Wall Street wizards have been expecting higher long-term interest rates for a couple of years, but some now seem surprised they are arriving. The yield on the 10-year United States Treasury note climbed above 5 percent today, and there have been rises in most other countries as well. Maybe China is less willing to buy American and European bonds. Maybe there is something else.

It is instructive that the housing market in many regions, if not in Manhattan, cracked before long-term interest rates went up. The ad campaign run by the National Association of Realtors proclaiming that now is a good time to buy a house may have to be amended to drop the claim that mortgage interest rates are at record lows.

A housing market that was reeling before rates went up may have further to fall. Home builder shares have fallen 6 percent over the past few days, but remain well above where they were last summer, when long-term rates were about where they are now but before there was real evidence that the housing market was tumbling.



June 4, 2007, 4:05 pm

Taxes and Stock Options

A Senate hearing on Tuesday will examine the fact that many companies get a much bigger tax deduction for their employee stock options than they report on their income statements to shareholders. Senator Carl Levin, Democrat of Michigan, thinks this is costing the Treasury a lot of money.

That is arguable at best, given that the executives who cash in those options pay a lot of taxes on the profits.

But there is still a case for changing the law. Now employees do not pay taxes on options until they cash them in, and then the company gets an identical deduction. If the option expires worthless, the company gets no deduction, and the employee has no profits on which to pay taxes.

Here is an alternative. Tax the employee on the value of the option when issued. Then, when the option is exercised, or expires worthless, the employee would have a taxable gain (or loss) equal to the difference between the value when issued and the value when exercised.

The company would get a tax deduction for the value of the option, which, as I argued in my column last week, would give the company an incentive not to low-ball the value.

But there is another virtue to that idea. Assume that the companies that are the most successful are the ones whose share prices go up the most. (I know, that is not always the case, but there must be some correlation.) The companies that are struggling end up getting no tax deduction for the options they hand out, while the companies that are making the most money get huge deductions. That part of the tax law is regressive: Your company pays more taxes if it does badly than if it does well.

With normal forms of compensation, when the company makes the payment it knows what the tax deduction will be. For options it does not.