ESOP's and Market Distortions

Abstract

Since 1974, Congress has created numerous tax benefits favoring Employee Stock Ownership Plans (ESOPs). Congress significantly expanded those benefits with the Deficit Reduction Act of1984, and as a result the use of ESOPs is likely to increase substantially in the future. In this Article, Professors Doernberg and Macey argue that ESOPs do not deliver the non-tax benefits claimed for them by proponents and cause inefficient market distortions. After exploring the history and requirements ofESOPs, they discuss various market distortions caused by ESOPs, with particular emphasis on the market for corporate control. After reviewing the treatment ESOPs have received in recent tax reform proposals, Professors Doernberg and Macey conclude by suggesting that many of the beneficial goals ESOPs are alleged to serve could be better achieved by modifying the laws governing individual retirement accounts.