- The Washington Times - Monday, April 1, 2002

For many years, leading Democrats such as the late Sen. Russell Long of Louisiana were wildly enthusiastic about encouraging employees to own stock in the companies they worked for. Special tax breaks were enacted for employee stock ownership plans, ESOPs, and those plans were prohibited from diversifying.
Today, by contrast, Democratic Sens. John Corzine of New Jersey and Barbara Boxer of California want to prohibit employees from owning "too much" stock in the companies they work for, whether they like it or not. The old view about boosting employee stock ownership is suddenly out of style, and the opposite view is in.
Two years ago, when the stock market was booming, investors were widely accused of paying far too little attention to profits. Investors were ridiculed for bidding-up the prices of companies, like amazon.com, that had never shown a profit. Today, by contrast, the same chronic critics claim investors have become too focused on quarterly profit reports and should pay more attention to the future.
In the 1993 tax bill, the Clinton administration and all congressional Democrats enacted a "million dollar rule" to penalize companies for paying top executives big salaries. Public companies can no longer write off the legitimate expense of any salary above a million dollars, although they can still write off any amount of "performance-based" pay.
The intent of this "reform" was to tilt executive compensation away from salaries toward stock options, and it certainly worked. Today, however, many of the same legislators who voted to promote stock options at the expense of salaries in 1993 are feigning indignant surprise that executives now collect most of their pay as stock options rather than salary.
In each of these cases, neither the original fad nor its subsequent reversal ever had it quite right. Owning a lot of stock in the company you work for is not such a bad idea, because you know more about that company than others. Holding many stocks is safer, of course, but no amount of diversification could have prevented big losses when the Nasdaq dropped from more than 5,000 to under 2,000.
Similarly, it is not necessarily foolish to ignore the fact that a company has no profit if it has a promising new product and high start-up costs. Betting on the future success of unproven technology carries big risks, but can also bring big rewards. On the other hand, it is also not unwise to react to a startling new earnings report either, because new information may change your outlook about a company's future. The currently popular notion that immediate profit is all investors care about implies that stocks of thousands of companies with no profits must sell for zero but that is true only of companies facing bankruptcy.
As for stock options, they serve an extremely useful purpose, particularly for exciting new enterprises trying to recruit talented people but unable to pay Fortune 500 salaries. Still, there was no legitimate excuse for penalizing large salaries in the 1993 tax law. Salaries are an essential cost of doing business and should be fully deductible for employers because they are fully taxable to employees.
It would be equally inexcusable to penalize stock options by limiting their deductibility to an estimate of their future value, as the newly revived 1997 Levin-McCain bill (S 1940) would do. An employee's tax on stock options is based on their actual value when the cash is received, not on some estimate of their possible value when options were granted five years earlier. The amount employers deduct for the cost of options equals the amount employees report as taxable income, as it should. The cost of exercised options is not at all hidden, as supporters of Levin-McCain claim, because financing the payments to employees requires either dipping into cash to buy the required shares (a buyback) or issuing additional shares (dilution) either of which reduces earnings per share. Like the other fads, past and present, this year's political crusade against stock options is entirely unfounded and potentially dangerous.
The periodic flip-flops of legislators and journalists over trendy economic issues are nothing more than a reliable source of juvenile entertainment. Since conventional opinion swings so frequently and so violently from one extreme to another, we should have learned by now not to take the latest fads any more seriously than the last batch.

Alan Reynolds is a nationally syndicated columnist.

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