Election 2015: NDP and Liberals Want to Tax Stock Options 100%

Another day, another foolish campaign policy proposal.

This time, the NDP and Liberals have proposed one of their dumbest policies yet: 100% tax on stock options, instead of the usual 50%.

They think they are being clever and that this provides a clever way to “tax the rich,” but this proposal is pure failure and reveals disheartening ignorance among our would-be rulers.

If they do this, it is expected that corporations would be able to deduct stock options as expenses.

Net impact on government revenue? Virtually nothing, or less revenue overall.

Oops.

But what if they tax options at 100% and they disallow the deductions? Then won’t the Liberals and NDP prevail and get more money while sticking it to “rich” people?

Hardly. Stock based compensation would simply switch to deferred stock units, restricted stock units, or something similar.

The CFOs of companies sophisticated enough to have compensation plans with stock options are smarter than the lawmakers. Forget it.

This silly proposal also ignores the countless middle class taxpayers who get stock options as a meaningful chunk of their compensation. There are many companies where even the lowest level corporate grunt job gets stock options. This proposal would hurt the middle class and it’s delusional to think it would bring in more revenue.

What a bunch of fools.

— Read more at CBC.ca

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Is a minimum income “fairer” than a minimum wage?

The economic argument against the minimum wage is irrefutable. It hurts the most marginal workers by making it illegal to hire them at the market price. It helps larger, more established firms (who tend to pay more than minimum wage) at the expense of smaller, competing firms (who are more likely to pay lower wages).

Andrew Coyne, writing for the Financial Post, concedes the economic argument against the minimum wage. It hurts those it is professedly intended to help, and doesn’t help fight poverty. Yet he remains convinced that wealth must be reallocated with the government’s badges and guns — he just wants a more direct, efficient way of doing it.

He proposes a minimum income paid by the state, instead of a  minimum wage paid by employers.

This is a terrible idea.

First, we should note that nowhere in his article does Mr Coyne give a moral argument as to why the state should take property from some people and give it to those who cannot or will not take care of themselves. Anyone speaking of fairness should be expected to raise the moral issue. Economics is a technical discipline and its laws do not deal with fairness. Instead, fairness is an issue for ethics and moral philosophy.

Nor does Mr Coyne offer any economic reasons as to why charity should not handled by voluntary activities. The best case he can make is based on nothing more than a complete lack of imagination and a silly anti-capitalism cheap shot:

I think it is because people imagine the alternative is… nothing. Let people starve, that is, to sate some sadistic God of Laissez-Faire. But that is not the alternative. The alternative to the minimum wage is a minimum income: paid not by employers, but by the state.

So his only argument, if it can be called that, is that it’s fairer to have a minimum income, because minimum wages instead involve shunting off “our” responsibility for “distributional justice” onto others.

I am not sure how one tallies up the fair score for each side to see which one is fairer. Let us merely note that there is nothing positively fair about this proposal as such. For what is using the state to impose the “collective ideal” of distributional justice, other than completely unfair? Because a government taking money from one group to give to another group is a political issue — by definition, it is determined by who has the most power in a political system. That is always unfair.

A minimum income must be paid by the government, which acquires most revenue through taxation. But in democracy, the amount a person pays through taxation can only be decided with a ballot box and a gun. How is that ever fair? And “need” can never be objectively quantified, so there can never be a “correct” value for the minimum income.

Putting aside the issue of fairness, what would be the economic impact of a state-provided minimum income? It’s amazing that someone like Mr Coyne, clearly capable of following the steps in reasoning which show the failure of minimum wage laws, would yet propose something even worse.

Obviously, a state-provided minimum income is a subsidy to poverty and idleness. Therefore, this effort to combat poverty and idleness will increase poverty and idleness. As Thomas Mackay wrote more than 100 years ago, “the cause of pauperism is relief. . . . we can have exactly as many paupers as the country chooses to pay for.” Unemployment relief accomplishes the same thing by subsidizing unemployment. If you do not accept the law that subsidizing gives you more of it, then you might as well throw all of economics in the garbage.

Providing a minimum income for not working causes the labor market to be smaller than it would otherwise be — this causes the price of labor to rise. But because nothing has changed to increase the marginal productivity of labor, employers will simply hire fewer workers. One of the reasons unions support unemployment aid and minimum wage laws is to preserve their artificially high wage, below which they withhold their labor. So basically, a minimum income still has a distorting effect on wages. However, to benefit from a higher minimum wage you have or get a job at the new minimum wage. With a minimum income, you don’t have to go work — you can sit around with no pants on, playing Xbox instead.

Additionally, these social programs reduce the incentive to be a producer. All taxes imply a decrease in present and future goods, because not only are resources shifted away from the producer, but the producer’s incentive to add more value in the future is diminished . Therefore, as with all government transfer payments, such a minimum income program would systematically depress the utility of productivity and encourage the tendency to be nonproductive.  People will shift from productive, tax-paying efforts, to nonproductive, tax-consuming activities. With a minimum wage law, you still need to get a minimum wage paying job to see any benefit. With a minimum income, you can sit around with no pants playing Xbox all day. Nonproductive bureaucrats must also administer the minimum income. The entire economy would necessarily contract.

There is only one way to create “wealth” in society: to increase the marginal productivity of labor with capital investment. Shuffling existing wealth around with schemes like minimum wages and minimum incomes only aggravates the problem of poverty by encouraging people to be poor and unemployed. Men such as Mr Coyne need to consistently apply the principles that reject the minimum wage to all other forms of social welfare.

Jim Rogers, Andrew Schiff, and some economic ignoramus named Doug Henwood talk about TBTF and taxes.

Listening to this Doug Henwood fellow on taxes is truly unbearable. Have fun.

This is an entertaining discussion but it is pretty boisterous and a lot of cogent points get lost. The group talks about the Too Big To Fail policy as “socialism for the rich,” which is a legitimate given the policy of bailing out big, insolvent financial institutions. There is no dispute with any of this.

Socialism for the rich should be rejected, but Schiff makes a valid point that, insofar as bailing out financial institutions was intended to keep credit flowing liberally to borrowers whose credit-worthiness was otherwise inadequate, the TBTF policy was “socialism for the poor” as well. American consumers are addicted to debt and low interest rates.

Rogers and Schiff are apparently opposed to socialism in principle, but Henwood is only against “socialism for the rich.” He likes other forms of economic interference, such as that which distorts interest rates, or that which taxes the rich.

Henwood thinks it is perfectly justified to say that higher taxes can possibly help economic growth. This is untrue, and the economic case against it is probably irrefutable. I will summarize:

If economic actors exchange property voluntarily, then it is implied that both actors are better off than they would be in absence of this trade. If both did not expect to benefit from the trade, they would not take part. The matter is quite different in the case of taxation. With taxation, the producer’s supply of goods is reduced against his will to a level below what it would be absent the taxation. In addition to this reduction of present goods, the supply of future goods is reduced as well. For taxation is not unsystematic and random, but systematic and expected to continue in one form or another. Therefore, it implies a reduced rate of return on investment and produces an added incentive to engage in fewer acts of production in the future than one otherwise would. Overall incentive to be a taxpayer decreases, and incentive to become a tax-consumer increases.

This is always true. But Mr. Henwood would disregard economic science and make his inferences based on a shallow analysis of empirical data. Of the US, he says the Clinton years saw a period of great economic growth, and tax rates were higher than they are now. So, he infers, higher tax rates contribute to economic growth.

This doesn’t make any sense. If Henwood were an economist, I would call him a crank. But he is not an economist, he is an English major. He does not have a background in economics, but he likes to write about it. There is no evidence that he is capable of applying formal theory to reality and interpreting it.

In addition to being completely fallacious, the above argument for higher taxes is only credible on the most superficial analysis. If Austrian business cycle theory is correct, then one could easily argue that the much-heralded ‘growth’ of the Clinton years was just phony wealth created by economic bubbles brought about by artificially low interest rates.

When Reagan was elected in 1980, short-term rates were 11.4 percent. When Bush I lost to Clinton in 1992, the rate was 3.4 percent. Rates moves upwards over the course of the Clinton years, and in 2000 the average Treasury bill rate was 5.8. The manipulation of interest rates created economic dislocations — the dot-com bubble, among other things — and the inevitable crash.

Doug Henwood doesn’t know what he is talking about.

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