Tax Cuts May Lead To Increased Interest In Stock Options Say Experts

by Leroy Baker, Tax-News.com, New York

11 June 2003

The recently enacted tax cuts which are due to be phased in over the coming weeks are likely to increase the popularity of stock options as a method of employee compensation, some experts have stated.

The main reason for this is simply that the tax differential between the top rate of income tax at 35%, and capital gains and dividend tax at 15% will be so high. According to analysts such as William Gale, co-director of the Urban-Brookings Tax Policy Center, this is likely to result in the increasing use of corporations for tax sheltering purposes.

However, the Treasury Department has disputed this view, arguing that the reduction in taxation of dividend and capital gains income will have exactly the opposite effect- i.e., there will be less of an incentive to set up tax sheltering devices. Greg Jenner, deputy assistant director for tax policy confirmed the Treasury's line on the issue: "The best thing we can do to stop tax shelters is to get rates down," the official told Reuters.

However, the general consensus amongst US tax experts is in opposition to the government's view, and many believe that it will inevitably lead to increased use of the much maligned stock option, a tax strategy that came to the fore a couple of years ago in some high profile corporate scandals. However, speaking to Reuters, international tax expert Selva Ozelli of New York tax consultants RAI asked: "Who wants to pay 35 percent when they can pay 15 percent on the compensation they get?"

Recommended