4 Pages Posted: 31 May 2012
Date Written: May 16, 2011
Tax contributes to high-risk investments that cause meltdowns when the high risk turns into losses. This proposal would end the exemption of compensatory stock options from the section 162(m) $1 million limit on compensation deductions. A CEO with stock options has an incentive to increase the volatility of corporate assets, because an option holder participates in gains but does not share in the losses from volatile corporate assets. However, high-risk investments hurt outside parties when they collapse. In some cases, the government has had to pay bailouts to prevent further economic meltdown. It is far better not to induce high risk in the first place.
This proposal is made as a part of the Shelf Project, a collaboration among tax professionals to develop proposals to raise revenue by defending the tax base. It is intended to raise revenue without a VAT or a rate increase in ways that would improve the fairness, efficiency, and rationality of the tax system. The hard work needs to be done now to develop viable proposals. Shelf projects are intended to foreclose both 85 percent income rate and 60% national sales tax rates.
Suggested Citation: Suggested Citation
Johnson, Calvin H., Corporate Meltdowns Caused by Compensatory Stock Options (May 16, 2011). Tax Notes, Vol. 131, p. 737, May 2011; The Shelf Project. Available at SSRN: https://ssrn.com/abstract=2070108