The Income Rich Take One For The Team. Thanks!

http://techcrunch.com/2013/01/01/the-income-rich-take-one-for-the-team-thanks/

by ssclafani • 14 years ago

119 151 14 years ago

techcrunch.com

pg2• 14 years ago

It's pretty impressive for someone running a fund to call publicly for the end of the carried interest loophole.

mattdeboard• 14 years ago

Why?

pg2• 14 years ago

Because people running funds are the beneficiaries of it.

jspthrowaway23• 14 years ago

I thought the same thing. I think he anticipated our thoughts when he wrote (paraphrased) "it's so egregious, I benefit from it and I want it to end."

Maybe, just maybe, I misjudged Arrington a bit.

jacques_chester8• 14 years ago

I believe it's perfectly legal to donate any amount of money to the US government.

So if he wants to pay more tax, he can.

He may also rearrange his tax affairs to increase his tax liability. Same thing, but with the exciting frisson of potential coercion (gosh!).

He doesn't seem to be doing either of these, however. Possibly because that might lower his social status vis-a-vis others of his kind.

So actually, he's prepared to make a great personal sacrifice ... if everyone in his class does too.

It seems less impressive when you put it that way, but that's human nature.

Mc_Big_G• 14 years ago

It seems impressive, and but is there really a risk in saying it?

chatmasta3• 14 years ago

Paul, I have a tremendous amount of respect for you. In many ways you serve as a role model to me.

But I think you need to be careful calling what Arrington describes a "loophole." Yes, the people running the funds are the beneficiaries of this specific "hole" in the tax code. But have you considered that this could be a loophole by design? In other words, an incentive?

In many ways, capital is the eponymous character of capitalism. Capital drives our economy. It feeds our society. It's also a good indicator of our prosperity level.

No economist will argue with the fact that capital begets more capital, and therefore we should encourage any mechanism that creates it. Normally I avoid such generalities, but economists accept this as such a simple fact that it would be impossible for them to disagree with it.

This "loophole" in the tax code is a great example of an incentive for investing capital. It makes sense to place that incentive in the tax code because investing capital leads to more capital. Policy makers want people running funds to "exploit" this "loophole." The tax benefits are a reward for efficiently "putting the capital to work," so to speak.

If we can agree that this "loophole" in the tax code functions as an incentive, then I think we should also agree not to call it a loophole. When we call this a loophole rather than an incentive, we make it appear as though our profession (well, your profession... I'm still in college) is the business of exploiting loopholes. That is not what we value and I think we should respect ourselves enough to avoid this perception.

Thanks Paul -- I hope you find time to read this.

jacalata• 14 years ago

Of course it was created as an incentive, there's a nice justification for pretty much every line of the millions in the tax code, however it is considered a loophole because it turns out that it is really easy to manipulate the structure of investment deals so that all the income is gained as carried interest, and it even more surprisingly turns out people actually do this if there's sufficient incentive, so a lot of people now redefine what would have been 'income' into 'carried interest' in a way that appears not to have been intended when the rule was created.

If you really want people to respect your profession (I assume you intend to go into finance?) you should focus a little more on the ethics of what you actually do and less on how to spin it.

tomp2• 14 years ago

So, wait - I understand how this might be an incentive so that Arrington's investors invest more capital - they pay low taxes on any gains the fund produces. But, why is also Arrington himself, as the fund manager, paying non-income tax, even though all the money he makes is his proper income, and not money produced by his capital investments (as he has no capital invested)?

eli_gottlieb12• 14 years ago

That's nice for you, but as long as capital remains a legally separate category from all other income, the only thing accomplished by differential taxes on "capital gains" is to give a government favor to a narrow class of "capitalists".

As others in this thread have pointed out, there are plenty of highly productive, successful people like top Google engineers who aren't part of the financial sector, the executive class, or the investor-for-a-living class, and they get hit with higher taxes than the capitalist class because they dare, the sheer chutzpah, to take home most of their very-high incomes as salary rather than dividends, interest, or asset appreciation.

credo• 14 years ago

It is good, but he most certainly isn't unique in this regard and he is late to the game.

For several years, Fred Wilson has written that "carried interest" should be taxed as ordinary income. For instance, see http://www.avc.com/a_vc/2010/05/why-taxing-carried-interest-... (and my guess is that Fred Wilson earns more carried-interest-income than Mike Arrington whose biggest payout was probably the sale of TechCrunch.)

I'm sure that many other investors (e.g Nick Hanauer, here in Seattle) have the same (or more progressive) positions

Btw on some of the other comments ...this fiscal deal wasn't about cutting loopholes. It covered a lot of other more-urgent stuff. There is no way they could have tackled less-urgent stuff in this bill.

However, in the past, Obama has called for cutting loopholes and he stressed that point in his speech tonight. Last year, in October, Romney had also stressed the need to cut loopholes. Cutting loopholes is very hard because each loophole has a strong lobby behind it, but I hope the two parties are able to agree on cutting some of these outrageous loopholes.

btbuilder• 14 years ago

There's also the qualified dividend tax rate of 15%.

This is justified by the fact that the corporation will be taxed on any income that is paid out as a dividend. Therefore the effective tax rate on the income is the corporation tax plus the dividend tax rate.

whackedspinach• 14 years ago

Is the effective tax rate on the carried interest loophole just the 15% Arrington mentions, or is it also more?

I ask because we can talk about capital gains tax rates and how low they are, but we should always talk about effective tax rates, in my opinion. That was why Subchapter S Corporations were created, I believe.

gonehome2• 14 years ago

Looks like high income (250k-1.2million)/small investment portfolio people (doctors and lawyers) are going to be even more screwed since they already pay high taxes and probably have enormous student loans.

tobias3• 14 years ago

Can't you substract the interest from your income?

prostoalex8• 14 years ago

Ability to deduct phases out rather quickly (as soon as you hit $300k in income with current bill, looks like).

Nrsolis3• 14 years ago

No. That deduction gets phased out at higher incomes.

petercooper• 14 years ago

Non-American here. Was there/is there a rationale for allowing people to deduct interest from their incomes? It has always seemed odd to these English eyes. Is it considered a way to encourage people to buy property/invest in their education or is there more to it than that? As a home owner, I would love this deduction ;-)

sliverstorm3• 14 years ago

I'm confused how someone who makes 250k-1.2million in income, could be crushed by student loans. Are you telling me there are an appreciable number of people with student loans of several million?

gonehome2• 14 years ago

Well if you consider 4 years undergrad, 4 years medschool (medschools offer no aid and routinely cost 70-95k a year), 4 years residency, 3 years fellowship it can add up (you're not making too much in residency/fellowship). Additionally this would be basically your entire twenties so if you made an effort to have friends or get married (possibly have a kid) you'd be in even more trouble. Assuming a generous starting salary of 320k for some higher end specialty if you're getting taxed at nearly 50% of total income, leaving 160k take home, it would be a pretty poor ROI and you could be nearly a half million in debt.

I assume the low capital gains tax is because the money is 'at risk' in the market, but for professions with long expensive educations - the risk is in the time and money investment up front. Additionally doctors/lawyers are more likely to actually spend their money locally to buy and fund local business since they're not moving around millions of dollars or just leaving their wealth in the market - taxing them harder just means they won't pay local contractors to have an addition on their house and they'll pay taxes instead.

Cookingboy3• 14 years ago

I always thought it's silly for the Congress and WH to be focusing on raising the tax for the high income people (doctors, lawyers, senior engineers, people who are well off but still live off paychecks), whom are already paying a very high effective tax rate. Meanwhile the ultra-rich are mostly untouched by these new laws and people like Romney can still get away with a 13% effective tax rate.

The only significant portion of the new law that MAY make an impact on the uber-riches is raising long-term capital gain to 20% for people who make over $400k (so actually now even better reason for CEOs to take $1 salary and get the rest in stocks) and limit deductibles to $250k per family (So hopefully people like Romney can longer claim the expenses on their horses and everything else as deductibles).

Well, like MA said, the aspiring rich people took a bullet for the real rich people.

_delirium3• 14 years ago

Side question: are there really senior engineers who make >$400k in salary? I thought you had to go into upper management to break much above $200k in actual salary (paycheck, not equity), even in the Bay Area. But I could well be out of touch with recent developments in Valley pay.

prostoalex8• 14 years ago

Restricted stock units are treated as income, so while not technically "in salary", tax implications are the same.

Cookingboy3• 14 years ago

What prostoalex said, while it's still rare, but for senior engineers who work for companies that give out a lot of valuable RSUs such as Google/Apple, etc, it's very possible for them to make more than that amount.

jspthrowaway23• 14 years ago

A lot of people at Google are north of $500k, I've heard. We're talking engineering and product, not management.

I mean, what would you pay someone like Ken Thompson? There are the outliers like him, of course, but I've also heard that even the less-known folks do well.

Though I've heard all of that from Xooglers, it remains anecdotal. I also remain slightly old-school when dealing with other peoples' salary and give them respect; I'll freely tell you what I make (if permitted legally), but I understand people are not as open as I am and I try to respect their privacy.

prostoalex8• 14 years ago

Government taxes things (cigarettes, gasoline, high incomes) to discourage them.

turing• 14 years ago

Government taxes things to raise income.

MartinCron3• 14 years ago

And as a result, people decide that being rich isn't worth it and become welfare queens instead.

Tragic, really.

aqme28• 14 years ago

There is no tax rate < 100% that discourages a higher income.

smsm429• 14 years ago

One of the reasons Romney has 13% effective tax rate is that he gives a lot to charity - about 13% of his AGI on average, if you believe the auditors: http://content.usatoday.com/communities/onpolitics/post/2012...

So when using Romney as an example, it is good to know that if he did not give this much to charity, the rate would be somewhere around 27%, maybe more if charity deductions avoided triggering some higher rates, etc. Average effective income tax rate (don't confuse with marginal!) for millionaires is 23%, for "middle class" is 20% and below (the figures is for tax year 2010, other years I imagine they may differ).

gerhardi• 14 years ago

I find it weird that you can reduce charity contributions from taxation. Isn't it like grant for the rich to "choose where they pay their taxes"? And have nice dinners...

tansey• 14 years ago

Carried interest is just one of the loopholes that hedge funds exploit that should be closed. When I worked for a quant fund, we were making at least one trade a day, but because we were trading futures contracts we were mostly paying long-term instead of short-term capital gains.

jspthrowaway23• 14 years ago

The first thing I thought of when this bill cleared was the recent news regarding how much Apple pays Tim Cook[1], said to be the highest-paid executive in the country (in total, not just salary). His big RSU grant isn't going to begin vesting until 2016, but he now makes $1.36mm and more in incentives annually (in salary, which is Arrington's point) so presumably this deal will affect his taxes quite a bit. I'd be curious to know just how much to put things into a little bit of perspective.

[1] http://www.macworld.com/article/2023491/apple-gives-tim-cook...

hkmurakami• 14 years ago

What's striking to me is how he doesn't even have a grasp of the basic numbers that affect his returns. This speaks more to a "I am so rich and I made my money so easily that I don't care what I get taxed at" attitude.

>Nothing the government agreed to in the last few days actually affects the asset wealthy in this country.

The increased tax rate on dividends and capital gains definitely affects the "asset wealthy" in the country. In fact, both the top income tax rate and the dividend/capital gains tax rate for those making over $400k has increased by roughly the same amount [1].

However, complete inaction by government would have increased the dividend tax rate even more, so that it would have been considered ordinary income (43.4% top rate) [2]. The legislation passed on 12/31 and 1/1 by Congress definitely helped the asset wealthy. Oracle pays a 18c dividend per share, and Larry Ellison owns roughly a billion Oracle shares. The dividend tax savings he'll receive from this legislation is massive.

[1] The top income tax rate goes from 35% to 43.4% (39.6% + 3.8% health care tax) and the top dividend/capgains tax rate goes from 15% to 23.8% (20% + 3.8% health care tax). If person A makes $100MM in salary and person B makes $100MM in dividend/capgains in 2013, their relative tax rate increase compared to 2012 is about the same: 8.4% increase vs 8.8% increase.

[2] http://www.atr.org/trillion-obamacare-tax-hike-hitting-jan-a...

[3]http://www.bloomberg.com/news/2013-01-02/bipartisan-house-ba...

ww5202• 14 years ago

Thanks for explaining. Very informative.

Is the dividend/capital-gain increase across the board? Or is it bucketed progressively like the income tax rates?

_delirium3• 14 years ago

My read is yes, it's bucketed (corrections welcome, and my numbers are only for single filers):

Below $35k income: the 0% capital-gains/dividend rate is retained

Between $35k-$200k incomes: the 15% rate is retained

Between $200k-$400k incomes: PPACA adds a 3.8% capital-gains surtax, but the 15% base rate is retained, effectively raising the marginal rate to 18.8%

Above $400k incomes: the base marginal rate rises from 15% to 20%, plus the 3.8%, for a total of 23.8%

downandout3• 14 years ago

If person A makes $100MM in salary and person B makes $100MM in dividend/capgains in 2013, their relative tax rate increase compared to 2012 is about the same: 8.4% increase vs 8.8% increase.

Michael's point was that person A (someone with a high ordinary income) will have approximately double the tax bill of person B (someone with capital gains income) on an absolute basis, and that he believes this disparity to be unfair.

smsm429• 14 years ago

I'm not sure how to define "fair" but haven't the investment money been already taxed as corporate profits before they are paid out to investors? I know some investment vehicles allow to avoid that but most regular investments do not, as far as I know.

aneth42• 14 years ago

Is there somewhere the detailed effects of the deal are spelled out? I see conflicting reports over such things as whether the 20% capital gains rate applies to everyone and which income the 3.8% surcharge applies too.

jacoblyles12• 14 years ago

It amazes me at how far to the political left is Silicon Valley. The startup ecosystem depends on the recycling of the profits from successful ventures into new angel investment, venture capital funds, and bootstrapped ventures. An extreme example is Elon Musk, who famously netted $180 million from the Paypal sale and put every last dollar into founding Space X, Tesla, and Solar City. I'm assuming that money was taxed at the long term capital gains rate. If the cap gains loophole were closed, either Space X or Tesla would have been stillborn.

Yet Silicon Valley regularly supports candidates and policies that would place large burdens on the entrepreneurial ecosystem. We have plenty of examples of high-tax, high-regulation economies around the world with no startup scene. You can't grow one by punishing success and preventing innovation.

The deal that happened today means the top California cap gains tax is going up ~11% this year (PPACA, cliff deal, prop 30). That's 11% of new capital for startups being diverted from Palo Alto to Washington.

(And yeah, I'm flagging this article because I don't like seeing pure politics on hacker news. But I'll participate while we're having the discussion)

Cookingboy3• 14 years ago

Or maybe because for every Elon Musk who uses his money to create more opportunities for the market there are more Mitt Romneys who abuse the loopholes and use the money for more horses and car elevators. I love Silicon Valley due to the fact that people here actively CREATE wealth by producing ideas/products/companies with real, intrinsic values, which is a pretty big contrast to many of the folks on Wall Street.

jacoblyles12• 14 years ago

Unfortunately, raising the taxes on the Wall St. guys is going to hit Silicon Valley too. The carried interest rate is probably less relevant for SV than the long-term cap gains rate. California cap gains going up by 12% this year (prop 30, PPACA, and the cliff deal) means that 12% of new capital for Silicon Valley startups is going to be diverted from Palo Alto to Washington.

natrius• 14 years ago

Progressive taxation is not leftist. Americans broadly agree on the concept. A 2011 WSJ/NBC poll found that 81% of Americans approved of increasing taxes on those who make more than $1 million.

http://online.wsj.com/article/SB1000142405274870472800457617...

jacoblyles12• 14 years ago

It's never surprising that a group of people wants to raise taxes on other people who are not them. It doesn't mean it's good governance.

It's one of the classic problems of democracy - two wolves and a sheep voting on what to have for dinner.

sliverstorm3• 14 years ago

So what you're saying is Musk, had he been short 10-20 million of that $180, would have been completely unable to pull off Space X and Tesla?

I'm not sure how you figure. Were you perhaps under the impression that Space X and Tesla were funded solely by Musk? Considering Tesla's operating expenses last year cleared $400M and they are currently in debt, I am fairly certain Tesla is not funded solely by Musk's pocket book.

Anyway, so what if investments are taxed more heavily? So long as all types of investments are taxed equally, you will still have plenty of people investing in new business ventures.

jacoblyles12• 14 years ago

Musk famously borrowed money to pay his rent after plowing all his capital into his businesses:

http://pandodaily.com/2012/07/12/space-age-risks-and-profoun...

I'm sure he would have found a way to make do with 1% less capital. But what if rates had been 9% higher, as they will be going forward? What if rates were 28% higher, as they would be if cap gains were treated as ordinary income? At some point, either Space X or Tesla would have never been made.

The tragedy is that we will never know the future Space Xs that are never built.

myrandomcomment2• 14 years ago

The tax rate on his $180M at the time he cashed out was the 39.5% rate that thing would have reverted to if this bill failed. So your point is? The 5% increase just cost me personally an additional 100K minimum on my 2013 tax bill and I am okay with that.

jacoblyles12• 14 years ago

I'm pretty sure he was paying cap gains. You're quoting the ordinary income rate.

jacques_chester8• 14 years ago

> It amazes me at how far to the political left is Silicon Valley.

Speaking as a foreign onlooker (I'm in Australia), I see more libertarians than any other stripe, tbqh.

> Yet Silicon Valley regularly supports candidates and policies that would place large burdens on the entrepreneurial ecosystem.

The Bay Area is home to San Francisco, a traditional hotbed of leftist activism. It's also home to UCB, a traditional hotbed of leftist activism. Some of the outlying suburbs are ... yes, traditional hotbeds of leftist activism.

Mix in:

1. The relatively lower presence of traditional / conservative / "silent majority" voters who are motivated voters

2. That leftists are motivated voters

3. That libertarians are often not motivated voters

4. That voting in the USA is voluntary and not compulsory

and the electoral calculus suggests that libertarians will be out-numbered by leftists at the ballot box.

smsm429• 14 years ago

Libertarians are very active on the internet, but are practically non-existant as a political force on national scale. Fortunately, in some places (not in California) some Republican representatives hold views which are close to what libertarians can identify with. But this has very little to do with motivation and a lot to do with the fact that very small minority of people have libertarian views. Libertarian views are not natural. It is very hard to arrive at the idea that "there should be a law against that" is not the right answer for any problem and stay there. Most people think freedom is overrated.

jacoblyles12• 14 years ago

>Speaking as a foreign onlooker (I'm in Australia), I see more libertarians than any other stripe, tbqh.

Paul Graham's informal poll of investors had two-thirds voting for Obama. That's a stronger lean than the US as a whole. They might be libertarians, but they're libertarians voting for the unionist/leftist/regulatory party.

_delirium3• 14 years ago

I think of Silicon Valley as on the economic center-right, but socially liberal. Lots of techno-libertarian rhetoric (I find myself well to the left of the average techie on that), but cultural-conservative rhetoric doesn't play well. Candidates who are anti-gay, anti-abortion, or playing up the importance of religion in public life don't play well. The GOP has had a strong element of that cultural-conservatism for a while now, strongly damaging its brand among some demographics. The Democrats end up as the default option more than what people strongly support (I know many more people who were fired up against the GOP rather than for the Democrats in the last election).

Imo, the Democrats are a pretty miquetoast centrist party on economics, hardly "far left". They're broadly in favor of free trade with a modest safety net (quite modest, by first-world standards). Heck, I'm not sure more than a smallish minority of the party would even qualify as true social democrats, let alone actual leftists.

On policy terms, I would disagree that tax rates are strongly relevant to a startup scene (not irrelevant, but not one of the more sensitive environmental factors). I do think regulation is an important aspect. One reason I would support discontinuing the use of regulations to achieve quasi-safety-nets and replacing them with direct safety nets. But as for why SV is in SV? I think culture, networks, and education have a bigger role in it. Otherwise you'd expect a vibrant startup scene in lower-tax parts of the U.S. than California, Massachusetts, and New York, and we aren't really seeing that.

jacoblyles12• 14 years ago

It's unfortunate the CA GOP is too inept to adapt to local circumstances. It benefits them to have social moderates in congress from blue states - e.g. more Scott Browns in congress than Elizabeth Warrens. But it is a state party that suffers from long periods in the minority.

Neither party really supports the issues that Silicon Valley cares about. The California Democratic caucus listens to Hollywood and unions more than SV.

I agree that culture, social networks, and education matter more than issues to explain voting behavior. College-educated people vote for Democrats and leftist propositions, so S.V. does too.

Mvandenbergh• 14 years ago

Well this is partially because the alternative to the right, the Republicans, have gone full retard over the last two decades. A lot of people in the valley might vote for a moderate Republican like there used to be but will not vote for a party that puts someone who doesn't believe in evolution in charge of the House Science committee, regardless of their fiscal policy.

>We have plenty of examples of high-tax, high-regulation economies around the world with no startup scene.

Sure, but California is already high-tax compared to most of the US. Why isn't Silicon Valley in a state with no state level income or cap gains tax? There's a number of European countries that have marginal taxation similar to California, why isn't there start-up scene worth talking about there?

There is one Silicon Valley in the whole world, sure there is plenty of innovation elsewhere, but for the software industry there is one stand-out and that is the valley. If there were a few of them then we could easily draw parallels between them and see what they have in common, as it is we can't do that because we have an n=1 situation where all we can do is speculate.

eli_gottlieb12• 14 years ago

Taxing capital gains and ultra-high incomes is not placing a burden on the entrepreneurial ecosystem. Hell, it's not even really left-wing at all.

Further, in counterpoint: the Israeli economy supports a start-up scene larger than that of New York or Boston, second only to Silicon Valley, while paying marginal taxation rates that would have Americans squirming in their seats. We need high tax rates over here, because if we don't pay for the Army, we all die (or so the thinking goes). But also because a society without universal sick-fund membership or public higher education or scientific research grants or infrastructure projects would be uncivilized.

(Seriously, if you think "progressive Democrats" are left-wing, allow me to introduce you to my friend Karl Marx.)

subsystem• 14 years ago

If you object to the level of discussion on the subject, why contribute to the problem by throwing around clichés?

tezza• 14 years ago

Capital gains is a tough one because the "gain" could just move to a foreign asset

CrunchFund could start being denominated in Pesetas, Roubles, Euro or Sterling.

The interest deduction makes the effective rate of circa 15% internationally competitive.

There is still plenty of room to budge 5% say, but beyond that would get limited returns and capital rehoming.

http://accf.org/news/publication/an-international-comparison...

dllthomas3• 14 years ago

If his tax rate (and those of people similar and better off) did in fact jump from 15% to 20%, then that sounds like this particular policy change (tax the rich a little more) was successful and does not, in fact, apply only to the "income rich". "Tax capital gains much less than ordinary income, even on other people's money" is a seperate policy decision, which was the situation before and is the situation now. In fact, the gap closed very slightly - tax rates on the top income bracket went up 4.6%, whereas tax rates on capital gains for high earners went up 5%.

One thing that is bugging the hell out of me is the news coverage. They continually throw numbers around without being at all precise about what the numbers mean. I saw an op-ed, in the last run, arguing that $250k didn't amount to aaaalll that much once you take taxes out of it so let's not raise taxes on those making around $250k - except the $250k figure everyone was throwing around was post taxes; in pre-tax income $250k was simply not a any sort of interesting point. Now, we're hearing that capital gains is going up for people "making more than X", and the like - is that pre-tax? post-tax? is capital gains counted toward that? These things hugely change the character of the situation, and I flat out can't get it from the press, and that is absurd. Similarly, "Extend the Bush tax cuts for people making more than X" - that's not what anyone was talking about; they were talking about extending for everyone the Bush tax cuts on the first X dollars of income.

smsm429• 14 years ago

I would assume $250K and other figures relate to AGI (adjusted gross income). That's how taxes are usually based. As to how to calculate AGI from nominal salary, there's a reason there are 1.7 million accountants in the US :) US tax code is one messed up piece of spaghetti code.

dllthomas3• 14 years ago

For the $250K figure, you would be wrong. When that number was being cited, the top tax bracket started at something north of $350K ($366something, IIRC, but I may not) which wound up being $250k after taxes. This is, of course, precisely what is bugging me.

jpwagner2• 14 years ago

If there was no "carried interest loophole" people would have no incentive to invest money in their own business. Wouldn't this be a bad thing?

vidarh2• 14 years ago

The number of companies started in any number of countries around the world with substantially higher tax rates demonstrate that people clearly do still have incentive to invest in their own business even if they pay more.

jpwagner2• 14 years ago

this is not really a convincing response; starting a company doesn't have to be capital intensive and you could do it with someone else's money.

The Income Rich Take One For The Team. Thanks!

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