The Zuckerberg Tax

http://www.nytimes.com/2012/02/08/opinion/the-zuckerberg-tax.html

by teej • 14 years ago

136 173 14 years ago

rmnoon• 14 years ago

By only taxing publicly traded equity, it seems like they'd also hit small retail investors pretty hard too, while only serving to retard valuable new IPOs even more.

paulhauggis2• 14 years ago

I hate when they bring up Warren Buffett. He skirted the US tax laws for the majority of his life and now that he's older, he wants everyone to pay more in taxes.

If he really cared, he would have fought for higher tax laws earlier in his life.

Karunamon• 14 years ago

It's not "skirting" if you're following the letter of the law. Regardless of how you feel about the man, he makes a valid point.

jcampbell14• 14 years ago

The capital gains rate was 28+% for much of that period. Buffett didn't start advocating for higher tax rates until after the Bush (and Clinton) tax cuts which slashed capital gains rates to 15%.

Your position is as foolish as saying if Al Gore really cared about global warming, he would have been advocating for climate change policy during his college years.

blcArmadillo• 14 years ago

Agreed. Obama recently spoke at the university I attend. At one point in his speech he mentioned that Buffett's secretary told him that they have a higher tax rate than Warren Buffett. Then literally two minutes later in his speech he praised Warren Buffett for addressing the issue of needing to increase taxes on the wealthy. What a joke.

drewblaisdell4• 14 years ago

I don't see the problem here. Warren Buffett pays the 15% capital gains tax and wants to see it increased. Are you criticizing him for not paying more than he is taxed?

po• 14 years ago

If he really cared, he would have fought for higher tax laws earlier in his life.

I don't understand this kind of reasoning. He's arguing against his own self-interest now. I think it's hard to say he doesn't care. Maybe he didn't come to feel that he unfairly benefitted until he was older. It's not like he's saying we should tax young people more now that I'm old.

paulhauggis2• 14 years ago

The point is that he's 81 now. He doesn't have many more years to spend his millions (or billions). A few more percentage points in taxes isn't really going to matter to him.

It would have matter when he was much younger.

rprasad8• 14 years ago

For the majority of his life, until the Tax Reform Act of 1986, Warren Buffet's "tax skirting" still meant paying more than 25% rates on his income.

Effective tax rates (accounting for inflation) now are lower than they were at any time since 1913 (i.e., since we've had income taxes).

waqf4• 14 years ago

This should be combined with my even more radical plan for fixing some irregularities in the year-by-year accounting system for income tax (notably, the fact that progressive taxation punishes you more for earning nothing for nine years and then $1m the tenth year, than for earning $100k steadily each year):

Annually, you calculate how much income you've earned over your entire life (and of course subtract any deductions you've become entitled to over your entire life). Then you look that up in a progressive (i.e. convex) tax function which tells you how much tax you owe for your entire life. Subtract the amount of tax you've already paid with all prior years' returns, and pay the difference.

grecy5• 14 years ago

I think your suggestion is more "fair" for someone who earns a steady income every year of their life, but is horrible for people (like me) that drop in and out of earning money every few years.

Lets say I earn $100k for 5 years, and pay taxes on it during.. then take 5 years break, and only earn something like $10k a year to keep rent ticking over. So I would have to pay tax on $550k over 10 years... that effectively means my tax rate during the later 5 years was calculated on earnings of $55k a year, even though only $10k actually came in. So I have to pay more tax that I'm earning for those later 5 years. Lets hope I saved a bunch during the first 5.

Conversely, my brother is a ski bum and has not earned over $10k a year for the last 10 years. He's actually an Aerospace Engineer, so lets say he now goes and gets a big-wig job for $200k a year for just 3 years. During those three years, he'll only pay tax on an (average) income of $53k, even though he had $200k coming in those 3 years.

It's certainly more appealing to not go to work until the last few years and earn as much as you possibly can in those years... somewhat like the opposite of retirement I imagine.

waqf4• 14 years ago

You're imagining the tax rates as being much higher than they would actually have to be (and I think you also missed that the taxes you pay always end up being a tax-rate proportion applied to the amount you earned that year). Assume for simplicity that people typically have a 40-year working life.

Then when you earn your first $500k in five years, that will be taxed at a rate appropriate to someone who earns $500k over their working life (that is, $12.5k/year). What's the U.S. tax rate at that level, currently? 15%?

So I envision your annual taxes, in your example, as looking something like:

  Year  1     Earn $100k   Rate 10%   Tax  $10k
  Year  2     Earn $100k   Rate 10%   Tax  $10k
  Year  3     Earn $100k   Rate 10%   Tax  $10k
  Year  4     Earn $100k   Rate 15%   Tax  $15k
  Year  5     Earn $100k   Rate 15%   Tax  $15k
  Year  6     Earn  $10k   Rate 15%   Tax $1.5k
  Year  7     Earn  $10k   Rate 15%   Tax $1.5k
  Year  8     Earn  $10k   Rate 15%   Tax $1.5k
  Year  9     Earn  $10k   Rate 15%   Tax $1.5k
  Year 10     Earn  $10k   Rate 15%   Tax $1.5k

You won't move into the 25% band until you've earned something like $1.3m over your life.

BarkMore2• 14 years ago

This plan does not smooth things out completely because the value of a dollar decreases over time.

waqf4• 14 years ago

This is absolutely true.

Capital gains tax also screws people over because the value of a dollar decreases over time. If that's the biggest objection anybody comes up with I say we start tomorrow (and I'll have an inflation-indexed version worked out by then anyway).

Sniffnoy• 14 years ago

"Some would argue that it is inherently unfair to tax “paper gains” before they are realized — Mr. Zuckerberg won’t receive $28 billion in cash; he holds only paper. Moreover, markets are inherently volatile; one year’s paper gains is another’s real losses. However, these arguments are far less credible when paper losses give rise to real tax refunds."

Wouldn't it be simpler and more consistent to get rid of these tax refunds, and have neither paper gains nor paper losses taxed or refunded, than to have a separate tax for gains and refund for losses?

nh• 14 years ago

Not a tax lawyer, but doesn't the Jobs family pay 35% death tax? The writer intentionally does not mention this. Although this is not income tax, its false to suggest that they are someway cheating the system.

Edit: grammer

drewblaisdell4• 14 years ago

You are referring to the estate tax. The term "death tax" is deliberately misleading and used as a propaganda term by those who want to repeal the estate tax.

splat2• 14 years ago

I won't deny that it's a term of propaganda, but how is it misleading?

Jach3• 14 years ago

I'm not an admirer of Luntz's work, what he does is evil. His active spreading of the "death tax" term, however, is one exception. "Inheritance tax" is better of course, but "death tax" is still better than "estate tax" in terms of conveying the actual meaning and causing less confusion than "estate tax". In any case, this discussion has served little utility (especially considering the GP's question on Jobs' inheritance tax) and I wouldn't mind someone downvoting the whole comment chain.

rprasad8• 14 years ago

Actually, it is a death tax. The Gingrich Congress passed it to discentivize people from dying. :P

ipince• 14 years ago

Yes, can someone clarify what happens at death?

Even with the proposed change, it seems if Zuckerberg dies after the IPO but before the year's end, his heirs would pay no taxes on the stock?

philwelch• 14 years ago

They would pay estate tax of a percentage of what the estate, including stock, is valued at.

jonknee• 14 years ago

That only counts if you are passing it on to someone other than your spouse. The so called "unlimited marital deduction" which comes up frequently in gay marriage debates. If you keep it going with death/marriage/death/marriage you can avoid ever paying the estate tax.

greenyoda2• 14 years ago

I'm not a tax lawyer either, but if he set up trusts for his family members, they may be sheltered from paying estate taxes on some of that money.

BarkMore2• 14 years ago

This is correct, but the amount that can be sheltered is small compared to the overall value of the Job's estate.

jcampbell14• 14 years ago

Spouses are exempt from estate taxes. Had Steve left his stock to his children, then yes capital gains and estate taxes would both be paid on his $2B.

jpdoctor2• 14 years ago

> Not a tax lawyer, but doesn't the Jobs family pay 35% death tax?

Nobody who does any sensible planning pays the estate tax. It is a complete red herring used by politicians to demagogue their constituencies.

It is beatable in so many ways that it's not worth discussing.

dmbaggett3• 14 years ago

As the author off-handedly implies, this only works for liquid investments. It's obviously unworkable for someone with a massive paper gain in an illiquid investment -- e.g., shares in a privately held company whose stockholder agreement prohibits transfers.

But if the proposal would be to force paper gains only in publicly traded companies to be marked to market, then everyone will work awfully hard to avoid ever directly holding shares in publicly traded companies... which, I don't know, seems possibly problematic.

Seems more realistic to go after the revenue on its way in to companies. (E.g., require companies with executives domiciled in the US to pay US taxes on worldwide profits. No more "Double Irish" and zero US taxes for GE, unless Jeff Immelt wants to move to Dublin.)

jcampbell14• 14 years ago

Your cure is worse than the disease. Who really cares whether they work in Geneva or New York or Sydney or SF? They are all nice places to live, and that plan would be a national disaster.

The US just needs to tax capital gains as ordinary income, and cut the corporate income tax to 10-15% with no exceptions to be globally competitive. The goal is to have more multi-nationals based in the US, not less.

jseliger2• 14 years ago

The US just needs to tax capital gains as ordinary income, and cut the corporate income tax to 10-15% with no exceptions to be globally competitive.

This only makes sense if the income used to buy the capital hasn't already been taxed once, when it was earned. Since it already was, you're in effect arguing for double taxation. Which is why capital gains are taxed differently in the first place.

dmbaggett3• 14 years ago

The US corporate income tax rate is irrelevant to companies like GE that pay no US corporate income taxes.

Drbble3• 14 years ago

And tax unrealized gains, to eliminate a loophole that benefits folks who are rich enough to avoid realization.

And to smooth the progressive tax rate over multiple years, avoid punishing the entrepreneur and employees who toil for 5 years to earn one big pay day.

hessenwolf• 14 years ago

Taxing capital gains as normal income would also have a positive effect on the serious problem that 70% of US companies don't pay dividends, which is really missing the whole point of making capital allocation more efficient.

ikirill• 14 years ago

The author does explicitly state that his proposal is only about publicly-traded stocks, so your first point is moot.

Secondly, regarding your second point, some company or person would be holding those publicly-traded shares, which means that they will be paying tax under this proposal.

dmbaggett3• 14 years ago

Maybe feeding the troll, but in case you were serious...

My point was that the author is forced to use some arbitrary standard like "publicly traded" since such a proposal is inherently unworkable for illiquid investments. But in doing so, the author creates an obvious problem: if "publicly traded" is the litmus test for this new mark-to-market tax, then investors will move investments into non-public vehicles to avoid paying the tax.

As to your second point, the amount of publicly traded float is not zero sum: companies regularly go public and take themselves private to achieve financial, governance, and other objectives. So it is not the case that anyone necessarily would be paying the mark-to-market tax on shares of a currently publicly traded company, any more than it is the case that having an X% corporate tax rate means US companies pay X% of profits in tax to the US government.

If this proposal were enacted, future-incredibly-valuable company F woud avoid becoming a publicly traded company entirely. Facebook, which the author cites because it's headline-grabbing, harms rather than helps his case: they've intentionally avoided going public until now, and could into the arbitrary future if it were especially onerous for the founders/investors for the company to do so. The rational expectation of Facebook principals right now is that the benefits of going public (at least for the founders and investors) outweigh the negatives, because there is a massive liquidity and valuation improvement from doing so.

But under the author's proposal, that cost/benefit analysis would change, and companies would simply stay private and achieve liquidity for founders and investors via other mechanisms. Over time, these mechanisms would evolve into processes that were as close to indistinguishable from public company registration as possible without actually triggering the language of the market-to-market tax law. SEC rules about selling shares to non-qualified investors would still hold, obviously, but I'm sure with so much potential tax to be saved, investors would find ways to legally aggregate non-qualified investors into qualified vehicles to get around this. Or just live with qualified investors, and no others, owning their companies.

gyardley• 14 years ago

Yes, the situation is completely unworkable for illiquid investments.

But that's exactly how the US government treats permanent residents today should you lose your permanent residency, voluntarily or not - all the private stock you own gets marked-to-market and your tax bill is due immediately.

And my wife wonders why I'm paranoid when I cross the border.

kevingadd• 14 years ago

The idea of owing tax the moment a company goes public seems tremendously stupid. Not a single person I know who's had shares in a company that went public was able to sell them immediately. They all had to hold onto them for some set period, and some of them actually had to pay tax on the gains before they could even sell the shares (to get the liquid capital to pay the tax). Maybe I'm missing something?

rprasad8• 14 years ago

Yes, you're missing that management gets to choose the "lockout period" before existing shareholders can cash out. Usually, management imposes a 6 month lockout period but exempts management (i.e., board or executives)

Mr. Zuck is management at Facebook.

As for the taxes, you're thinking of the imputed income from exercising options at below the market price of the shares when exercised (i.e., an option to buy a $10 share of PublicCo for only $2 is $8 in imputed income b/c you could then immediately sell the shares for $8 in gains).

jonburs• 14 years ago

It's the underwriters of the IPO that impose the lockout periods, not management. The lockouts apply to all pre-IPO shareholders (excluding shares explicitly included as part of the offering).

Lockouts may also include provisions that any early release granted to management or dominant shareholders must also be granted to all other parties on equal terms; that was true of the one lockout agreement I was subject to.

ibejoeb2• 14 years ago

A very similar problem is plaguing Australian companies now. The downside to share-based compensation can outweigh the upside. For example, options would be taxed upon vesting rather than exercise, so there are immediate liquidity issues. Even those that are anti-dilutive for EPS purposes from the grantors perspective (e.g., underwater options) may be taxed.

hristov2• 14 years ago

Yes you are missing a little detail. He is paying tax on exercising options which he was awarded as part of his salary. He does not owe the money because the company went public but because he chose to exercise the options. He could exercise less options and pay less taxes. And the fact that he can exercise the options usually means that he can sell the resulting shares.

citricsquid2• 14 years ago

> That’s what Lawrence J. Ellison, the chief executive of Oracle, did. He reportedly borrowed more than a billion dollars against his Oracle shares and bought one of the most expensive yachts in the world.

I believe this is also what Markus Persson (Notch) of Minecraft fame did. He mentioned a couple of months back about how it's cheaper for him to borrow money than it is than for him to take money out of the company. He's not as rich as Zuck though.

holdenc2• 14 years ago

At some point though the borrowed money needs to be repaid, and this would be with income (capital gains or earned income) that is taxed, right? So, I am curious how this works out in the long run. I imagine there is a twist to this I am missing...

joshu• 14 years ago

Yeah, I'm trying to figure this out myself.

jacques_chester5• 14 years ago

You could presumably pay the loan off with shares. Since it was a loan, it's not income, so no income tax.

IANATL, TINLA.

rayiner11• 14 years ago

Yes, the tax is ultimately the same, modulo the time value of money. However, the idea of the realization requirement is that it's not reasonable to tax someone on a gain in the value of property when they don't have liquid assets to pay the tax, or when they haven't realized benefits from that appreciation. Taking a loan against those assets cuts against that, though. And the time value of money does make a difference. Say your stock appreciates $10 this year and stops appreciating. You will ultimately pay taxes on that $10 when you sell it, but if you can borrow against that money now, you can enjoy current benefits from that money while delaying the tax to years in the future when it is worth a lot less.

Jach3• 14 years ago

> If his Facebook shares decline in value next year, he’d get a refund.

This seems like potentially the biggest problem with the scheme, at least in a sane world. What if, as happens in the markets, the shares decline in a big way? The author addressed it briefly in the end but I felt it was half-assed and an overall unsatisfying answer. The government is happy to take $X where X is huge but next year $X is gone on government spending and the refund due to any reason (bad economy, bad company) is basically created out of thin air. Unless the government happens to be better at using $X to create $X+$c than the original holder of $X, the refund has to be artificially created or deducted from other government programs. Nothing new for our government though, especially for amounts as insignificant as billions of dollars when trillions are so easily created. Seriously, justifications like this:

> A mark-to-market system of taxation on the top one-tenth of 1 percent would raise hundreds of billions of dollars of new revenue over the next 10 years.

don't sound very convincing to me at all. All this arguing over a few hundred billion dollars over 10 years? The US government is still spending trillions of dollars each year, we're still trillions of dollars in debt. Maybe the government can keep going for another 100 years in this crazy state, maybe it can't. If it can't, I'd rather get the worst of the possible financial problems over with now and have the US citizens deprive the feds from all sources of income and talk about things like taxes and valid uses of tax revenue from a fresh start with an entirely new government (even cooler, a saner and more distributed approach to government than massarchy). This might be radical enough to get some downvotes but I don't think anything less than a radical change will fix things in a way the huge majority will enjoy. (Other radical changes I'm banking more on and care more about are things like a positive Singularity.)

mhb• 14 years ago

Besides that, is this tax refund for a marked-to-market loss a new element of this scheme? Right now, real losses can only be used to offset similar gains and excess losses are carried forward.

ChuckMcM• 14 years ago

As it stands you can't get a refund for AMT tax against non-equivalent assets. Instead you get to write it off at $3,000 per year against your income. A number of dot com vets have 150 to 200 years worth of $3K/year write off headed their way.

patrickaljord• 14 years ago

> What if, as happens in the markets, the shares decline in a big way?

The government could wait a full year before spending the money so that refunding from the previous year would be easy. I'm not sure I really understood from the article if refund only happens from one year to the other though and if not how fair would that be.

nasmorn• 14 years ago

Actually holding on to cash is a serious issue at the size we are talking about. Over night the feds would be the biggest investor in everything. A small country can go set up a sovereign wealth fund but the US would probably just hold its own paper which is equivalent to spending the money in the first place.

edoloughlin2• 14 years ago

> Unless the government happens to be better at using $X to create $X+$c than the original holder of $X, the refund has to be artificially created or deducted from other government programs

Instead of a refund, a tax credit could be issued which could be carried over for X years.

teja1990• 14 years ago

And the $X won't be of same value because of inflation. Will the govt. gives back the money after adjusting for inflation? I doubt that.

sunsu• 14 years ago

Taxing someone based on their unrealized gains only makes sense if you have liquidity! Instead of making the tax system more complicated with propositions like this, we should just switch to a consumption based tax system.

chii2• 14 years ago

A consumption based tax unfairly places more tax burden the poor, who is less likely to be able to afford it.

kansface3• 14 years ago

The tax doesn't have to be flat- luxury goods can be taxed at a higher percentage.

greenyoda2• 14 years ago

"If Mr. Zuckerberg never sells his shares, he can avoid all income tax and then, on his death, pass on his shares to his heirs."

Assuming that Zuckerberg has a normal life expectancy, what's the probability that Facebook will still be around in 60 years? Not very many corporations have lasted that long.

kansface3• 14 years ago

This is the risk the banks take using shares in a tech company IPO as collateral. How does this weigh in on the proposed tax?

temphn2• 14 years ago

According to many people in favor of higher taxes, quantitative easing has no ill effects. Why don't they just ease $5B into existence?

And why don't people concerned with "unfair" taxes call for Gaga's rate to be lowered rather than Zuck's to be raised?

Miller doesn't seem to understand that the superwealthy also tend to be highly intelligent and resourceful. They are not stationary targets. A tax like this would push growing startups to grow outside the US a few years before IPO. A multinational can change its base of incorporation, and many people can and will change their citizenship over a million bucks, let alone a billion. This kind of foolish proposal would just drive more US businesses overseas.

phillmv2• 14 years ago

Tomfoolery.

>According to many people in favor of higher taxes, quantitative easing has no ill effects. Why don't they just ease $5B into existence?

It increases inflation. Right now, it's better to have more people employed/have the economy growing than it is to have inflation below 2%.

QE isn't exactly a progressive tool of choice, and I'm only minimally informed, but iirc that's the broad keynesian view as to why in theory it's at least better than doing nothing at all.

>And why don't people concerned with "unfair" taxes call for Gaga's rate to be lowered rather than Zuck's to be raised?

Because I'm not worried about Gaga's overall income. In fact, she probably ought to be taxed at a higher rate, because people like her comprise of almost zero per cent of the population. Cry me a river, in other words; it's not at her income range we're concerned with inequality.

>A tax like this would push growing startups to grow outside the US a few years before IPO.

Serious question time. Is this even reasonable?

If Zuck could have saved a cool billion in taxes, what's stopping him from doing just that?

If I'm say a Canadian citizen and I live in Canada but I own a fuckload of Facebook stock that qualifies as a salary, where do I file income taxes?

>This kind of foolish proposal would just drive more US businesses overseas.

These kind of astronomical windfall events are extremely rare and as I've denoted above, what you describe is already currently possible. So… why don't we already see this?

Other than the fact that you there are many advantages to having lots of engineering staff located in the United States/North America.

nhaehnle• 14 years ago

> > According to many people in favor of higher taxes, > > quantitative easing has no ill effects. Why don't they > > just ease $5B into existence? > > It increases inflation. Right now, it's better to have > more people employed/have the economy growing than it is > to have inflation below 2%.

There's an orthodox misconception here that is taking some time to be fixed / properly understood by economists.

Quantitative easing is nothing more than an asset swap for banks. It increases the reserves in the banking system, yes, but it does not actually put more money into the hands of people who will spend it in the real economy. Its effect is at best indirect: it pushes the interbank lending rate down, and that can increase the pool of potential borrowers. But the effect is marginal at best.

Note in particular how the "money multiplier" dropped after QE: http://research.stlouisfed.org/fred2/series/MULT?cid=25

ThomPete• 14 years ago

Do you have any data to support the claim that they are highly intelligent?

andrewflnr2• 14 years ago

I believe that he's referring to all the schemes they currently use for evading taxes and (at least for the likes of Zuck and Buffet) the way they got their money to begin with. Regardless of whether they or merely their accountants are intelligent, they won't take a massive tax hike lying down.

rayiner11• 14 years ago

> A multinational can change its base of incorporation, and many people can and will change their citizenship over a million bucks, let alone a billion.

I see this argument, but it is completely non-sensical. Someone who just cashed in to the tune of $5 billion is going to leave the US to avoid paying $2 billion in tax? To where? Europe, with its super low tax rates? The developing world? Every place worth living has higher tax rates than the U.S.

jacques_chester5• 14 years ago

Singapore and Hong Kong would like to talk to your about you theory that every major domicile has higher taxes than the US.

Plus, if you enjoy living in a sea of sandcastles, Dubai has no income tax.

rprasad8• 14 years ago

A multinational can change its base of incorporation, and many people can and will change their citizenship over a million bucks, let alone a billion. This kind of foolish proposal would just drive more US businesses overseas.

I do international tax for a living. I laughed so hard at this line I started crying.

Businesses will do business in any nation where they can make money, taxes be damned. Moreover, taxes are the price of doing business in a country -- if they don't want to pay taxes in a country they won't get to do business there either. Multinationals will focus on miniziming taxes where feasible, but taxes usually aren't the biggest costs on their books.

The U.S. corporate tax rate is the "highest" in the world, but it only taxes profits (most other countries base corporate income taxes on revenue), which results in effective income taxation rates in the low single digits for all but a tiny handful of companies.

Tsagadai• 14 years ago

Businesses will do business in any nation where they can make money, taxes be damned. Moreover, taxes are the price of doing business in a country -- if they don't want to pay taxes in a country they won't get to do business there either. Multinationals will focus on miniziming taxes where feasible, but taxes usually aren't the biggest costs on their books.

Thank you for your comment. So many people seem trapped in the media doublethink loop that they forget corporations will form anywhere you can make money from forming a corporation. Taxation is rarely a hurdle to starting a successful company and if you are relying on a very thin margin (say, about the size of the effective tax rate) you probably won't be successful in five years.

temphn2• 14 years ago

Well, if you are an international tax lawyer, obviously moves like the Double Irish show that the base of incorporation matters quite a bit:

  http://en.wikipedia.org/wiki/Double_Irish_arrangement

  The Double Irish arrangement is a tax avoidance strategy 
  that U.S. based multinational corporations use to lower 
  their corporate tax liability. The idea is to use payments 
  between related entities in a corporate structure to shift 
  income from a higher-tax country to a lower-tax country. 
  It relies on the fact that Irish tax law does not include 
  U.S. transfer pricing rules.[1]

Obviously there are many more things one can do to avoid (not evade) US taxes through various international arbitrage opportunities and offshore tax havens.

And I don't see why any company wouldn't do that. Why would you want more of your money wasted in Iraq and Afghanistan?

pfedor• 14 years ago

In case you wonder what the term "superwealthy" means in practice, the HEART Act of 2008 could offer some help. The act introduces a mark-to-market tax for people who wish to give up their citizenship, as well as long-term Green Card holders if they give up their Green Card. To prevent the super-rich from avoiding taxation. Senator Kennedy called it "the billionaires' amendment".

Now who is a billionaire according to Senator Kennedy? Anyone with (a) the tax liability above $139k on average over the past five years (inflation adjusted), or (b) the net worth above $2M (not inflation adjusted).

Hope that helps.

jimmyhwang• 14 years ago

What concerns me about Mr. Miller's proposal is that if we went to a marked-to-market and in year 1 the stock gained 100%. Then let's assume that provided the government with $5Bil in taxes, the government would spend that money like a kid in a candy store. Then what would happen if that stock lost 50% of it's value in year 2? How would the government have the funds to "refund" that $5Bil back? Would they just print more money?

This idea doesn't take into account how volatile the market is and the nature of government to spend during any surplus. Not to mention all the overhead needed to find fair "marked-to-market" values for pre-IPO companies.

And as other comments have stated, if this were to happen, what would be the motivation of CEOs to drive the price of the stock higher? Wouldn't it be in their best interest to keep it low so their tax bill would be lower?

Aloisius• 14 years ago

Or you could simply regulate loans made using stocks as collateral by either setting the minimum APR to say 20% or making the whole practice illegal.

Seems a lot easier than getting a new tax passed (loans are well regulated already) and won't harm the poor guy who is paper wealthy but can't actually sell his shares.

enjo• 14 years ago

I'm still trying to figure out where they get the money to pay off the loan.

ibejoeb2• 14 years ago

I believe the implication is that it is simply cheaper to refinance.

jklp• 14 years ago

> He could sell some shares to pay the tax (and would be > left with over $20 billion of Facebook stock after tax), > or borrow to pay the tax. > > If his Facebook shares decline in value next year, he’d > get a refund.

What happens if the market goes through a downturn and the government has to refund all the superwealthy their taxes?

I can imagine this working well in a bull market, but when a bear comes around the corner it could be disaster for the budget.

kiba• 14 years ago

At this point, congress should be focusing on cleaning up the tax code, not trying to tax Zukerberg.

What's unfair is that we got a byzantine taxation system with all sort of exceptions, subsidy, loopholes, plugs, punishment, etc.

rayiner11• 14 years ago

That's kind of like saying we should rewrite the Windows codebase because it has all sorts of patches, hacks, etc. Do you have any evidence on how much those things are actually costing us?

I don't (I'm not the one making dramatic claims), but my hunch is that most of the real revenue losses in our tax system are from some broad failings, not little loopholes. Our ridiculously low capital gains rate, for example.

To the point of the article, there is actually a deep-running theoretical difference between various realization schemes. This isn't just "trying to tax Zuckerberg" but rather figuring out how to properly compute "income = net accession in wealth." The theoretical amount subject to tax is: Gain = Net income + Delta(value of property). Theoretically, you could compute the latter term at any interval you like (every year, etc). As a general policy we compute the term at sale of property because it's the easiest time to do so (the valuation is fixed precisely by a market transaction). But for something like a publicly traded stock, that rationale carries much less weight. And the counter-veiling concern of ensuring that the amount does get fairly taxed (instead of being held on-to indefinitely) probably outweighs that rationale in this case.

jpdoctor2• 14 years ago

How does this tax lawyer know that:

The $5 billion he will receive upon exercising those options will be treated as salary

Was it in the S-1 that Zuckerberg did no tax planning?

chi_h• 14 years ago

To me, the loophole seems to be 'Now his widow can sell those shares without paying any income tax on the appreciation before his death. She would have to pay taxes only on the increase in value from the time of his death to the time of the sale. '

Why doesn't the widow need to pay taxes on the increase from the original cost basis to time of sale? What is the reasoning for resetting the cost basis to 'value at time of death', when no taxes are paid at that time?

JOnAgain• 14 years ago

The one aspect I'm not seeing anyone mention here is the very real implications this has for the company in question. I don't have the numbers, but a tax like this could (and probably would) cause Zuckerberg to no longer have control of Facebook since he had to sell shares. Or Bezos to lose control of Amazon, etc.

I, for one, think this is a big negative.

jerfelix14• 14 years ago

This article has a fundamental flaw. It starts with the premise that some outrageous tax revenue level is necessary, and from that premise tries to analyze the fairness of the existing tax code.

There's one thing I would really like to understand. I've been mulling this over for a couple of months, and I'm coming to the conclusion that a vote in favor of ANY tax is immoral.

If I cast a vote for a tax, I am voting in favor of taking money from someone else, with the force of gunpoint and the threat of prison. How can that be moral?

Since coming to this conclusion, I have tried to find arguments, and they usually start with "well, we need to have a tax, or no one will pay." (Romney even said that in one of the debates.) But I can't find any proof to this statement, and I find lots of things that disprove it.

1) The United States was founded with a volunteer militia funded completely voluntarily. (And at the time, citizens had to pay tax to the enemy of the revolution, England.)

2) Numerous organizations ranging from charities, to huge churches that have survived several millenniums, to a complete country (Vatican City) are funded voluntarily, and do that quite successfully.

3) Free people freely give to causes that they believe in. And people believe in freedom. It would not be a hard sell.

The whole argument that we have to get more from the rich (or more from anyone, for that matter) is standing on this shaky ground - that somehow it's moral for "the majority" to steal from others through a diffuse system of voting, representatives, laws and organizations like the IRS. But it's you and me, stealing from other people, and using organizations like the IRS and the police force as our weapons. And that can't be right.

Honest question: Can someone convince me that it's not immoral to vote for a tax? Please don't down-vote me for asking a question, because I am honestly trying to understand. If you disagree, help persuade me.

Edit: I WANT to pay for freedom. I DON'T want to FORCE someone else to pay for freedom (which has an obvious contradiction).

grecy5• 14 years ago

I think your idea that people will pay for something they believe in really only works out in fantasy land, not the real world.

In fact, your sentiment is the exact case study that shows how horribly this would fail. You are saying that a vote in favor of any tax is immoral - therefore promoting a "more for me" attitude. Just imagine if everyone thought like that. Your utopia will quickly crumble.

I think fantastic cases in point are Google, Apple, Facebook, etc. These are massive corporations making billions in profit, and paying less tax than you and I do. Sure, they could pay more if they wanted to, but are they? Why not? Because they (or the shareholders) have a "more for me" attitude.

(On a side note, I can't believe Google are doing that and still get away with their "Don't be Evil" line. Everyday Google use simple public services (Police, Fire, road, courts, judges) and don't pay for it. That looks evil to me.)

jerfelix14• 14 years ago

I cited several examples where this works in the "real world" and not fantasy land. You cited zero.

I NEVER advocated not paying taxes - I pay my taxes as I am forced to do, and I do it "honestly". So your second paragraph is simply inaccurate. I would also give to an organization, if there was one (maybe there is), IN ADDITION to paying my taxes, that promoted the establishment of such a system of FREE choice in government. I also give to charities. Each of these points disproves your second paragraph where you claim that this is just a "more for me" attitude.

Your point that corporations not paying tax somehow disproves my point is a red herring. Corporations are structured with charters which dictate objectives, which are often to maximize shareholder value. I am talking about people, humans, not corporations. People give to causes that they believe in, and people believe in freedom.

So I appreciate the reply, but you really didn't say anything to persuade me. You just went back to the "it wouldn't work" argument, without shooting down the MANY examples where it DOES work.

cecilpl• 14 years ago

If taxes weren't mandatory, I wouldn't pay them. Most people I know wouldn't either.

Then suddenly things like road systems, hospitals, schools, police, water systems, sewer systems, and courts would no longer be able to run.

Do you honestly believe that you could run a major developed country on donations? The Vatican doesn't count because it has a population of 800 and is run by the church.

project25o1• 14 years ago

>Then suddenly things like road systems, hospitals, schools, police, water systems, sewer systems, and courts would no longer be able to run.

Exactly. And people would no longer be using Facebook. Citizens who personally benefit the most from this great society are, similarly, the most indebted to it.

While certainly morally just, this is beside the point: It is imperative that such a society continues to exist so that the _next_ Zuckerberg/Jobs/Gates has the opportunity to advance our species further.

mike_esspe2• 14 years ago

My country for a long time believed, that you even can't run a shoes store without government owning it.

Why private roads, hospitals, schools, police, water and sewer systems can't exist?

andrewflnr2• 14 years ago

I doubt people would donate enough to support a modern military, but maybe we could get by with a smaller one (personally, I wouldn't count on it). Overall, it would at least take a pretty radical change in our culture, which has gotten used to receiving from the government.

I would definitely like to see people having more direct control over which projects their money goes to, though, like earmarking some of your (already mandatory in my scenario) money for street repairs near your house. Projects people care about get funded. Bridges to nowhere... less so.

What in your view is the threshold for government action? Is it only to prevent violence, or similar violations of person and property?

jerfelix14• 14 years ago

> What in your view is the threshold for government action? Is it only to prevent violence, or similar violations of person and property?

My views are evolving, which is why I asked the question in this forum, which I consider to be pretty sharp and left-leaning. I think government could extend beyond what you suggest. Public works projects are not out of the question. Establishment of just laws seems reasonable. Protecting the country from the tyranny of other nations seems necessary.

I think the US Constitution is a good place to start, to determine the threshold.

I actually have little doubt that we could raise enough money through donations to support a modern military. The people who have a great deal of wealth have reason to protect the system; many have a strong desire to make a difference.

pyre5• 14 years ago

  > If I cast a vote for a tax, I am voting in favor
  > of taking money from someone else, with the force
  > of gunpoint and the threat of prison. How can that
  > be moral?

How can you run a government without revenue of some sort?

You suggest donations, but I seriously do not believe that it would be possible to get enough money to run a government based entirely on that. Even with a 'trimming of the fat' in government, there would be too many people willing to try and 'game' the system.

(I guess it would possible to cut the required money even further by making government offices on a volunteer basis, but that would setup a bad set of incentives. It would only attract rich people that could afford to do something like that on a volunteer basis and/or people that are power-hunger/power-seeking.)

  > 2) Numerous organizations ranging from charities, to
  > huge churches that have survived several millenniums,
  > to a complete country (Vatican City) are funded
  > voluntarily, and do that quite successfully.

You're ignoring:

1) For several hundred years some of those religions were the official religions of several counties, and 'donations' were compulsory[1].

2) The Vatican is not completely funded voluntarily[2]:

  The Holy See, which depends largely on investments for
  its annual income, had income of about $326 million
  and expenses of about $313 million.

There's also tourism, in addition to "Peter's Pence" (donations to the Holy See, Vatican's governing body). I tried looking for actual numbers, but didn't find anything in the little bit of looking that I did.

[1] http://en.wikipedia.org/wiki/Tithes

[2] http://ncronline.org/news/vatican/vatican-budget-surplus-201...

jerfelix14• 14 years ago

> How can you run a government without revenue of some sort?

How does the Mormon Church work? They have no tax. Don't tell me tithe. There's no threat of jail time and income confiscation for not tithing.

bentlegen• 14 years ago

I guess that would depend on an individual's moral code. I, personally, would argue that it's immoral to vote against a tax.

jerfelix14• 14 years ago

Interesting. Is there any logic behind that?

entangld• 14 years ago

It's almost impossible to make major decisions without being unfair to some people. Ask any manager.

Voting requires the voter to make decisions, hard decisions. Even decisions about other people's money. Sometimes the status quo is unbearable and something has to be done. Where exactly is the unfairness in taxing wealthier people at the same percentage as middle class and others? I'm pro capitalism, but the argument that capital gains taxes need to be lower than income is a separate argument. There are probably great reasons for capital gains taxes to be much lower than income, but fairness isn't one of those reasons.

1. Volunteerism doesn't scale.

2. Charity doesn't support everything. I've done non-profit fundraising and rich people like to give money to put their names on buildings a lot more than they like to fund operating expenses in local charities.

3. People like roads and bridges and such, but a lot of services require people and salaries and it's much harder to raise money for things like that.

It's not immoral to vote for taxes. People vote for taxes that they pay and they vote for taxes that they'll never pay, but when individuals in the government don't act, the responsibility to do the difficult lies with the voters.

jerfelix14• 14 years ago

People thought something as complicated as an Operating System couldn't be written by volunteers also, because volunteerism doesn't scale.

> Where exactly is the unfairness in taxing wealthier people at the same percentage as middle class and others?

I have no issue with cutting the middle class tax. The false premise in the article leads people to the false conclusion that the only solution is to raise the tax on the wealthy.

rayiner11• 14 years ago

> This article has a fundamental flaw. It starts with the premise that some outrageous tax revenue level is necessary, and from that premise tries to analyze the fairness of the existing tax code.

It's really not. The proposal in the article has a strong theoretical basis. Read the chapter on realization in this book: http://www.amazon.com/Chirelsteins-Taxation-Concepts-Insight....

> Honest question: Can someone convince me that it's not immoral to vote for a tax? Please don't down-vote me for asking a question, because I am honestly trying to understand. If you disagree, help persuade me.

Taxation is only "immoral" if you believe in radical individualistic libertarianism. That is not the only tenable view of the world (and I'd argue it's not even a tenable view of the world).

Alternatively: 1) Human beings are inherently social, communal creatures. 2) Division of labor requires social organization. 3) Without division of labor, you can't create wealth. 4) Government is created by groups of humans to implement social organization and facilitate division of labor. 5) Fine-grained division of labor yields a huge surplus (i.e. the total production of society using socially-organized division of labor is far higher than the aggregate production of a group of unorganized individuals). 6) The proceeds of that surplus, which exist but-for the institution of social organization, don't morally have to be distributed in any specific way. 7) The rules underlying the social organization are there for utilitarian reasons, and taxation is just another rule that should be justified on utilitarian reasons.

There are no God-given rights. "Rights" and "property" make no sense at all without society imposing, by the threat of force, certain rules on certain people for the greater good. "Theft" is different from "taxation" because the former is not sanctioned by society, for utilitarian reasons, while the latter is sanctioned, again for utilitarian reasons.

Zuckerberg and Elison wouldn't be rich but for the existence of government. They'd be at the bottom of the pecking order, physically weak nerds that would be enslaved or killed by the physically strong. Indeed, "billionaires" on their scale would not exist without government--a society without an effective government can't create that kind of wealth! When society institutes a set of rules to create a net benefit from the combined productivity of a large number of people, why is it "immoral" for society to then decide how those proceeds are distributed?

jerfelix14• 14 years ago

Maybe I am misreading what you are saying, but I didn't say taxation was immoral. I said it's immoral for me to vote to impose a tax on someone else.

There's nothing inherently immoral about taxation, and certainly if I wanted to vote to impose a tax on myself, that wouldn't be immoral.

You make some interesting points, but it's exactly the "sanctioning by society" that I am questioning. Actually, what you may mean by "society" is "the majority". If everyone in a society agreed to something, then fine, you are not forcing someone to do something. But if not, then it's not "sanctioned by society", but rather sanctioned by a subset of society.

The US Constitution was written to protect the minority from the tyranny of the majority.

chubot• 14 years ago

Well, for starters, where did you even get the concept of "money" from? That's not "yours"; you didn't invent it. Someone else gave it to you. It essentially came from the same place that gave us taxes.

The premise that "taking money from someone else" is inherently immoral is trying to assume an impossible ideal that each person is an autonomous being, and that our lives aren't inextricably interwined with everything around us (or at least that's as much as I can gather from your reasoning). Would you also agree that a police officer arresting a citizen is immoral under any circumstances?

Now I don't necessarily disagree with your notion that taxes are unnecessary (or at least some taxes). I'm sure that it's possible for the government to be at least an order of magnitude more efficient. One somewhat surprising thing I learned (from Ron Paul) is that the income tax didn't even exist until the 20th century. So it's far from clear that it's even necessary.

But I would not start with the assumption that money is a inalienable right. And I don't really understand your alternative. Who is going to beg others to fund things like roads and sewers and subways and food inspection? Fund-raising costs money.

Also, there are a few things that are most efficiently done by a government monolopy -- i.e. it's not practical to have 5 competing subway systems in NYC.

So anyway, I think you're trying to come down too conclusively on one side, whereas the answer is probably more mundane and in between.

(Also, I think you are being slightly dramatic in that in all likelihood no will point a gun at you if you don't pay your taxes. More likely you will get a bunch of letters from IRS over many years.)

rayiner11• 14 years ago

> One somewhat surprising thing I learned (from Ron Paul) is that the income tax didn't even exist until the 20th century.

Before the 20th century, the majority of Americans lived in rural areas working on small farms. Industrialization dramatically increased the level of division of labor in the society, and of course as you increase the degree of social inter-dependence, it's no surprise that your organization overhead increases, super-linearly.

If we were talking about any system other than the political system, the proposition that bigger, more complicated systems have exponentially-increasing amounts of organizational overhead would be completely uncontroversial. It's a phenomenon that us engineers see in systems constantly. Yet, when we see it in the political system, we assume something is wrong.

When I work on a small farm, and you work on a small farm, we don't need an EPA. When we live in a city and your factory dumps poisons into our shared river and makes my kids sick, we do. When we work on small farms, we don't need an SEC. When we work in the city and our savings consist of securities rather than silos full of grain, we do. When we make all our own clothes we don't need a Consumer Products Safety Commission, when we grow our own food we don't need an FDA, when we work for ourselves on our own farms we don't need an NLRB or an EEOC. When we ride horses to work we don't need an FAA. When we don't depend critically on Middle Eastern oil we don't need a very big Army. When people die naturally of old age at 45 we don't need Social Security. When small, stable, farming communities take care of their poor we don't need Medicaid.

jerfelix14• 14 years ago

Well, I know people like Wesley Snipes didn't just get a letter and report to jail. I am quite certain that someone showed up at his door, with a gun, and hauled him away. Maybe the gun wasn't pointed at him, but I'm sure it would have been, if he resisted.

http://today.msnbc.msn.com/id/16109063/ns/today-entertainmen...

(Note, I'm no advocate of tax cheats. I'm just saying that the end penalty is not "a bunch of letters from the IRS", it's a guy, or a team of people, showing up at your door with guns.)

Edit: OK maybe Snipes wasn't the best example, since he surrendered. But I bet he would have been hauled off, had he not surrendered.

frisco• 14 years ago

This is one of the most frustrating article to read I've ever seen on HN. The proposal is completely ridiculous. Ellison and Jobs never selling shares has so much less to do with avoiding taxation as it does with maintaining control and upside exposure.

This proposal would effect a slow creep of management being universally excised from their companies over time, as they're compelled to sell shares to cover their tax liability. I fail to see any good whatsoever that would come of this. All it does is introduce a time decay of company control for founders and owners. The secondary effects of trying to collect a little more tax here would redefine industries.

jhurliman• 14 years ago

This article must be some form of NYTimes trollbait. Catastrophic unintended consequences aside, it would be hilariously ironic to use Enron's accounting system in a misguided attempt at tax reform (http://en.wikipedia.org/wiki/Enron_scandal#Mark-to-market_ac...).

asto• 14 years ago

Yes, this is a very big problem especially for startups.

Ex: Let's say I set up a nice startup that receives attention from an investor who purchases a 10% stake in my company for a million dollars. My company is now worth 10 million "marked to market". So I will need to pay tax on the appreciation of my 90% stake from next to nothing to 9 million when I haven't actually earned a single buck!

Badly thought out article in my opinion. This move is practically untenable.

edoloughlin2• 14 years ago

There are problems with the proposal, but it does explicitly say it's for publicly traded stocks only and, thus, wouldn't apply to startups.

Flenser• 14 years ago

The author said it was only for publicly traded stock. In your scenario you'd only have to pay tax if you did an IPO, at which point you would have the money.

atakan_gurkan• 14 years ago

Regardless of Jobs's and Ellison's intentions, they did avoid taxation despite accumulating large wealth. Furthermore, the people who inherit from them will not pay taxes over this accumulation of wealth, either. This could be a side effect, but it is a real effect.

It is possible to prevent the creep you are referring to, just decouple control from the wealth brought by the shares. After all, this is by design. You can distribute voting rights independent of the share of income. I realize one has to be intelligent about this, but I don't see how it is inherently impossible.

The good it brings is fairness. I am taxed on the wealth I accumulate, so should the others. Now, there are exceptions to this; e.g., very poor should not be taxed since that does more harm than good. Perhaps what is suggested in the article would also do more harm than good, but to me it looks like the harm can be prevented.

fragsworth• 14 years ago

Taxing the super-rich is rife with problems. They will find other ways to avoid taxes. The only tax that makes sense to me is a sales tax on luxury goods. Let them keep their money however long they want. It doesn't affect anyone: until they buy that yacht that takes 100 man years of labor to make. Charge big taxes on those yachts, etc.

neworbit• 14 years ago

Why wouldn't they then lease it, or have it owned by some foreign entity not subject to local/national taxes, or have an exemption lobbied into existence for this particular yacht? Cargo ships get flagged Panama or Liberia for roughly this sort of tax-dodge reason, I would think luxury craft would fare the same...

jacques_chester5• 14 years ago

Tax-on-profit/refund-on-losses are, in terms of economics equations, "elegant". It appears to minimise distortion.

But there's two problems in practice.

1. Hollywood Accounting. "I get a refund for losses? Look how much I lost this year!" It would just lead to a new round of shuffling deck chairs.

2. Sovereign Risk. Sure they promise to pay you back. But does anyone honestly expect that politicians would be prepared to allow a $1 billion cheque to be cut for a billionaire?

Both of these are why such taxes are neat in theory, economic kryptonite in practice.

newbusox• 14 years ago

If anyone would like a more detailed investigation of this topic, there's a good article on SSRN by another tax professor (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734601), or Miller's own more expansive article (http://www.cadwalader.com/assets/article/120505MillerTaxNote...).

capkutay• 14 years ago

I still don't see the appeal of raising taxes for the wealthiest income bracket. Do people expect faster lines at the dmv and world class public schools to suddenly appear once we start taxing the rich more?

cperciva2• 14 years ago

Do I understand this correctly? If an American sells an asset the day before he dies, he pays tax on it, but if his widow sells the exact same asset the day after he dies, she doesn't pay any taxes?

I think the colloquial phrase for that is "fucked up".

jessriedel• 14 years ago

As far as I can tell, the entire problem can be solved by just fixing this flaw. You don't even have to tax most of the estate, just tax realized gains by the widow/heirs when they sell the stock. And this entire 100 comment+ thread can be avoided.

Or am I missing something?

cperciva2• 14 years ago

Yes, eliminate the "tax cost of asset gets reset by death" rule and the entire problem evaporates.

Which, incidentally, is exactly what Canada does in the case of assets inherited by a spouse. (Assets inherited by non-spouses are usually but not always considered to be sold at market value, resulting in a tax bill for the estate. I am not a tax lawyer and this is not legal advice.)

Drbble3• 14 years ago

    Our tax system is based on the concept of "realization."

Interesting that the same system that un-taxes the original corporate owner (Zuckerberg, Jobs) punitively taxes rank and file staff who exercise options in pre-IPO stock as "realizing" gains as "ordinary income", even though the stock is illiquid.

hristov2• 14 years ago

This is a bad idea for so many reasons. People have to understand that the current trading price of a particular stock does not mean as much as they think it does.

Just because a stock is trading at price X at a particular time does mean that one can sell a million shares at price X. Thus if one has a million shares of that company, it is unfair to assume that they have X times a million of ready money. Thus, this tax is unfair and dangerous. It can easily cause a stock's price to collapse as an investor is dumping shares to pay the IRS.

Furthermore, it will probably cause more large companies to go private, which will result in great inefficiencies in our economy.

The problem here is that certain people are trying to think up some weird exotic tax which will satisfy the popular desire to tax the rich more fairly and yet leave those certain people untaxed.

As far as the supposed unfairness of the examples provided by the article that is caused by a loophole that happens at death more than anything else. It seems that when someone dies their heirs get to have a higher basis on their assets without paying any income tax on the asset gains. We can easily close this loophole without enacting new exotic taxes. You can simply make it so dieing does not result in increasing the basis, which is the logical thing to do anyways.

JanezStupar• 14 years ago

Assuming that this kind of taxation would have no impact on the way stock market works is wrong IMO.

This kind of tax would probably at least to some degree make market participants more weary about "true" or "long term" stock price.

gaius• 14 years ago

Author is a tax lawyer. The more nonsensical the tax code, the more money he makes.

jbarham• 14 years ago

Sounds like the perfect get-rich-quick scheme:

1. Buy a publicly traded company 2. Surreptitiously drive it into bankruptcy while maintaining semblance of fiduciary duty 3. Collect refund from government from loss in share price

Oh wait, they've already done that: http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program

patrickwiseman2• 14 years ago

The simpler solution to the proposed problem is an estate tax on capital holdings. This could be done by simple requiring the shares be sold on death and repurchased in the beneficiaries name.

Mark-to-market adds voodoo to tax valuation, has the government managing investor cash flow, and rewards investment losses more than the current system. Why reward poor market performance?

Personally, I think this seems like a suggestion for bad governance trying to appease wealth envy.

kansface3• 14 years ago

What would stop the unscrupulous from creating a shell company, attract investors at a huge markup for a extremely small share, then declare the loss the next day (and split the refund check or do the same in return).

chris_dcosta• 14 years ago

This could never work in practice because it would unfairly penalise founders of small companies whose share value may not be so spectacular.

The principle of paying tax on a notional value (which is what the market share price effectively is) is crazy - as the author points out the value can go down. Who's to say that it doesn't go through the floor at some point, which by his reckoning would allow for you to claim some of the tax back? Talk about volatility - you would want the stock to be massively unstable!

The author suggests that selling stock to pay for a tax bill as a solution - but that sale would also be taxable. Therefore you could never fully pay off your tax bill, and what would happen if you ran out of shares to sell?

I think the rot stems from the practice of lending where shares in public companies are used as security. This is not security at all and should be stopped. The impact would be clear it would force companies to either pay a (taxable) salary to it's founders and directors (like SMEs) or let them sell shares to realise income.

MarkMc• 14 years ago

All the comments on this thread agree that the proposed tax rule sucks, so they prefer the existing capital gains tax rules. But there is a third option which I think would be the best.

There is clearly a problem with the current capital gains tax rules because it favours people who hold their shares over those that trade frequently, even when the rate of return is the same.

For example, suppose I have two trading strategies: Strategy A buys shares and holds them for 20 years. Strategy B buys shares but trades them once a year for 20 years. Also assume that both strategies produce an annual capital gain of 10%. With the current capital gains rules, Strategy A pays far less tax overall than Strategy B - distorting the market and leading to inefficiencies.

So here's my proposal: make the capital gain percentage a function of the duration of the investment and the average rate of return. For example:

If your investment return was 10% over 1 year your capital gain tax is 15%

If your investment return averaged 10% over 3 years your capital gain tax is 16.23%

If your investment return averaged 10% over 20 years your capital gain tax is 28.21%

If your investment return was 20% over 1 year your tax capital gain is 15%

If your investment return averaged 20% over 3 years your capital gain tax is 15.94%

If your investment return averaged 20% over 20 years your capital gain tax is 21.30%

etc...

Ok, it's not the simplest tax rule, but it would greatly reduce the distortion of the current capital gain tax system.

The Zuckerberg Tax

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