Stock Option Deduction costs $725 million and mostly benefits the 1%

by Toby Sanger, Canadians for Tax Fairness Board Member and Senior Economist, CUPE

Finance Canada published its annual Tax Expenditure Report for 2011 and it shows that the cost of some of the most inequitable tax preferences and loopholes continues to rise.

For instance the stock option deduction, which allows CEOs and executives to pay tax at half the rate of ordinary working income, is estimated to cost the federal government $725 million last year.

I’d written about this major problems with this tax preference a number of times before.  Not only is it highly inequitable, but it also fuels speculative behaviour and short-term behaviour.

Now even Roger Martin, dean of U of T’s Rotman School of Management, says they should be eliminated, while well-known McGill business prof Henry Mintzberg wrote in the Wall Street Journal that they ” represent the most prominent form of legal corruption that has been undermining our large corporations and bringing down the global economy.”

Hugh Mackenzie’s annual report on CEO incomes for the CCPA shows just how much stock options provide as part of total compensation for CEOs.  Even the Globe and Mail’s conservative columnist Margaret Wente has argued that they should be eliminated.

Analysis of the CRA’s income tax statistics for 2009 shows that over 95% of the value of this tax preference went to the 2% of taxfilers with incomes of over $150,000 and close to 90% went to the less than 1% of taxfilers with incomes of over $250,000.

The cost of related tax preferences for capital gains also continued to increase.   The half tax rate for capital gains in relation to personal income was estimated to cost $3.6 billion last year while the similar half tax rate for capital gains from corporate income is estimated to cost the federal government $3.9 billion last year.    In total, the stock option deduction and preferential rates for capital gains cost the federal government over $8 billion a year.   These tax preferences also cost provincial governments billions as they generally use the same tax base.

These tax preferences for stock options and capital gains were largely rationalized because it was argued that  they would boost investment and thereby productivity and economic growth in the economy, as supply-side economist Herb Grubel argued a decade ago when the inclusion rate was reduced from 75% to 50%.

That clearly hasn’t happened.   It’s time that the stock option deduction is completely eliminated and that capital gains are taxed at the full rate, after adjusting for inflation, as the CCPA’s Alternative Federal Budget has argued for many years.

If the federal government followed the advice of AFB and these esteemed business professors, it would be many billions better off — and we’d have a more equitable, stable and productive economy.