Ottawa should stop wasting billions on stock benefits for the rich
TheStar.com – Opinion/Editorials – Every year the federal government forgoes hundreds of millions of dollars to subsidize the very rich. It’s obscene.
Nov. 20, 2016. Editorial
The Liberal campaign promise to end, or at least reduce, the highly regressive tax break on executive stock options was an important signal that, under a Trudeau government, everyone would have to pay their fair share.
Since its introduction in 1984, the loophole has primarily benefited the very rich at a great cost to the public purse. It seemed fitting that Finance Minister Bill Morneau, who has said that pursuing tax fairness is his top priority, would close it.
But for those, like us, who were so encouraged by the government’s promise to fix the backwards tax break, the absence of any such action in its first budget and the subsequent silence on the issue has been a great disappointment.
When Morneau met with the Star’s editorial board this month, we asked him why the vow had not been fulfilled in the last budget and whether it would be in the next. “We’re very focused on creating new jobs,” he said. “We heard from some of the most innovative firms that are hoping to grow that (scrapping the tax break) could impact their decisions on investment.” The promise, it seems, will be broken.
That’s a shame. Under the current system, compensation received in the form of stock options is taxed at a much lower rate than regular income or bonuses. This was originally designed, in part, as a way to help capital-starved start-ups attract top talent, but has been co-opted by executives at established companies as a way to dodge taxes. Ottawa loses about $1 billion in revenue every year through the loophole.
Despite the tax break’s stated purpose, its beneficiaries are not primarily the employees of small, risky start-ups. They are, for instance, top bankers or the heads of mining and telecommunications corporations, the richest of the rich. In fact, more than 90 per cent of the benefit goes to the top 1 per cent of earners.
A study by the Canadian Centre for Policy Alternatives found that in 2013, 75 of Canada’s 100 top-paid CEOs received part of their income in the form of stock options. The loophole allowed them to accrue combined savings of $495 million, or $6.6 million each. That’s half a billion dollars of foregone public money to subsidize 75 very rich people. It’s obscene.
The government should also consider whether incenting companies to compensate employees with stock options is really such a good idea. Proponents claim that by doing so businesses align their executives’ interests with those of the company. However, the evidence is not at all clear that it works. Roger Martin, former dean of the Rotman School of Business, says stock options encourage CEOs to drive up expectations, and thus stock prices, not actual results. He calls the tax break “indefensible.”
It’s true, as Morneau says, that some start-up executives, particularly in the tech sector, have expressed concern that closing the loophole might hurt innovation. Of course, those who benefit from the tax break have every reason to say that, whatever the merits. But, in any case, surely there is a way to help these small enterprises that doesn’t require an annual billion-dollar public gift that mostly benefits people who have nothing to do with start-ups.
The instrument is too blunt, the consequences grossly unfair. Imagine the good that could be done with all that money. If the finance minister means what he says about wanting to make our tax system more just, he will change his mind again, keep his campaign promise and close this iniquitous loophole.
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