has said, however, that it would create an exemption for earlystage companies that use options as a cheap form of compensation.
The Liberals have also proposed to fully tax stock-option gains, but say they would allow the first $100,000 of annual gains to remain taxed at the 50per-cent tax rate to ensure the change doesn't hurt startups.
In a report released Wednesday, Mr. Mintz and co-author Balaji Venkatachalam say the current tax treatment is undeniably favourable for those exercising options, but the tax code also contains an offsetting provision that prohibits companies from writing off the cost of stock-option compensation as a business expense.
Mr. Mintz argues an NDP or Liberal government charging full tax on options gains would have to make a corresponding change to allow companies to have a writeoff for options, ensuring the tax treatment is the same for all forms of compensation.
Companies currently can write off the expense of other forms of pay, such as cash or share units.
"I can think of no country in the world that brings in full taxation on stock options but then no deduction for the corporation," Mr. Mintz said.
If there is no corresponding adjustment, Mr. Mintz said many companies will stop issuing stock options because there is no favourable treatment for either party to make them attractive. He said options are already falling out of favour as a compensation choice at many companies, and a tax change would spur even more companies to abandon their use.
Under his analysis, Mr. Mintz argues the revenue gain from fully taxing options in 2015 would add $1.2-billion to federal and provincial tax revenue, but the amount would be offset by a matching company writeoff for option compensation, which would cost $1.3-billion using 2015 projections.
The analysis says there would also be some tax gain - estimated at $138-million - if companies receive a tax deduction for option costs and use the money to pass along more dividends and capital gains to their shareholders, creating more tax for the government on those amounts. The final tally would be a net tax loss of $12-million.
Mr. Mintz also questioned the NDP's plan to create an exemption for startup companies, saying it is difficult to define true startups and it could even lead some companies to wind down and reincorporate to continually qualify as startups.
© The Globe and Mail.
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