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.