The Capitalist/Socialist Cycle – Phase II: Thoughts on a More Efficient Form of Capitalism

Abstract

The author’s undergraduate thesis work in American Studies and post-graduate writings and thesis in Taxation are the basis for defining the Capitalism/Socialism Cycle ('Cycle'), a socio-economic ebb and flow currently in the final stages of its first phase in America. The author calls for a more efficient form of capitalism, currently in its Fat Capitalism ('FC') stage.The author asserts that FC is at its denouement prompted without fanfare by the Economic Recovery Tax Act ('ERTA') of 1981 and the simple indexation of tax brackets, forcing ever greater amounts of taxable income to be taxed at lower rates of taxation. When coupled with the severe recession of 2008-2010, the result are dizzying additions to the national debt via annual budget deficits in excess of $1 trillion as declining tax revenues are mismatched against a recalcitrant government unwilling to reduce its spending.Against the backdrop of Modern Portfolio Theory ('MPT'), the efficient frontier ('EF') and the Security Market Line ('SML'), the author calls for equity capital to be more efficient. Using a balloon analogy, the author describes FC, a partnership between government and business, as being bloated and unguided, eventually calling for a thinner more directed version of itself, i.e., Thin Capitalism ('TC'). The lynchpin for these alterations begins with changes to employee stock options ('ESOs'), the workhorse of FC and suggests that this one remedy is a good starting point for curing what ails the capitalistic system.The author takes the reader through the current tax treatment for ESOs and suggests that such treatment is endemic of the relationship between government and business. The risks and returns from ESOs are explored through the eyes of the employee who serves as conduit for the employer’s equity capital replacement process, as discussed by the author, highlighting the extraordinary compliance burden surrounding ESOs for both employers and employees.The author focuses on ESO valuation models in anticipation of his final recommendation, calling for that more efficient form of capitalism or TC, reviewing the Financial Accounting Standards Board’s ('FASB') Accounting Standards Codification ('ASC') 718, Compensation-Stock Compensation, which provides the impetus for a change in, not only the tax treatment of ESOs, but a fundamental change in the instrument itself and the way that employees are compensated with equity. A key focal point for this change is Securities & Exchange Commission ('SEC') Release No. 34-60126 issued June 19, 2009 which is the basis for an entirely new, equity based financial instrument.