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SENATE STOCK OPTION PREENING

June 06, 2007

Sometimes Congress acts like a parent-slayer complaining of the trials of orphanhood. Take the Senate subcommittee hearings yesterday on stock options.

Senator Carl Levin complained that the difference between the financial accounting rules and the tax rules for reporting stock options is an unwarranted tax break for option issuers:

An investigation by the subcommittee's staff found that from December 2004 to June 2005, U.S. public companies legally avoided billions of dollars in taxes by claiming $43 billion more in tax deductions for options awards than the compensation for options recorded on their books.

Gee, that's just awful. And who wrote the rules that say how stock options are deducted on tax returns? Why, it's Congress!

And who wrote the rules that make stock options for executive compensation more deductible than cash salaries and bonuses? Why, Congress did that!

And who delayed for years the rules that required companies to make any expense provision on financial statements at all for stock options? Why, Congress again! (Though, in fairness, Sen. Levin supported the expensing requirement)

Maybe if Congress didn't try to make executive compensation decisions that properly belong to public company boards, these problems wouldn't come up so much.

Of course, economic illiteracy is a bipartisan phenomenon. From Tax Notes coverage of the hearings ($link):

Subcommittee ranking minority member Norm Coleman, R-Minn., said the excessive compensation granted to corporate executives through stock options "robs shareholders" and that the current book-tax gap "must narrow."

To remedy this issue and improve the public perception of executive compensation, Congress is also considering a bill that would require public companies to give shareholders an advisory role on its corporate compensation committees, Coleman said.

So paying employees "robs shareholders?" No, not really. Executives work for their money, and they can get fired if they don't produce. For real robbery, think of the billions that public companies must spend pointlessly on lawyers and accountants under the Sarbanes-Oxley rules, and to maneuver through the tax maze created by Mr. Coleman and his congressional colleagues. But good luck getting a congresscritter fired.

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