Politics is such a confusing mess these days yet when the historical dust settles it should be clear that the guy who got financial regulation right was John McCain. His simple proposal made in the late 1990’s was ingenious and would have prevented both the .com bust and the financial crisis of 2008.
McCain saw that by fixing one accounting anomaly the whole system could self correct. He, along with Levin from Michigan, proposed that companies could issue all the stock options they desired with one simple caveat. That is, the company would have to recognize an expense on their finanical books equal to the tax deduction they are taking for tax purposes on those very same options.
The genius of McCain’s proposal is an instructive lesson for the tax debate today. That is, the attention should first be on the “tax deduction” side, not the rate charged on earnings. It doesn’t matter much if the rate is 5 percent or 50 percent if illegitimate tax deductions are being taken.
What most investors do not realize is that the issuance of options was the root of both the .com and the financial crisis of 2008. Such options and related short term gains allowed executives to completely compromise many organizations’ fundamental financial integrity. Boards would have acted very differently if the tax deductions on such option gains were reflected in public financial statements, which would have significantly reduced reported earnings.
Ironically, McCain was defeated by both key Democrats and fellow Republicans respresenting powerful interests in the financial industry including Merrill Lynch, Countrywide, Citigroup and JP Morgan.
