IP: RE: multi-billion dollar deductions eradicate Cisco, Microsoft federal tax liability

[Dave Farber <farber@cis.upenn.edu>]

>To: farber@cis.upenn.edu
From: Larry Tesler <larry@nomodes.com>



>Dave,
>
>The Howard Jarvis Taxpayers Association is an organization that fights for 
>keeping property taxes down so that people who can afford to send their 
>kids to private school, or whose kids are grown, or who don't have kids, 
>don't have to fund a lot of free education for other people's kids. I'm 
>glad to see that, for a change, they are interested in a cause that sounds 
>pro-egalitarian, but I think that there is no smoking gun here.
>
>When a janitor receives a wage or an engineer receives a salary, the 
>expense is deducted from corporate profits. The employee pays the tax, not 
>the company.
>
>This "employee pays" policy generally enhances government revenues. 
>Consider the case of a professor on salary from a non-profit university. 
>If the tax on salary was the employer's responsibility, the government 
>would get no tax at all. Now consider a for-profit corporation that, 
>because of business losses, is in a low tax bracket or pays no tax at all. 
>The government is, again, better off taxing the employee than the company. 
>For consistency, "employee pays" applies across the board, even when the 
>company is profitable.
>
>As John Shoch so well explained, the gains realized by employees upon 
>stock option exercise are treated as ordinary income for the employee. 
>They are also a compensation expense for the employer because, sooner or 
>later, the company has to spend money to buy that many shares back. The 
>company is out the money and the employee is in the money. It is a form of 
>compensation that is analogous to salary, and is taxed in an analogous 
>way. Instead of the company paying the tax, the employee pays.
>
>Without this deduction, there would be a double tax on the income. 
>Congress is not averse to double-taxing companies and individuals: witness 
>the taxation on dividends. But in the case of stock option exercises, so 
>far, they have not chosen to double-tax the gains. For pro-egalitarian 
>reasons, Congress wants to spread corporate ownership to as many employees 
>as possible. A double tax on stock option exercise gains would disincent 
>companies from doing that.