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> any founder who's reached millions in personal gain from their single, undiversified startup, will begin to employ financial strategies to diversify some of t

by bhupy 6y ago

> any founder who's reached millions in personal gain from their single, undiversified startup, will begin to employ financial strategies to diversify some of that gain into other instruments to reduce risk This is literally not true for the wealthiest founders. The vast majority of billionaires (and even high $100M) only enjoy that net worth because the vast majority of their wealth is in a single stock: their own company. Even if 10% of their wealth is in diversified portfolios, that isn't nearly enough to offset the tax required to pay off the remaining 90% of their wealth. Second of all, even for those that have decided that they no longer care about maintaining a majority of their net worth in their own company, they have to liquidate their existing holdings in order to buy into diversified portfolios, at which point the wealth is taxed. And then any appreciation within their new portfolio is ultimately taxed when any capital gains are realized. In the US, we do not tax wealth, we tax income, dividends, and capital gains, because wealth is not money.

clairity 6y ago
no, only the most obstinate would not diversify their holdings once they reach tens of millions, let alone billions.
- bhupy 6y ago
  > no, only the most obstinate would not diversify their holdings once they reach tens of millions, let alone billions. Just do the math, you need to divest a significant percentage of your own holdings in order to re-invest it into diversified portfolios sufficient to pay a wealth tax. The vast majority of founder paper-billionaires haven't come remotely close to doing this.
- nybble41 6y ago
  Owning shares isn't only about wealth, it's also about control. The kinds of people that create successful startups aren't likely, as a rule, to give them up without a fight. By the time you've divested 50% of your shares in the company you founded it's no longer your company, and yet with 50% in one company you're still nowhere near sufficiently diversified to be able to count on those average market returns.
  - clairity 6y ago
    no, you don't divest and lose control, because you can pay taxes and diversify without selling shares (incidentally, this is similar in shape to a credit default swap). even so, you don't need 50% of the shares to control a company. in both of these instances, there are many more ways than one to skin a cat.
nrmitchi 6y ago
> In the US, we do not tax wealth, we tax income, because wealth is not money. There is also the reason that income is easier to manipulate, and the rich-of-the-rich do not, for the most part, have "income". The top marginal income tax rate is 37%. The top capital gains (income for wealthy people) tax rate is 20%. Why does someone actively working for an income pay a higher tax rate than that paid on someone's passive income?
- bhupy 6y ago
  Agree! IMO the solution isn't a wealth tax, it's to just tie the capital gains tax to the income tax bracket. That, or adding a top marginal capital gains bracket for any gain above (say) $100 million. This also has the built-in advantage of not requiring a Constitutional amendment.
- ojbyrne 6y ago
  To encourage investment. In order to incur capital gains, you have to invest, which is entirely voluntary.
- jandrewrogers 6y ago
  The combined long-term capital gains rate in places like California is >37%. The 20% is just the base federal rate, it can almost double when other investment taxes are accounted for. You missed a major reason long-term capital gains rates are lower than income tax rates: they are not indexed for inflation in the US and inflation on income is negligible. As a matter of tax policy, it is much simpler to reduce the rate than to compute a very large inflation deduction, but you can find countries that go both ways.
  - bhupy 6y ago
    > You missed a major reason long-term capital gains rates are lower than income tax rates: they are not indexed for inflation in the US and inflation on income is negligible. As a matter of tax policy, it is much simpler to reduce the rate than to compute a very large inflation deduction, but you can find countries that go both ways. Very interesting point.
solidasparagus 6y ago
And yet these founders with paper wealth regularly find money for the things they want or need. Because wealth can be easily turned into money. The idea that billionaires can find money for multiple million dollar homes, but it's impossible for them to pay taxes is ridiculous.
- bhupy 6y ago
  Yes, and when they do turn their wealth into money for whatever needs arise, they pay taxes on it. The tax rate they pay on it (20% federally, up to 37% depending on the state) is roughly equivalent to paying a compounding wealth tax after N number of years. > The idea that billionaires can find money for multiple million dollar homes, but it's impossible for them to pay taxes is ridiculous. It's not ridiculous at all, it's literally in the math. It's one thing to occasionally voluntarily liquidate tiny fractions of your holdings for one-off purchases (like a home or a yacht or to make an annual living), and another thing entirely to impose a yearly "cost to maintain ownership of your company" resulting in involuntary liquidation.

by bhupy 6y ago

clairity 6y ago

no, only the most obstinate would not diversify their holdings once they reach tens of millions, let alone billions.

bhupy 6y ago
> no, only the most obstinate would not diversify their holdings once they reach tens of millions, let alone billions. Just do the math, you need to divest a significant percentage of your own holdings in order to re-invest it into diversified portfolios sufficient to pay a wealth tax. The vast majority of founder paper-billionaires haven't come remotely close to doing this.
nybble41 6y ago
Owning shares isn't only about wealth, it's also about control. The kinds of people that create successful startups aren't likely, as a rule, to give them up without a fight. By the time you've divested 50% of your shares in the company you founded it's no longer your company, and yet with 50% in one company you're still nowhere near sufficiently diversified to be able to count on those average market returns.
- clairity 6y ago
  no, you don't divest and lose control, because you can pay taxes and diversify without selling shares (incidentally, this is similar in shape to a credit default swap). even so, you don't need 50% of the shares to control a company. in both of these instances, there are many more ways than one to skin a cat.

nrmitchi 6y ago

> In the US, we do not tax wealth, we tax income, because wealth is not money. There is also the reason that income is easier to manipulate, and the rich-of-the-rich do not, for the most part, have "income". The top marginal income tax rate is 37%. The top capital gains (income for wealthy people) tax rate is 20%. Why does someone actively working for an income pay a higher tax rate than that paid on someone's passive income?

bhupy 6y ago
Agree! IMO the solution isn't a wealth tax, it's to just tie the capital gains tax to the income tax bracket. That, or adding a top marginal capital gains bracket for any gain above (say) $100 million. This also has the built-in advantage of not requiring a Constitutional amendment.
ojbyrne 6y ago
To encourage investment. In order to incur capital gains, you have to invest, which is entirely voluntary.
jandrewrogers 6y ago
The combined long-term capital gains rate in places like California is >37%. The 20% is just the base federal rate, it can almost double when other investment taxes are accounted for. You missed a major reason long-term capital gains rates are lower than income tax rates: they are not indexed for inflation in the US and inflation on income is negligible. As a matter of tax policy, it is much simpler to reduce the rate than to compute a very large inflation deduction, but you can find countries that go both ways.
- bhupy 6y ago
  > You missed a major reason long-term capital gains rates are lower than income tax rates: they are not indexed for inflation in the US and inflation on income is negligible. As a matter of tax policy, it is much simpler to reduce the rate than to compute a very large inflation deduction, but you can find countries that go both ways. Very interesting point.

solidasparagus 6y ago

And yet these founders with paper wealth regularly find money for the things they want or need. Because wealth can be easily turned into money. The idea that billionaires can find money for multiple million dollar homes, but it's impossible for them to pay taxes is ridiculous.

bhupy 6y ago
Yes, and when they do turn their wealth into money for whatever needs arise, they pay taxes on it. The tax rate they pay on it (20% federally, up to 37% depending on the state) is roughly equivalent to paying a compounding wealth tax after N number of years. > The idea that billionaires can find money for multiple million dollar homes, but it's impossible for them to pay taxes is ridiculous. It's not ridiculous at all, it's literally in the math. It's one thing to occasionally voluntarily liquidate tiny fractions of your holdings for one-off purchases (like a home or a yacht or to make an annual living), and another thing entirely to impose a yearly "cost to maintain ownership of your company" resulting in involuntary liquidation.