15 ms·

The Zuckerberg Tax

136 points by teej 15y ago

kevingadd 15y 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?
- rprasad 15y 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 15y 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.
    - rprasad 15y ago
      And management chooses the underwriters, who therefore will conform their requirements to management's demands, as they have here. Underwriters frequently try to impose lockouts, but its the management who actually sets the terms, which is why some lockouts are as short as 3 months while others are as long as 9 months. There is no requirement that the lockouts apply equally to management/dominant shareholders and other shareholders, though management frequently accept such restrictions b/c its not usually worth the cost to carve out such an exception.
- ibejoeb 15y 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.
- hristov 15y 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.
citricsquid 15y 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.
- holdenc 15y 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 15y ago
    Yeah, I'm trying to figure this out myself.
    - citricsquid 15y ago
      He only casually mentioned it (Twitter link here: https://twitter.com/#!/notch/status/110068027608932352 https://twitter.com/#!/notch/status/110068027608932352) so I too have absolutely no idea.
  - jacques_chester 15y 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.
    - holdenc 15y ago
      I am pretty sure that paying off a loan with the shares would mean that the shares had been sold in the eyes of the IRS. If not, this seem to be a pretty simple way to avoid paying capital gains on the shares of even small stock sales.
dmbaggett 15y 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.)
- jcampbell1 15y 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.
  - jseliger 15y 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.
    - jquery 15y ago
      The capital was taxed at ordinary income, yes, but the capital gains was not. He's right, it's time to start treating capital gains as ordinary income. My fifty dollars of capital generated by fixing a bug at work is equal to your fifty dollars of capital generated by the time/risk value of money.
rmnoon 15y 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.
paulhauggis 15y 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 15y 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.
- jcampbell1 15y 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 15y 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.
  - drewblaisdell 15y 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?
    - adharmad 15y ago
      If its a good idea after the government makes a legislation, surely its a good idea even otherwise.
waqf 15y 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.
- grecy 15y 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.
  - deleted 15y ago
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  - waqf 15y 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.
Sniffnoy 15y 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 15y 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
- drewblaisdell 15y 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.
  - splat 15y ago
    I won't deny that it's a term of propaganda, but how is it misleading?
    - drewblaisdell 15y ago
      Income tax taxes income, sales tax taxes sales. Death tax is not a tax on death. I have heard people equate "death tax" with "paying to die" and as support for the phrase "even death isn't free".
      - splat 15y ago
        I suppose that technically it's a tax on the transfer of your assets after your death. But unless you have no assets at all, it's hard to die and not transfer your assets to anyone.
  - Jach 15y 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.
Jach 15y 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 15y 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 15y 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.
sunsu 15y 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.
- chii 15y ago
  A consumption based tax unfairly places more tax burden the poor, who is less likely to be able to afford it.
  - kansface 15y ago
    The tax doesn't have to be flat- luxury goods can be taxed at a higher percentage.
    - chii 15y ago
      And who gets to decide what is "luxury goods"? I think consumption tax is still considered unfair, whether it's tweaked to be "unfair" to the rich, or "unfair" to the poor.
deleted 15y ago
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greenyoda 15y 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.
- kansface 15y 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?
temphn 15y 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.
- phillmv 15y 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.
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pfedor 15y 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 15y 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 15y 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 15y ago
  I'm still trying to figure out where they get the money to pay off the loan.
  - ibejoeb 15y ago
    I believe the implication is that it is simply cheaper to refinance.
jklp 15y 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 15y 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.
- rayiner 15y 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.
jpdoctor 15y 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 15y 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 15y 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.
jerfelix 15y 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).
- grecy 15y 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.)
frisco 15y 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 15y 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_accounting http://en.wikipedia.org/wiki/Enron_scandal#Mark-to-market_ac...).
- asto 15y 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.
  - edoloughlin 15y 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 15y 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.
fragsworth 15y 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 15y 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_chester 15y 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 15y 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 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734601), or Miller's own more expansive article (http://www.cadwalader.com/assets/article/120505MillerTaxNotes.pdf http://www.cadwalader.com/assets/article/120505MillerTaxNote...).
capkutay 15y 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?
cperciva 15y 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".
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- jessriedel 15y 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?
  - cperciva 15y 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.)
Drbble 15y 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.
hristov 15y 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 15y 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 15y ago
  Author is a tax lawyer. The more nonsensical the tax code, the more money he makes.
jbarham 15y 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 http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
patrickwiseman 15y 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.
kansface 15y 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 15y 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 15y 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.

136 points by teej 15y 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?

rprasad 15y 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 15y 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.
  - rprasad 15y ago
    And management chooses the underwriters, who therefore will conform their requirements to management's demands, as they have here. Underwriters frequently try to impose lockouts, but its the management who actually sets the terms, which is why some lockouts are as short as 3 months while others are as long as 9 months. There is no requirement that the lockouts apply equally to management/dominant shareholders and other shareholders, though management frequently accept such restrictions b/c its not usually worth the cost to carve out such an exception.
ibejoeb 15y 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.
hristov 15y 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.

citricsquid 15y 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.

holdenc 15y 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 15y ago
  Yeah, I'm trying to figure this out myself.
  - citricsquid 15y ago
    He only casually mentioned it (Twitter link here: https://twitter.com/#!/notch/status/110068027608932352 https://twitter.com/#!/notch/status/110068027608932352) so I too have absolutely no idea.
- jacques_chester 15y 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.
  - holdenc 15y ago
    I am pretty sure that paying off a loan with the shares would mean that the shares had been sold in the eyes of the IRS. If not, this seem to be a pretty simple way to avoid paying capital gains on the shares of even small stock sales.

dmbaggett 15y 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.)

jcampbell1 15y 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.
- jseliger 15y 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.
  - jquery 15y ago
    The capital was taxed at ordinary income, yes, but the capital gains was not. He's right, it's time to start treating capital gains as ordinary income. My fifty dollars of capital generated by fixing a bug at work is equal to your fifty dollars of capital generated by the time/risk value of money.

rmnoon 15y 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.

paulhauggis 15y 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 15y 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.
jcampbell1 15y 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 15y 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.
- drewblaisdell 15y 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?
  - adharmad 15y ago
    If its a good idea after the government makes a legislation, surely its a good idea even otherwise.

waqf 15y 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.

grecy 15y 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.
- deleted 15y ago
  [deleted]
- waqf 15y 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.

Sniffnoy 15y 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 15y 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

drewblaisdell 15y 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.
- splat 15y ago
  I won't deny that it's a term of propaganda, but how is it misleading?
  - drewblaisdell 15y ago
    Income tax taxes income, sales tax taxes sales. Death tax is not a tax on death. I have heard people equate "death tax" with "paying to die" and as support for the phrase "even death isn't free".
    - splat 15y ago
      I suppose that technically it's a tax on the transfer of your assets after your death. But unless you have no assets at all, it's hard to die and not transfer your assets to anyone.
- Jach 15y 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.

Jach 15y 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 15y 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 15y 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.

sunsu 15y 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.

chii 15y ago
A consumption based tax unfairly places more tax burden the poor, who is less likely to be able to afford it.
- kansface 15y ago
  The tax doesn't have to be flat- luxury goods can be taxed at a higher percentage.
  - chii 15y ago
    And who gets to decide what is "luxury goods"? I think consumption tax is still considered unfair, whether it's tweaked to be "unfair" to the rich, or "unfair" to the poor.

deleted 15y ago

[deleted]

greenyoda 15y 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.

kansface 15y 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?

temphn 15y 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.

phillmv 15y 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.
- deleted 15y ago
  [deleted]

pfedor 15y 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 15y 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 15y 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 15y ago
I'm still trying to figure out where they get the money to pay off the loan.
- ibejoeb 15y ago
  I believe the implication is that it is simply cheaper to refinance.

jklp 15y 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 15y 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.

rayiner 15y 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.

jpdoctor 15y 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 15y 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 15y 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.

jerfelix 15y 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).

grecy 15y 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.)

frisco 15y 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 15y 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_accounting http://en.wikipedia.org/wiki/Enron_scandal#Mark-to-market_ac...).
asto 15y 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.
- edoloughlin 15y 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 15y 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.

fragsworth 15y 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 15y 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_chester 15y 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 15y 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 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734601), or Miller's own more expansive article (http://www.cadwalader.com/assets/article/120505MillerTaxNotes.pdf http://www.cadwalader.com/assets/article/120505MillerTaxNote...).

capkutay 15y 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?

cperciva 15y 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".

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jessriedel 15y 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?
- cperciva 15y 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.)

Drbble 15y 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.

hristov 15y 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 15y 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 15y ago
Author is a tax lawyer. The more nonsensical the tax code, the more money he makes.

jbarham 15y 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 http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program

patrickwiseman 15y 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.

kansface 15y 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 15y 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 15y 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.