Wednesday, August 23, 2006

Chason on Deferred Compensation Reform

Chason870_1 Eric Chason (William & Mary) just sent me a reprint on his thoughtful new piece in the Ohio State Law Journal: Deferred Compensation Reform: Taxing the Fruit of the Tree in its Proper Season, 67 Ohio St. L. J. 347 (2006) (here is the SSRN link).

From the abstract:

Executive pensions (or deferred compensation) grabbed headlines after Enron's collapse and fresh concerns over ever-increasing executive pay. They also grabbed the attention of Congress, which reformed executive pensions legislatively in 2004 with ยง 409A of the Internal Revenue Code.  Section 409A merely tightens and clarifies the doctrines that had already governed executive pensions, leaving the basic economics of executive pensions unchanged. Executives can still defer taxation on current compensation until actual payment is made in the future. Deferral still comes at the same price to the employer, namely the deferral of its deduction for the compensation expense. Thus, the timing of deduction and inclusion are matched.

[T]he primary problem of executive pensions is the temporal shifting of executive compensation from high-tax years to low-tax years. This temporal shifting is clearly allowed by current law, in contrast to personal shifting of compensation income from high-rate taxpayers to low-rate taxpayers. The policy concerns are largely the same, however, and the tax laws should limit the temporal shifting as well. The ideal response would be a system of accrual taxation on executive pensions. The second best would be taxing the delayed payment at the highest marginal tax rates that apply to individuals.

Check out this insightful contribution to the area of executive pensions, as this original approach to the law will surely come to the attention of decisionmakers in this ever-changing area of the law.


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