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View Diary: Preventing the Next Financial Mess: An Idea (6 comments)

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  •  Make sure the taxe rate is still progressive (1+ / 0-)
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    The problem your discussing is known in economics as a principal-agent problem, and arises from asymmetric information. I agree that firms would do well to tie the pay of executive officers and management to the long-run performance of the firm. The one thing that I would be wary about, however, is treating their income as capital gains, simply because their is no progressivity built into the system. We might do better in treating the initial value of the stocks issued as their income, and the government taking a share equal to the rate of taxes they would otherwise be paying (their income tax rate, as though they were being payed fully in cash), and having this value in taxes deducted from the value of the stocks they are receiving. Thus, the individual does not need to worry about paying high taxes immediately on income he hasn't yet earned, and the government would not be controlling a portion of the firms stock, and the system would be as progressive as the current income tax system is.

    •  Capital Gains (1+ / 0-)
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      However, I should add that they should also pay capital gains taxes, upon sale of the stock, as per usual. In this way they would be paying the same tax rates as a person who was paid in cash, subsequently bought stock, and sold the stock at a later date.

      •  Understood... (0+ / 0-)

        I see your point about the capital gains rate not being progressive... Maybe some compromise could be reached.

        If I got some "5 year stock" today bought at $10, and in 5 years time, the stock is at $5, I shouldn't have to pay an income tax at that point on the original amount that was spent to buy the $10 stock. If that were the case, I'd be forced sell everything to cover the tax. If the stock was at $0 after 5 years, I'd really be screwed.

        I was trying to avoid a situation where the recipient was forced to sell stock at the "point of vesting" (for lack of a better term) to pay a tax.

        There would probably have to be some formula to make it work. I'm sure it could be done - I'll have to think about that some more. It'd have to be straightforward to have legs.

        Another and better option might be to make the capital gains tax progressive. But, I don't know how practical it is to count on that happening.

    •  I re-read your comment... (0+ / 0-)

      Actually, I like your proposal.. I'll add that to my "rev 2". Hopefully that version will get a few more eyes looking at it :-).

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