Section of Taxation Publications

VOL. 62
NO. 2
Winter 2009

Contents | TTL Home


Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

Fifty Years of Utopia: A Half-Century After Louis Kelso’s The Capitalist Manifesto, a Look Back at the Weird History of the ESOP

Andrew W. Stumpff*

I. Introduction

Employee stock ownership plans are qualified retirement plans designed to invest in the stock of the companies that adopt them. The idea is that by participating in these plans, employees become, over time, owners of their own employers. Provisions to encourage the use of plans like this, known by their acronym “ESOPs,” are scattered throughout the Code and the Employee Retirement Income Security Act of 1974 (ERISA).

One unusual thing about ESOPs is that they are almost entirely, from the original idea for the plans themselves to the array of enabling legislation, a product of the self-developed economic theories and vigorous lobbying of a single, now semi-obscure, private individual. In the middle of the last century,
Louis O. Kelso, a lawyer in San Francisco, became convinced that (1) in general, the economic value of any given worker’s labor would be insufficient to support a living wage for that worker; (2) as a result, it was essential to encourage more widespread ownership of capital among laborers as a means of providing them with supplementary income; and (3) a good way to accomplish that goal was by encouraging investment by employee retirement plans in stock of the participants’ employers.

Kelso publicly advanced these views just over 50 years ago, in 1958, in the book The Capitalist Manifesto, which he co-authored with Mortimer Adler. The title suggests the authors’ ambitions. Like Karl Marx, Louis Kelso believed he had stumbled upon a profound, previously unrecognized scientific truth that had the power to explain every economic problem and raise working people from poverty; the only difference was the prescription. “It’s one of the most important discoveries in the history of mankind,” he told a reporter. In The Communist Manifesto, Marx had demanded an end to capitalism, whereas in The Capitalist Manifesto, Kelso demanded more of it.

Kelso quit his law job, formed a consulting firm, and from 1958 until his death devoted most of his time to promoting ESOPs. It was an uphill battle. In 1958—and now, and at all times in between—the reaction of mainstream economic academia to Kelso’s theories has been one of annoyed contempt. Kelso seems to have been one of those people, however, with a level of self-certainty that renders them impervious to rejection. He kept trying, and in 1973 he experienced the kind of breakthrough very few academic economists ever will: he convinced the Chairman of the Senate Finance Committee of the rightness—in fact, of the urgent importance—of his views. Such was the power at the time of the Senator, Russell Long of Louisiana, that the day after his meeting with Kelso, an ESOP provision had been inserted into legislation, the Railroad Reorganization Act, on the fast track to enactment.

That turned out to be just the beginning. From 1973 until his retirement from the Senate in 1986, by the estimate of one staff member, Senator Long arranged for the enactment of at least 25 separate pieces of legislation supportive of ESOPs. These included, crucially, revisions to ERISA itself that prevented that statute from, as it would have otherwise, rendering ESOPs illegal; they also included a number of distinct, cumulatively massive ESOP tax breaks. As best one can tell, all of these provisions were, for practical purposes, the legislative work of Russell Long alone. Few others in Congress, the White House, or the Treasury ever seemed too interested one way or the other.

Once Long retired, the flow of favorable legislation dried up. By then, though, the tax subsidies had led to adoption of thousands of ESOPs, by companies as large as Avis and Phillips Petroleum. Overall values are hard to assess, but they run into the hundreds of billions of dollars in terms of stock acquired over the years by ESOPs and at least tens of billions of dollars in tax thereby avoided or deferred. And although many of the ESOP provisions have now been repealed, not all have, and of course, ESOPs themselves remain very much with us. Their existence is, in retrospect, actually difficult to understand. To the question, “Why does the United States have ESOPs?” it is not an exaggeration to say the answer is that a guy in California thought they were a good idea, and he personally persuaded a member of the Louisiana congressional delegation that he was right.

*Andrew W. Stumpff teaches employee benefits law at the University of Michigan Law School and maintains a benefits practice with the firm of Stevenson Keppelman Associates in Ann Arbor, Michigan. He is a former partner of the New York law firm Davis Polk & Wardwell and a former assistant branch chief with the IRS Office of Chief Counsel. The author thanks the staff of the University of Michigan Law Library, in particular Jocelyn Kennedy, for invaluable research assistance, and Robert S. Melson for reviewing a draft of this Article.


Published by the
American Bar Association Section of Taxation
in Collaboration with the
Georgetown University Law Center


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