10 ms·

Close My Tax Loophole

45 points by jstreebin 10y ago

hyperliner 10y ago
Why do some people always want the federal government to solve their problems? It's simple. Donate the extra taxes you should be paying at http://fms.treas.gov/faq/moretopics_gifts.html http://fms.treas.gov/faq/moretopics_gifts.html. (Edit: Also, there are plenty of problems with the Federal Government size already. Pick a local cause such as Education, Low Income Families, Veterans, etc. and you will find plenty of non-governmental state or county-level groups and organizations who can put your money to a great use. Simply do the math that would leave you with the income you should have if the tax rate applied to your carry, and donate the rest).
- YuriNiyazov 10y ago
  I think you missed the point of the article. At the risk of explaining the obvious: the "my" in "Close My Tax Loophole" doesn't refer to just the author; it refers to all venture capitalists and money managers. The author may very well be donating the extra taxes, but he wants others in his profession to do the same.
  - hyperliner 10y ago
    That point was not made. The author wants the government to solve the problem. Not a single call to action to other VCs was made to solve the problem by themselves. The author should create the "VC Group for Local Change" and pick a few missions and hire a few people to address them, and stop asking the Federal Government to solve all problems that there are simply by throwing money over the fence to make themselves feel good. It's not like we have an effective Federal Government.
- jsmeaton 10y ago
  This is very close to saying the government shouldn't tax anyone, and that people should donate what they feel comfortable with to various causes or departments. Taxes (and tax exemptions/loopholes) are firmly with government.
  - hyperliner 10y ago
    I did not make that point. The point I made is we have a society who expects the federal government to solve problems that society can solve on their own if they really wanted to. I agree some problems can only be solved by the government, for which some amount of tax is needed, but not more than that.
- function_seven 10y ago
  If I think the speed limit on my street should be 25 instead of 45, I won't do a thing to solve that by driving 25 on my own.
  - hyperliner 10y ago
    Put up a speed bump.
ageek123 10y ago
http://mobile.nytimes.com/2016/07/16/business/dealbook/the-carried-interest-loophole-what-loophole.html http://mobile.nytimes.com/2016/07/16/business/dealbook/the-c... is a reasonable explanation of why this isn't really a loophole.
- rlucas 10y ago
  The Klinsky explanation you linked to is borderline disingenuous. Nah, it's just disingenuous. It's exhausting and daunting to list all the ways that Klinsky's ELI5 example is meaningfully different from what really happens in PE-land. What it comes down to is this: PE managers get a success fee for managing other people's money without putting up their own, which is very very normal, and usually counts as earned income (normal tax rate). However, when certain very specific circumstances apply, a bit of the tax code lets you legally pretend that instead of a success fee, the amount you get paid is a return on invested capital. Very plainly, the pension funds, sovereign wealth funds, HNWIs, etc. who put up the actual risk capital into the PE funds are putting dollars at risk and earning a return on invested capital. If one simply does the exercise of asking, "where are the dollars that the PE manager put at risk?" the lie is exposed. My personal pet peeve on this is that, back in the 1970s, it was actually the case that the general partners would have had unlimited liability and therefore really were, after a fashion, putting the entirety of their capital at risk to earn the carry. But since the 1990s at least and probably earlier, everyone in this game has used a pass-through LLC blocker entity to limit the personal liability of the managers. So they keep all the tax benefit but give up that pesky "risk" part. (Partnership structures and carried interest actually do have other things to recommend them as ways of aligning interests and making deals work. But pretending that the contingent, earned, success-based portion of income accruing to the manager is a return on risk capital invested for tax purposes is just a total fiction.)
  - amluto 10y ago
    > However, when certain very specific circumstances apply, a bit of the tax code lets you legally pretend that instead of a success fee, the amount you get paid is a return on invested capital. I'd love to see an explanation of why it makes any sense to continue treating capital gains income (i.e. "return on invested capital") any differently than ordinary income. If we fixed that, then the carried interest "loophole" would cease to be relevant because it wouldn't change the tax rates paid. I don't see why the tax code should incentivize passive investment over actual work.
millstone 10y ago
I have read that the differential tax treatment of income and capital gains has given rise to various techniques for "transforming" ordinary income into capital gains via "pass-through" entities [1]. This transformation is apparently quite labor intensive while being wholly non-productive (save for the favorable tax treatment). I don't understand what these pass-through entities do at all - can someone explain it? Naively it seems like differential tax treatment creates distortionary incentives. Maybe I quit being the sole proprietor of my business in order to day trade, thereby escaping payroll and income taxes. This replaces productive work with non-productive speculation - a loss for the economy and a country. What's the argument against this? [1] https://tcf.org/content/commentary/10-reasons-to-eliminate-the-tax-break-for-capital-gains/ https://tcf.org/content/commentary/10-reasons-to-eliminate-t...
- mtanski 10y ago
  > Maybe I quit being the sole proprietor of my business in order to day trade, thereby escaping payroll and income taxes. [...] What's the argument against this? The argument is that, it doesn't work like you think. If you're day trading chances are you're generating short term gains (or losses). Mist day traders don't hold positions 1yr+. Second as a sole proprietor your still responsible for payroll taxes, or what becomes known as self employment tax. http://www.marketwatch.com/story/do-you-owe-the-self-employment-tax-2013-08-20 http://www.marketwatch.com/story/do-you-owe-the-self-employm...
- maxerickson 10y ago
  The IRS has some information about trading as an income generating activity (it's a fuzzy line): https://www.irs.gov/taxtopics/tc429.html https://www.irs.gov/taxtopics/tc429.html Any proceeds are taxed as business income, not as capital gains.
aminok 10y ago
In what universe is it reasonable to be forced to hand over 35% of the currency that you receive in private trade or be thrown in prison where you are kept in a small enclosure, and have a high chance of developing mental illness and suffering physical and sexual abuse. You have an inhuman ideology.
- Retric 10y ago
  And your living in a fairy tale. You can easily move to a low tax country, they are worse places to live QED 30-50% tax rates are a good thing.
  - aminok 10y ago
    "You can move to another country" So is that what you tell people who are forced by their government to wear a burka? Again how is it reasonable to threaten people with prison for refusing to hand over 35% of the currency they receive in private trade?
    - Retric 10y ago
      > So is that what you tell people who are forced to ware a burka? Yes. Lower tax rates have massive downsides and if you want to live in a shithole then feel free to move, but don't try to ruin this country for the rest of us. Immigration is something millions of people do every year, people look down on immigrants illegal or otherwise, but they at least have the balls to stand up for what they want.
      - aminok 10y ago
        You tell people they shouldn't complain about their government forcing them to wear a burka, because they can move to a different country? Really? Of course you can't prove that lower tax rates have "massive downsides", but you want to impose your beliefs on other people, so you don't care. Even if you could prove that not having mandatory burka, or 30% income tax rates, is societally detrimental, it would not justify violating people's human rights to impose either on them.
aminok 10y ago
The income tax is a grotesque violation of Human Rights and should be abolished. Threatening to throw someone in prison for refusing to disclose their income or hand over a share of the currency they receive in private trade is antithetical to a free society.
- koralatov 10y ago
  I can't tell if this is satire or not.
  - aminok 10y ago
    What part of it resembles satire? There's nothing funny about throwing someone in prison.
    - aninhumer 10y ago
      Unless it's because they tried to use some resources that the government assigned you exclusive rights to, then it's an integral part of a free society?
    - Dylan16807 10y ago
      And there's nothing funny about underfunded critical community services.
      - aminok 10y ago
        Throwing people in prison for not funding something, even if it is critical, is wrong..
        pdkl95 10y ago
        Failure to pay income tax is not a crime punishable with prison time. If you cannot pay, all the IRS will do is arrange for future payment through civil methods (e.g. garnishing future wages, putting a lien on your house, etc). If your poor, the IRS won't throw you in jail. However, if you have a reasonable source of income, you will be asked to pay your share of the services you're using[2]. Note that tax evasion/fraud[1] is illegal, which may be difficult to distinguish in some cases. [1] not to be confused with tax avoidance [2] services like national security, various types of infrastructure, verification and enforcement of safety regulations (e.g. no melamine in your food). You may not like all of these services - I certainly disagree strongly with some - but citizenship is not à la carte[3]. If you don't like some things your tax money is going to, I encourage you to participate in the political process so your opinions are heard, or even run for office yourself. [3] https://www.youtube.com/watch?v=zSQCH1qyIDo#t=219 https://www.youtube.com/watch?v=zSQCH1qyIDo#t=219
jgalt212 10y ago
Obama, as a Democratic president, should be embarrassed and ashamed that he has not closed this loophole. Treasury has the power to unilaterally do so, but yet America's regressive tax policies with all there undesirable consequences to exists. Misallocation of economic resources towards tax-effective financial activities over other more productive, but less tax-effective, activities. Increasing wealth disparity in this country--so much so that the Fed is basically afraid to raise rates because it would lower asset prices.
AznHisoka 10y ago
There's no such thing as a tax loophole. It's either legal or not. If it's legal and you don't like it then make it illegal. You still get punished if you're a day less than legal drinking age and get caught. So you can't have it both ways. If they're not following the law then punish them.
- rlucas 10y ago
  No, that's simply untrue when it comes to taxes. Once you get to the level of money sloshing around that you can afford to pay for legal and banking fees and new corporate entity filings, a whole world of shenanigans opens up, which are plainly not ok but would be impossible to exhaustively legislate. For example, you can manufacture losses for yourself to offset profits. You can instead of realizing some income, loan money to yourself and spend it and enjoy it while never paying taxes on it. You can wrap up dubious transactions in layers of opacity such that you end up legally deducting your expenses on hookers and cocaine. The set of primitives exposed by the tax code, quite legitimately in order to meaningfully address the real underlying economics of modern business and finance, are also by necessity sufficient to build arbitrary shenanigans. In hacker terms, it's like trying to create a "safe sandbox" for executing arbitrary user-specified code. Once you allow a few things, like say recursion or system calls, there's just no way to keep it truly "safe." Being able to set up notionally arms length entities which you effectively control is the tax code equivalent of shelling out to the OS. So, no, the existence of a sufficiently complex tax code guarantees loopholes and unintended consequences. See also, DAO.
cheriot 10y ago
Income from investment is taxed less than income from work in order to boost the economy by incentivizing investment, right? (Please tell me if there's another good reason.) Does our economy still need this? Interest rates are low, long term rates are low, and there's enough money sloshing around hedge and venture funds that people are worried about reckless "yield seeking" behavior. So why do we still incentivize investment more than work? Perhaps we don't need transfer payments to offset wealth inequality, perhaps we just need to stop giving the wealthy so many advantages.
- todd8 10y ago
  Yes there are other reasons. I'm not sure if they are good reasons, but a logical tax system would need considerable changes in lot's of areas. Here are two of the reasons for a separate capital gains tax rate. First, when you say sell a house or piece of property or really anything, some of the difference in price is due to inflation or deflation. When I bought my first house in 1980 the rate of inflation was around 14%. If I had sold a $100,000 house one year later for $114,000 I would have more dollars but each would be worth less and I would in effect made nothing on the investment. It makes sense to normalize the gain with respect to inflation over the holding period. They don't do that and this has a large impact on investments of all types held for many years. The lower capital gains rate helps, but doesn't erase the fact that you are being taxed on nominal income not real, inflation adjusted income. A second reason is that an investment in a company (by say buying it's stock) goes up and down in value. In theory (at least according to some people) the stocks value should represent the net present value of the future dividend stream from the company issued to the shareholder. Dividends are uncertain and it isn't always clear that a company will ever get around to issuing dividends, but that's the theory. Nevertheless, this is how shares of a stock are tied to the value of the company. The company itself is trying to make revenue. This revenue is split into three parts: (1) salary and benefits to employees, (2) dividends issued to shareholders or (3) retained for future spending, improvements in the company's machines (etc.) and cost reductions (driven by competition) to its products. The profits are taxed at the corporate tax rate, the dividends are taxed, and the salaries to employees are taxed. Thus, there are already taxes holding back the "value" of the company to shareholders. Indirectly, before shareholders see a gain in a stock's price, taxes are already being taken out of company profits somewhere. For these two reasons, it doesn't make sense to tax capital gains at the same rate as ordinary income. I know that this explanation might engender all kinds of fairness arguments, but please, dear reader, understand that I'm not saying this this fair. I'm only trying to point out some of the convoluted reasons that are used to justify our current tax system. I would love to see the tax system completely overhauled.

45 points by jstreebin 10y ago

Why do some people always want the federal government to solve their problems? It's simple. Donate the extra taxes you should be paying at http://fms.treas.gov/faq/moretopics_gifts.html http://fms.treas.gov/faq/moretopics_gifts.html. (Edit: Also, there are plenty of problems with the Federal Government size already. Pick a local cause such as Education, Low Income Families, Veterans, etc. and you will find plenty of non-governmental state or county-level groups and organizations who can put your money to a great use. Simply do the math that would leave you with the income you should have if the tax rate applied to your carry, and donate the rest).

YuriNiyazov 10y ago
I think you missed the point of the article. At the risk of explaining the obvious: the "my" in "Close My Tax Loophole" doesn't refer to just the author; it refers to all venture capitalists and money managers. The author may very well be donating the extra taxes, but he wants others in his profession to do the same.
- hyperliner 10y ago
  That point was not made. The author wants the government to solve the problem. Not a single call to action to other VCs was made to solve the problem by themselves. The author should create the "VC Group for Local Change" and pick a few missions and hire a few people to address them, and stop asking the Federal Government to solve all problems that there are simply by throwing money over the fence to make themselves feel good. It's not like we have an effective Federal Government.
jsmeaton 10y ago
This is very close to saying the government shouldn't tax anyone, and that people should donate what they feel comfortable with to various causes or departments. Taxes (and tax exemptions/loopholes) are firmly with government.
- hyperliner 10y ago
  I did not make that point. The point I made is we have a society who expects the federal government to solve problems that society can solve on their own if they really wanted to. I agree some problems can only be solved by the government, for which some amount of tax is needed, but not more than that.
function_seven 10y ago
If I think the speed limit on my street should be 25 instead of 45, I won't do a thing to solve that by driving 25 on my own.
- hyperliner 10y ago
  Put up a speed bump.

ageek123 10y ago

http://mobile.nytimes.com/2016/07/16/business/dealbook/the-carried-interest-loophole-what-loophole.html http://mobile.nytimes.com/2016/07/16/business/dealbook/the-c... is a reasonable explanation of why this isn't really a loophole.

rlucas 10y ago
The Klinsky explanation you linked to is borderline disingenuous. Nah, it's just disingenuous. It's exhausting and daunting to list all the ways that Klinsky's ELI5 example is meaningfully different from what really happens in PE-land. What it comes down to is this: PE managers get a success fee for managing other people's money without putting up their own, which is very very normal, and usually counts as earned income (normal tax rate). However, when certain very specific circumstances apply, a bit of the tax code lets you legally pretend that instead of a success fee, the amount you get paid is a return on invested capital. Very plainly, the pension funds, sovereign wealth funds, HNWIs, etc. who put up the actual risk capital into the PE funds are putting dollars at risk and earning a return on invested capital. If one simply does the exercise of asking, "where are the dollars that the PE manager put at risk?" the lie is exposed. My personal pet peeve on this is that, back in the 1970s, it was actually the case that the general partners would have had unlimited liability and therefore really were, after a fashion, putting the entirety of their capital at risk to earn the carry. But since the 1990s at least and probably earlier, everyone in this game has used a pass-through LLC blocker entity to limit the personal liability of the managers. So they keep all the tax benefit but give up that pesky "risk" part. (Partnership structures and carried interest actually do have other things to recommend them as ways of aligning interests and making deals work. But pretending that the contingent, earned, success-based portion of income accruing to the manager is a return on risk capital invested for tax purposes is just a total fiction.)
- amluto 10y ago
  > However, when certain very specific circumstances apply, a bit of the tax code lets you legally pretend that instead of a success fee, the amount you get paid is a return on invested capital. I'd love to see an explanation of why it makes any sense to continue treating capital gains income (i.e. "return on invested capital") any differently than ordinary income. If we fixed that, then the carried interest "loophole" would cease to be relevant because it wouldn't change the tax rates paid. I don't see why the tax code should incentivize passive investment over actual work.

millstone 10y ago

I have read that the differential tax treatment of income and capital gains has given rise to various techniques for "transforming" ordinary income into capital gains via "pass-through" entities [1]. This transformation is apparently quite labor intensive while being wholly non-productive (save for the favorable tax treatment). I don't understand what these pass-through entities do at all - can someone explain it? Naively it seems like differential tax treatment creates distortionary incentives. Maybe I quit being the sole proprietor of my business in order to day trade, thereby escaping payroll and income taxes. This replaces productive work with non-productive speculation - a loss for the economy and a country. What's the argument against this? [1] https://tcf.org/content/commentary/10-reasons-to-eliminate-the-tax-break-for-capital-gains/ https://tcf.org/content/commentary/10-reasons-to-eliminate-t...

mtanski 10y ago
> Maybe I quit being the sole proprietor of my business in order to day trade, thereby escaping payroll and income taxes. [...] What's the argument against this? The argument is that, it doesn't work like you think. If you're day trading chances are you're generating short term gains (or losses). Mist day traders don't hold positions 1yr+. Second as a sole proprietor your still responsible for payroll taxes, or what becomes known as self employment tax. http://www.marketwatch.com/story/do-you-owe-the-self-employment-tax-2013-08-20 http://www.marketwatch.com/story/do-you-owe-the-self-employm...
maxerickson 10y ago
The IRS has some information about trading as an income generating activity (it's a fuzzy line): https://www.irs.gov/taxtopics/tc429.html https://www.irs.gov/taxtopics/tc429.html Any proceeds are taxed as business income, not as capital gains.

aminok 10y ago

In what universe is it reasonable to be forced to hand over 35% of the currency that you receive in private trade or be thrown in prison where you are kept in a small enclosure, and have a high chance of developing mental illness and suffering physical and sexual abuse. You have an inhuman ideology.

Retric 10y ago
And your living in a fairy tale. You can easily move to a low tax country, they are worse places to live QED 30-50% tax rates are a good thing.
- aminok 10y ago
  "You can move to another country" So is that what you tell people who are forced by their government to wear a burka? Again how is it reasonable to threaten people with prison for refusing to hand over 35% of the currency they receive in private trade?
  - Retric 10y ago
    > So is that what you tell people who are forced to ware a burka? Yes. Lower tax rates have massive downsides and if you want to live in a shithole then feel free to move, but don't try to ruin this country for the rest of us. Immigration is something millions of people do every year, people look down on immigrants illegal or otherwise, but they at least have the balls to stand up for what they want.
    - aminok 10y ago
      You tell people they shouldn't complain about their government forcing them to wear a burka, because they can move to a different country? Really? Of course you can't prove that lower tax rates have "massive downsides", but you want to impose your beliefs on other people, so you don't care. Even if you could prove that not having mandatory burka, or 30% income tax rates, is societally detrimental, it would not justify violating people's human rights to impose either on them.

aminok 10y ago

The income tax is a grotesque violation of Human Rights and should be abolished. Threatening to throw someone in prison for refusing to disclose their income or hand over a share of the currency they receive in private trade is antithetical to a free society.

koralatov 10y ago
I can't tell if this is satire or not.
- aminok 10y ago
  What part of it resembles satire? There's nothing funny about throwing someone in prison.
  - aninhumer 10y ago
    Unless it's because they tried to use some resources that the government assigned you exclusive rights to, then it's an integral part of a free society?
  - Dylan16807 10y ago
    And there's nothing funny about underfunded critical community services.
    - aminok 10y ago
      Throwing people in prison for not funding something, even if it is critical, is wrong..
      - pdkl95 10y ago
        Failure to pay income tax is not a crime punishable with prison time. If you cannot pay, all the IRS will do is arrange for future payment through civil methods (e.g. garnishing future wages, putting a lien on your house, etc). If your poor, the IRS won't throw you in jail. However, if you have a reasonable source of income, you will be asked to pay your share of the services you're using[2]. Note that tax evasion/fraud[1] is illegal, which may be difficult to distinguish in some cases. [1] not to be confused with tax avoidance [2] services like national security, various types of infrastructure, verification and enforcement of safety regulations (e.g. no melamine in your food). You may not like all of these services - I certainly disagree strongly with some - but citizenship is not à la carte[3]. If you don't like some things your tax money is going to, I encourage you to participate in the political process so your opinions are heard, or even run for office yourself. [3] https://www.youtube.com/watch?v=zSQCH1qyIDo#t=219 https://www.youtube.com/watch?v=zSQCH1qyIDo#t=219

jgalt212 10y ago

Obama, as a Democratic president, should be embarrassed and ashamed that he has not closed this loophole. Treasury has the power to unilaterally do so, but yet America's regressive tax policies with all there undesirable consequences to exists. Misallocation of economic resources towards tax-effective financial activities over other more productive, but less tax-effective, activities. Increasing wealth disparity in this country--so much so that the Fed is basically afraid to raise rates because it would lower asset prices.

AznHisoka 10y ago

There's no such thing as a tax loophole. It's either legal or not. If it's legal and you don't like it then make it illegal. You still get punished if you're a day less than legal drinking age and get caught. So you can't have it both ways. If they're not following the law then punish them.

rlucas 10y ago
No, that's simply untrue when it comes to taxes. Once you get to the level of money sloshing around that you can afford to pay for legal and banking fees and new corporate entity filings, a whole world of shenanigans opens up, which are plainly not ok but would be impossible to exhaustively legislate. For example, you can manufacture losses for yourself to offset profits. You can instead of realizing some income, loan money to yourself and spend it and enjoy it while never paying taxes on it. You can wrap up dubious transactions in layers of opacity such that you end up legally deducting your expenses on hookers and cocaine. The set of primitives exposed by the tax code, quite legitimately in order to meaningfully address the real underlying economics of modern business and finance, are also by necessity sufficient to build arbitrary shenanigans. In hacker terms, it's like trying to create a "safe sandbox" for executing arbitrary user-specified code. Once you allow a few things, like say recursion or system calls, there's just no way to keep it truly "safe." Being able to set up notionally arms length entities which you effectively control is the tax code equivalent of shelling out to the OS. So, no, the existence of a sufficiently complex tax code guarantees loopholes and unintended consequences. See also, DAO.

cheriot 10y ago

Income from investment is taxed less than income from work in order to boost the economy by incentivizing investment, right? (Please tell me if there's another good reason.) Does our economy still need this? Interest rates are low, long term rates are low, and there's enough money sloshing around hedge and venture funds that people are worried about reckless "yield seeking" behavior. So why do we still incentivize investment more than work? Perhaps we don't need transfer payments to offset wealth inequality, perhaps we just need to stop giving the wealthy so many advantages.

todd8 10y ago
Yes there are other reasons. I'm not sure if they are good reasons, but a logical tax system would need considerable changes in lot's of areas. Here are two of the reasons for a separate capital gains tax rate. First, when you say sell a house or piece of property or really anything, some of the difference in price is due to inflation or deflation. When I bought my first house in 1980 the rate of inflation was around 14%. If I had sold a $100,000 house one year later for $114,000 I would have more dollars but each would be worth less and I would in effect made nothing on the investment. It makes sense to normalize the gain with respect to inflation over the holding period. They don't do that and this has a large impact on investments of all types held for many years. The lower capital gains rate helps, but doesn't erase the fact that you are being taxed on nominal income not real, inflation adjusted income. A second reason is that an investment in a company (by say buying it's stock) goes up and down in value. In theory (at least according to some people) the stocks value should represent the net present value of the future dividend stream from the company issued to the shareholder. Dividends are uncertain and it isn't always clear that a company will ever get around to issuing dividends, but that's the theory. Nevertheless, this is how shares of a stock are tied to the value of the company. The company itself is trying to make revenue. This revenue is split into three parts: (1) salary and benefits to employees, (2) dividends issued to shareholders or (3) retained for future spending, improvements in the company's machines (etc.) and cost reductions (driven by competition) to its products. The profits are taxed at the corporate tax rate, the dividends are taxed, and the salaries to employees are taxed. Thus, there are already taxes holding back the "value" of the company to shareholders. Indirectly, before shareholders see a gain in a stock's price, taxes are already being taken out of company profits somewhere. For these two reasons, it doesn't make sense to tax capital gains at the same rate as ordinary income. I know that this explanation might engender all kinds of fairness arguments, but please, dear reader, understand that I'm not saying this this fair. I'm only trying to point out some of the convoluted reasons that are used to justify our current tax system. I would love to see the tax system completely overhauled.