Twitter IPO Prompts Senators to Renew Call to Eliminate “Loophole”

Posted by:

On the eve of the high-profile Twitter IPO last week, Senators Carl Levin (D – Michigan) and John McCain (R – Arizona) issued a joint statement calling for the elimination of the corporate tax deduction (“loophole”) for share-based compensation of employees at fair value. Invoking the federal deficit and the horror of the “sequester,” these gentlemen further stated that the “Joint Committee on Taxation has estimated that ending this tax break would raise $23 billion for the US Treasury.”

Now, we’re all in favor of reducing the deficit, but we would like to point out that our elected representatives in Washington have missed the point yet again. When those TWTR options are exercised, the intrinsic value will be fully taxable as income to the individual recipients. What is more, this value will also be subject to FICA and Medicare taxes. When you consider that the corporate federal tax rate is 35%, while the top marginal personal rate is 39.6%, and an additional 7.65% is payable for FICA and Medicare, it would seem that this “loophole” actually generates more federal tax revenue rather than less. Perhaps the Senators would like to tax this income twice, once on the corporate return and again on the individual returns.

Such short-term thinking also ignores the effects of potential growth in corporate profits as a result of a highly motivated cadre of employees. Is this sound tax policy or blatant political grandstanding? You be the judge.

About the Author:

Greg is a Derivative Valuation Consultant with Montgomery Investment Technology, Inc. He holds a BS from Carnegie-Mellon University and a PhD in Chemical Engineering with a concentration in Applied Mathematics from Princeton University. His experience spans management at both public and privately held companies, as well as teaching finance at the university level. Greg is a Chartered Alternative Investment Analyst (CAIA) and a Financial Risk Manager (FRM)