An analysis of the benefits S ESOPs provide the U.S. economy and workforce

Policymakers’ interest in tax reform has increased dramatically in recent years as a consensus on broadening the tax base and lowering marginal tax rates has emerged. As such base broadening would necessitate curbing or eliminating certain tax expenditures, this paper examines the economic impact of the preferential tax treatment of employee stock ownership plans (ESOPs). Through a comprehensive literature review as well as a new analysis of ESOPs sponsored by S corporations (S ESOPs), this paper demonstrates how ESOPs—and in particular S ESOPs—contribute positively to job creation in the U.S. economy by promoting employee commitment. The existing academic literature confirms that the level of employee commitment is an important driver of firms’ productivity, growth, and job stability. ESOPs have been shown to facilitate firm performance and job stability in large part because they foster loyalty to the company among employees. This evidence of the connection between worker loyalty and firm performance begs the question: how can companies foster employee commitment? One answer is through employee ownership, and one proven way of successfully establishing employee ownership of firms has been through S ESOPs, which are often 100 percent employee owned. S ESOPs foster a workplace culture of participation and commitment. Previous research has shown that, by facilitating employee ownership of firms, S ESOPs can lead to higher wages, greater job stability, and higher retirement plan contributions.