Hey Dalton: Harmonize this

Apparently the corporate sector is applauding Dalton McGuinty’s tax grab to harmonize Ontario’s 8% PST with the 5% GST, such that consumers will pay 13% on everything under the sun. This is because the harmonization favours the corporate sector with lower taxes at the expense of the consumer.

Well, here’s a tax that I would like to see harmonized for a whole host of good policy reasons, namely the harmonization of employment taxes for CEOs with that of the average working stiff. What policy objective is served by having employee stock option gains taxed at half the rate of the employment income it represents? What greater social good is served by employee stock options that justifies this massive tax break? Unlike people who have real money at risk in the marketplace, and whose gains are taxed at half the rate of income, the holders of employee stock options have ZERO money at risk, so why are they taxed as if they had capital at risk? Makes absolutely no sense whatsoever.

Furthermore, stock options are not aligned with the interests of shareholders, as their payoff structure encourages undue risk taking. No where was this more evident than with the CEO of Manulife, who exercised over 1 million stock options in the last three years at a personal gain of some $24 million, that were taxed at the same rate as a Canadian making $24,000 a year. Does that sound fair to you? Does that sound to you like the "progressive" tax system we are supposed to have? Meanwhile we learn, that during the time that Manulife’s CEO was busily engaged in exercising these options, he was engaging in pivotal and foolhardy decisions to arbitrarily (some would say artificially) inflate Manulife’s earnings per share (ergo Manulife’s stock price and ergo his stock option gains) by not hedging the risks that were being assumed on Manulife’s balance sheet and its shareholders by his decision to NOT HEDGE Manulife's new variable rate annuity business that guaranteed investors with market based returns and a protection of their downside.

This foolhardy decision that placed Manulife's solvency at risk was driven by Manulife's executive compensation system. The decision to NOT HEDGE amounted to a calculated gamble on the part of the CEO of Manulife, equivalent to: “Heads I win, tails you lose”, with Manulife shareholders assuming the opposite side of that trade, i.e. a no win proposition.

Manulife and its CEO are but one example. The world around us is rife with others. What do you suppose drove the sub prime behaviour of Wall Street, the executives at AIG and Fannie Mae and Freddie Mac , if it wasn’t how these people are compensated? Why the government is engaged in the tax subsidy of this kind of improper compensation is a rip off of both taxpayers, but also an abuse of good regulatory practices and having sound foundations for our economy.

Perhaps Dalton McGuinty should turn his mind to tax policy that serve goals that affect society in positive ways, rather than simply policies that are the manifestation of more endless corporate lobbying. The capital gains treatment of employee stock options, that treats these employment based gains at half the rate of the employment income they represent needs to be abolished....in the name of fairness....and in the name of appropriate incentives for the corporate sector, who have proven themselves to be in urgent need of some adult supervision and tax harmonization with the real world of sweat and toil. We have been left holding the bag on two fronts: making up for their absence of taxes, and living with the consequences of the behaviour these unfair tax regimes have encouraged.