TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

A Member of the Law Professor Blogs Network

Thursday, December 8, 2011

Fleischer: Taxing Founders' Stock

Victor Fleischer (Colorado), Taxing Founders’ Stock, 59 UCLA L. Rev. 60 (2011):

Founders of a start-up usually take common stock as a large portion of their compensation for current and future labor efforts. By electing to pay a nominal amount of ordinary income tax on the speculative value of the stock when it is received, founders pay tax on any appreciation at the long-term capital gains rate.

This Article argues that the preferential tax treatment of founders’ stock is not normatively justified. The economic efficiency case for a tax preference for founders’ stock is weak: Tax has a limited effect on entrepreneurial entry. Geographic, cultural, and business factors are far more important, as are nontax legal factors like bankruptcy, employment law, immigration policy, and securities law. Tax is a blunt policy instrument, and given the problems associated with direct government subsidies, the optimal level of government subsidy of entrepreneurship may be zero.

The case for reform is compelling. Taxing founders at a low rate is a conspicuous loophole in the fabric of our progressive income tax system, uniquely undermining our shared commitment to equal opportunity and distributive justice. Founders’ stock is often bequeathed to heirs who receive a step up in basis, leaving a legacy of dynastic wealth that is exempt from the income tax and subject only to the rather dodgy application of the estate tax.

While it would be normatively desirable to tax gains from founders’ stock at the same rate as labor income, fixing the problem is not administratively feasible within our current tax system. I offer solutions that policymakers might consider as part of a broader tax reform and deficit reduction effort.

http://taxprof.typepad.com/taxprof_blog/2011/12/fleischer-.html

Scholarship, Tax | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341c4eab53ef01539434829a970b

Listed below are links to weblogs that reference Fleischer: Taxing Founders' Stock:

Comments

uniquely undermining our shared commitment to equal opportunity and distributive justice.

Is this a polemic or an analysis?

Posted by: Yo Gabba Gabba | Dec 8, 2011 8:07:40 PM