In 2002, The Century Foundation convened the Working Group on Tax Expenditures to examine and propose reforms to the tax code. The resulting report, Bad Breaks All Around, identifies twelve tax breaks with little or no economic justification. These “dirty dozen” are no less ripe for the chopping block a decade later, as Congress finally takes up the task of simplifying the tax code. Follow along at Blog of the Century and on the “Dirty Dozen” expenditures homepage as we reintroduce each of the “dirty dozen” and explain why it’s long past time to eliminate these costly tax breaks.

Although The Century Foundation’s Working Group on Tax Expenditures recommended eliminating special tax rules for employee stock ownership plans (ESOPs) in its 2002 report, Bad Breaks All Around, TCFis generally in the practice of supportingtax policies that expand economic equality and encourage employees to earn equity in the companies they work for.

While there is some risk that employee stock ownership plans effectually reduce employees’ retirement portfolio diversity, theoretically leaving them exposed should their employer go bankrupt, studies show that businesses with ESOPs tend to survive longer than comparable firms by better aligning workers’ and owners’ incentives.In a 2008 analysis, University of Pennsylvania professors Steven F. Freeman and Michael Knoll surveyed the extant literature on ESOPs, finding a wide range of benefits for employees and firms. These included:

  • Greater employment stability
  • Improved productivity and increased profits
  • Increased job satisfaction and increased organizational commitment, identification, motivation and workplace participation
  • Increased sales and employment growth
  • Higher shareholder return for employee-owned firms than for comparable firms.

At the time of the 2008 survey, the National Center for Employment Ownership counted nearly 10,000 ESOPs in the United States, with combined assets approaching $1 trillion. According to the Office of Management and Budget, special tax breaks for these plans cost the federal government about $1.6 billion last year.

However,Freeman and Knoll’s research indicates these lost revenues were more than compensated by higher tax revenue from higher average wages and increased profits at employee-owned firms (emphasis added):

Annual gainsattributable to increased job stability also save employees approximately $3 billion annually. Accumulated stakes, which are essentially forced savings and usually do not displace other savings, lead to additional annual accruals of $34 billion. Employers pay for ESOP contributions out of firm-level productivity and sales gains of $33 billion annually attributable to employee ownership. We estimate that one quarter of the annual gain, $8 billion ultimately goes to the federal treasury, which thereby also benefits from the adoption of [employee stock ownership plans].

Learn more about the”Dirty Dozen” tax breakshere.