Economic Impact
Summary of a report commissioned by Employee Ownership Group
"Modelling Proposed Tax Reform of Employee Share Ownership Plans" (Econtech, 14 October 2004)
The Employee ownership Group commissioned economic consultants Econtech Pty Ltd to undertake an independent study of the fiscal and economic implications of implementing the EOG's proposed reform of employee share ownership in Australia.
Econtech shows that Australia 's tax provisions for share plans can be redesigned to promote greater up-take of employee share plans and to increase national income by an estimated $185 million. (See Chart 1 below)
This increase more than offsets the modest $73 million cost to the Federal Budget of implementing the reform of employee share plan tax arrangements. In other words, for every $1 the Government contributes to promoting Employee Share Ownership Plans (ESOPs) through reformed tax measures, there is a $2.54 rise in national income.
Chart 1
Annual Long-Term Cost to Government and Gain in National Income ($ million)
Source: Econtech
Notes:
"Proposed policy (basecase)" assumes that the proposed ESOP reform is made and results in a doubling of ESOP share holdings.
"Lower extra take-up"assumes that the proposed ESOP reform is made and results in a 50 per cent rise in ESOP share holdings.
"No extra take-up" assumes that ESOP holdings remain the same under the reformed ESOP regime as they are under existing provisions.
"Half displaces normal share holdings" assumes that half of the additional take-up of ESOP holdings (under the reform proposal) displaces normal share holdings.
"Higher share price growth" varies the "Proposed policy (basecase)" scenario by assuming that the annual growth in share prices is 6 per cent. (Under the other scenarios annual share price growth is assumed to be 4.5%)
Econtech's study included:
- a "base case" under which there was no increase in productivity resulting from the wider spread of ESOPs and which yielded a $73 million budget cost offset by a $185 million increase in national income;
- a "conservative estimate" scenario under which ESOPs contributed a 3% increase in productivity (reflecting a boost to labour productivity of an estimated 200,000 new ESOP shareholders) and which trimmed the budget cost to $22 million and boosted national income by $425 million; and
- a "upper estimate" scenario under which ESOPs contributed a 6% productivity increase, boosted government revenue by $30 million, and topped up national income by $665 million.
According to the modelling undertaken by Econtech, a more widespread use of the reformed ESOP would increase national income and savings and, under certain scenarios, increase annual tax revenues.
These scenarios are summarised in Chart 2 (below).
Chart 2
Annual Long-Term Gain in National Income of Proposed Policy ($ million, deviations from "existing policy" scenario)
Source: Econtech
The Econtech study modelled a reform to Division 13A of the Income Tax Assessment Act (ITAA) which governs the tax treatment and principle design features of share plans typically offered by companies to their employees.
Division 13A as it currently stands provides for two forms of ESOP - a tax exempt and a tax deferred plan. The new ESOP proposed by EOG is designed to replace both these existing plans. The main features of the proposed new plan are:
- For discounts on shares acquired under Division 13A ESOPs in any income year, the first $1000 is exempt from personal income tax (as is the case presently under the tax exempt plan), and for any amounts over $1000, personal income tax is deferred until the disposal of those shares (as under the tax deferred plan).
- For capital gains made on the disposal of the shares, the standard post-Ralph tax treatment applies, so that only 50% of the gain is taxed (as under the existing tax exempt plan but not the tax deferred plan).
- The 10 year rule (which applies under the tax deferred plan) under which tax is paid on capital gains after 10 years even if the shares have not been sold, is abolished.
The Report, "Modelling Proposed Tax Reform of Employee Share Ownership Plans" (Econtech, 14 October 2004 ), forecasts the effects of the ESOP tax reform proposed by EOG on the Federal Government's budget as well as on national income, consumption and savings.
Because the proposed new ESOP involves an extension of existing tax concessions for ESOPs, its direct effect on the budget might be expected to be negative. However, the aim of the EOG proposal is to stimulate the extra take-up of ESOPs and, to the extent that this occurs, there should be benefits to both the Federal budget and to the economy generally.
The research evidence is clear that these benefits arise because of the link between ESOPs and increased productivity in the workplace. A number of studies have shown that productivity is higher in ESOP firms than in comparable non-ESOP firms. The higher productivity is the result of giving employees financial stakes in their employer's business. It is on this basis that Econtech's modelling estimated the impact of the proposed new ESOP under three different assumptions about productivity differences between ESOP and comparable non-ESOP firms.
Econtech modelled all of the possible direct and indirect effects of the proposed new ESOP. In its report, it provided conclusions developed under three scenarios: (a) "base-case assumption" (no change in productivity, with ESOP holdings doubling to around $6.8 billion, or just under 1% of the value of the stock market); (b) where the level of productivity is 3% higher in ESOP firms than their peers; and finally (c) where the level of productivity is 6% higher in ESOP forms.
The conclusion to be drawn from the Econtech study is that the ESOP tax reform proposed by the EOG (see our "EOG Policy" page) will have a significant positive impact on wealth creation and national savings and, under certain conditions, on the national budget.
The study indicates that the EOG proposal represents a substantial investment in the wellbeing of Australian as a free and enterprising democracy rather than a "cost" to Government.