Proposal to Repeal ESOPs

Posted by Aaron Juckett on Wed, Oct 21, 2009

Yesterday the Employee Ownership Blog discussed how an Influential Tax Journal Features Respected ERISA Expert Saying "Kill ESOPs".

The Tax Notes's Shelf Project is a column to report "proposals to help Congress when it is ready to raise revenue in the coming years." According to the ESOP Association the Tax Notes publication has “influence in the tight circles of tax law decision makers.” In January 2009 the project announced they had completed 27 proposals and announced they were working on a proposal to repeal ESOPs. They are also working on projects like returning the Estate tax and repealing the step up in basis, implementing a $2/gallon tax or a Carbon auction, and expanding Rangel's Corporate Tax Proposal.

According to the Employee Ownership Blog, the Shelf Project published "Repeal Tax Incentives for ESOPs" on October 19, 2009:

While a close read of the article reveals more of a dislike, or debunking if you will, of the economic theories of ESOP originator Louis O. Kelso, its bottom line is ESOPs do not improve company performance, do not increase wealth consistently, and therefore do not deserve to be ERISA plans nor have tax benefits.

According to their particular proposal, all qualified retirement plan would have to be well-diversified investments. Meaning that ESOPs would and should be subject to diversification rules and all ESOPs tax incentives should be repealed because as the authors state, "ESOPs represent bad public retirement policy…"

They provide four reasons for changing the tax policy to repeal ESOP tax incentives: (1.) ESOPs are not necessary to, and do not, increase workers' wealth; (2.) Stock ownership does not improve worker productivity; (3.) The pain of underdiversification; and (4.) No reason to subsidize ESOPs.

The Employee Ownership Blog post goes on to address the same stale anti-ESOP arguments that the ESOP community has countered with facts in the past.

One of the authors of the Shelf Project article, Andrew W. Stumpff, has also authored Fifty Years of Utopia: A Half-Century After Louis Kelso's The Capitalist Manifesto, a Look Back at the Weird History of the ESOP, 62 Tax Law. 419 (2009). I have not read the article, but observed that the introduction compares Louis O. Kelso to Karl Marx and has an overall negative tone towards ESOPs.

According to the ESOP Association, Norman Stein, the second professor who authored the article, is “a sought after advisor to the Congress on retirement savings policy, and is highly respected by staff policy makers in the Administration and the key Congressional tax committees” and “probably called to testify before Congress on ERISA more than any other person in America.”

Steve Sheppard addressed the article on his blog:

Academics and some politicians don't see the solutions residing there, instead relying upon their own inexperience and often untested ideas to throw rocks. The latest attack on ESOPs comes from Andrew Stumpff, an employee benefits law professor at the University of Michigan Law School and the University of Alabama Law School, along with Norman Stein, a Douglas Arant Professor of Law at the University of Alabama Law School. Their article published in the October 19, 2009 issue of Tax Notes posits four arguments against current ESOP law, arguments which likely would never have even been made had either of these pundits actually been part of an ESOP or even seriously studied ESOP performance. Nonetheless, they have taken their best shot out of some egalitarian and/or short-sighted perspectives, views that have always been killers of creativity, innovation and change. While the ESOP community implores business and government entities to look at the realities of ESOPs, the academics argue from theory and supposition.

Topics: ESOP, employee stock ownership plan

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