Infrastructural Reforms and Tax Incentives to Encourage Employee Stock Ownership Plans (ESOPs)

  1. Make debt service on a leveraged ESOP a tax-deductible business expense, so that employees without savings can purchase major portions (up to 100%) of a company’s common stock on borrowed funds repayable out of pre-tax corporate profits.
  2. Provide a tax-sheltered entity, such as an ESOP trust, so that shares of stock acquired by workers and earnings on the workers’ equity can be accumulated free of taxes until the benefits are distributed to participants, generally on retirement. When distributed, the ESOP benefits are taxed the same as other retirement incomes to the worker or his beneficiaries.
  3. Encourage the firm to pay out dividends to workers as supplementary property incomes on their shares by allowing dividends to be taxable at the personal level but deductible at the corporate level. Together with the two previous incentives, this feature, by eliminating the discriminatory double tax on corporate profits, helps to restore private property in corporate equity.
  4. Delay taxes in the stock distributions to the workers until the stock is sold and converted into spendable income. Allow the worker a tax-free “roll-over” into a tax-exempt “Individual Retirement Account”, i.e., to further delay paying personal income taxes if the cash proceeds are re-invested into securities of other private sector equity investments. The objective here is to encourage savings and investment and to provide new sources for financing new ventures.
  5. Similar to #4 above, free the seller of stock to an ESOP trust (generally the original owner) from any tax on the sale, provided that the seller re-invests the cash proceeds into securities of other productive enterprises in the country. This simultaneously reinforces both the goal of expanded share ownership opportunities and of providing new sources for financing new ventures.
  6. Where no adequate capital market exists, require the ESOP or the firm to plan for the repurchase of distributed shares through a tax-free liquidity fund within the ESOP.
  7. Allow stock accumulations to be used as substitutes for traditional pension plans and severance pay obligations for workers.
  8. Ensure the availability of means for the fair appraisal of the value of shares in closely-held companies and provide a regulatory oversight of ESOPs to minimize abuses, promote understanding and disseminate reliable information on the ESOP among workers, and generally protect the property rights of workers.
  9. Provide bankers and other financial institutions tax, credit and other incentives to make loans to leveraged ESOPs.
  10. Increase and democratize productive credit by making loans extended by commercial banks to ESOPs within private sector enterprises eligible for discounting with the central bank. New money issuances would be subject to 100% reserve requirement and made at a discount rate limited to a low “servicing fee” (to cover actual costs of administering and regulating national monetary incentives for private sector growth). This reform would radically reduce capital credit costs and increase the competitiveness of the nation’s enterprises in the global marketplace, reduce dependency on foreign capital and other sources of concentrated wealth, lower the risks of default on private sector productive loans, link increases in money to increases in national productivity, move toward an asset-backed currency, reduce causes of inflation, and broaden citizen participation in private sector ownership and profits.