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Employee Stock Ownership Plans

Employee Stock Ownership Plans

An Employee Stock Ownership plan (ESOP) is a plan of stock purchase by the employees of a firm which takes advantage of special tax treatment and proceeds toward eventual ownership of the firm by the employees or their retirement pension funds.

The major architect of the idea was Louis Kelso, a San Francisco investment banker, who promoted the idea in the 1950's. Kelso's plan called for the borrowing of enough capital to purchase the stock in a corporation by a trust who would hold the stock for the employees. The dividends paid to the trust would not be taxable under the Federal profit tax. This tax saving would then retire the loans. The whole basis of the plan was the special tax treatment of dividends paid to the trust holding the employees stock.

Kelso's plan for ESOP's was not implemented to any significant extent until measures were proposed in Congress to grant such special tax treatment. Such measures were sponsored by Hubert Humphrey, among others, but not much got done legislatively until Senator Russell Long of Louisiana backed the bill. Senator Long was one of the most powerful figures in Congress. His interest in ESOP stemmed from their similarity in spirit to the ideas of his father, Huey Long. Huey Long, governor and later senator from Louisiana, was a populist who advocated a redistribution of income in the United States. Kelso's plan offered a non-radical way of achieving a greater income equality. Senator Russell Long explained his backing of ESOP's with the statement, "The problem with capitalism is that there are not enough capitalists."

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