8 ms·

The Income Rich Take One For The Team. Thanks!

119 points by ssclafani 14y ago

pg 14y ago
It's pretty impressive for someone running a fund to call publicly for the end of the carried interest loophole.
- mattdeboard 14y ago
  Why?
  - pg 14y ago
    Because people running funds are the beneficiaries of it.
    - aneth4 14y ago
      He does specification call this out - that something must be truly egregious when the beneficiaries of a law call for its repeal. What's your position? Should we discount investment taxes to encourage reallocation of capital and tax earned income highly to discourage value add labour, or stop asking actual workers to suck it up because they can't flee like capital can?
- jspthrowaway2 14y ago
  I thought the same thing. I think he anticipated our thoughts when he wrote (paraphrased) "it's so egregious, I benefit from it and I want it to end." Maybe, just maybe, I misjudged Arrington a bit.
  - jacques_chester 14y ago
    I believe it's perfectly legal to donate any amount of money to the US government. So if he wants to pay more tax, he can. He may also rearrange his tax affairs to increase his tax liability. Same thing, but with the exciting frisson of potential coercion (gosh!). He doesn't seem to be doing either of these, however. Possibly because that might lower his social status vis-a-vis others of his kind. So actually, he's prepared to make a great personal sacrifice ... if everyone in his class does too. It seems less impressive when you put it that way, but that's human nature.
    - arn 14y ago
      It's not as selfish as you try to spin it. There are any number of political and economic policies that you might favor, but that only make sense in aggregate. I might favor more NASA funding, but I'm not going to write a check and donate to NASA. That doesn't make my desire for more NASA funding any less earnest than someone who wants less funding for NASA.
      - jacques_chester 14y ago
        It is exactly as selfish as I spun it. That's what "I won't give you X without receiving Y" means. I'm not judging, I'm exactly the same. I'm much happier if everyone else is beggared at the same time in the same way.
        arn 14y ago
        Not sure if selfish quite captures it. It's more practical consideration. I'll give you X, if everyone else is also giving you X. Otherwise, my X won't make any difference.
        jacques_chester 14y ago
        Looking at again: it's a variant of the prisoner's dilemma. If everyone moves, nobody is worse off. If you move on your own, you are worse off. If everyone else moves and you don't, you're best off. Unsurprisingly, the dominant strategy is to write blog posts saying "we really ought to amend the taxation laws" :D
        jdotjdot 14y ago
        I don't find this to be negative, though.
    - eli_gottlieb 14y ago
      Oh shut up with this already. Private property is just as coercive as taxation in the first place. You do not have a God-given right to make hundreds of thousands of dollars by investing millions of dollars and pay nothing towards the upkeep of society. Basic freaking social contract theory, and, in fact, basic law: financial instruments and corporations could not exist as they do except by government fiat. Second, yes, he will make the sacrifice if everyone else does it. That's sensible. You don't solve large-scale systemic problems by individual action, not even mass individual action, but only by collective action. Again, this is just how the world works.
- Mc_Big_G 14y ago
  It seems impressive, and but is there really a risk in saying it?
- chatmasta 14y ago
  Paul, I have a tremendous amount of respect for you. In many ways you serve as a role model to me. But I think you need to be careful calling what Arrington describes a "loophole." Yes, the people running the funds are the beneficiaries of this specific "hole" in the tax code. But have you considered that this could be a loophole by design? In other words, an incentive? In many ways, capital is the eponymous character of capitalism. Capital drives our economy. It feeds our society. It's also a good indicator of our prosperity level. No economist will argue with the fact that capital begets more capital, and therefore we should encourage any mechanism that creates it. Normally I avoid such generalities, but economists accept this as such a simple fact that it would be impossible for them to disagree with it. This "loophole" in the tax code is a great example of an incentive for investing capital. It makes sense to place that incentive in the tax code because investing capital leads to more capital. Policy makers want people running funds to "exploit" this "loophole." The tax benefits are a reward for efficiently "putting the capital to work," so to speak. If we can agree that this "loophole" in the tax code functions as an incentive, then I think we should also agree not to call it a loophole. When we call this a loophole rather than an incentive, we make it appear as though our profession (well, your profession... I'm still in college) is the business of exploiting loopholes. That is not what we value and I think we should respect ourselves enough to avoid this perception. Thanks Paul -- I hope you find time to read this.
  - jacalata 14y ago
    Of course it was created as an incentive, there's a nice justification for pretty much every line of the millions in the tax code, however it is considered a loophole because it turns out that it is really easy to manipulate the structure of investment deals so that all the income is gained as carried interest, and it even more surprisingly turns out people actually do this if there's sufficient incentive, so a lot of people now redefine what would have been 'income' into 'carried interest' in a way that appears not to have been intended when the rule was created. If you really want people to respect your profession (I assume you intend to go into finance?) you should focus a little more on the ethics of what you actually do and less on how to spin it.
    - 14y ago
- credo 14y ago
  It is good, but he most certainly isn't unique in this regard and he is late to the game. For several years, Fred Wilson has written that "carried interest" should be taxed as ordinary income. For instance, see http://www.avc.com/a_vc/2010/05/why-taxing-carried-interest-as-ordinary-income-is-good-policy.html http://www.avc.com/a_vc/2010/05/why-taxing-carried-interest-... (and my guess is that Fred Wilson earns more carried-interest-income than Mike Arrington whose biggest payout was probably the sale of TechCrunch.) I'm sure that many other investors (e.g Nick Hanauer, here in Seattle) have the same (or more progressive) positions Btw on some of the other comments ...this fiscal deal wasn't about cutting loopholes. It covered a lot of other more-urgent stuff. There is no way they could have tackled less-urgent stuff in this bill. However, in the past, Obama has called for cutting loopholes and he stressed that point in his speech tonight. Last year, in October, Romney had also stressed the need to cut loopholes. Cutting loopholes is very hard because each loophole has a strong lobby behind it, but I hope the two parties are able to agree on cutting some of these outrageous loopholes.
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btbuilder 14y ago
There's also the qualified dividend tax rate of 15%. This is justified by the fact that the corporation will be taxed on any income that is paid out as a dividend. Therefore the effective tax rate on the income is the corporation tax plus the dividend tax rate.
- whackedspinach 14y ago
  Is the effective tax rate on the carried interest loophole just the 15% Arrington mentions, or is it also more? I ask because we can talk about capital gains tax rates and how low they are, but we should always talk about effective tax rates, in my opinion. That was why Subchapter S Corporations were created, I believe.
fossuser 14y ago
Looks like high income (250k-1.2million)/small investment portfolio people (doctors and lawyers) are going to be even more screwed since they already pay high taxes and probably have enormous student loans.
- tobias3 14y ago
  Can't you substract the interest from your income?
  - prostoalex 14y ago
    Ability to deduct phases out rather quickly (as soon as you hit $300k in income with current bill, looks like).
    - Nrsolis 14y ago
      Not exactly. The student loan interest deduction gets phased out pretty early. It's gone once your AGI is over $75k. ITEMIZED deductions get reduced by 3% of every dollar you make over a specified threshold. That's 300k in 2013 with this bill. It's called the Pease phaseout and its back after being partially or completely repealed in previous years.
      - techsupporter 14y ago
        If you are married, filing jointly, the student loan interest deduction is fully gone at $150,000 of adjusted gross income. Yet another in a long line of reasons why DOMA sucks.
        Nrsolis 14y ago
        One of many. But I think my main point was that a lot of deductions disappear once your AGI reaches a point where people feel that you don't need the benefit of that deduction. With Pease Itemized Deduction phaseouts, the effective tax rate for high wage earners goes up independent of their marginal tax rate because more of their income is taxed at those rates.
Cookingboy 14y ago
I always thought it's silly for the Congress and WH to be focusing on raising the tax for the high income people (doctors, lawyers, senior engineers, people who are well off but still live off paychecks), whom are already paying a very high effective tax rate. Meanwhile the ultra-rich are mostly untouched by these new laws and people like Romney can still get away with a 13% effective tax rate. The only significant portion of the new law that MAY make an impact on the uber-riches is raising long-term capital gain to 20% for people who make over $400k (so actually now even better reason for CEOs to take $1 salary and get the rest in stocks) and limit deductibles to $250k per family (So hopefully people like Romney can longer claim the expenses on their horses and everything else as deductibles). Well, like MA said, the aspiring rich people took a bullet for the real rich people.
- _delirium 14y ago
  Side question: are there really senior engineers who make >$400k in salary? I thought you had to go into upper management to break much above $200k in actual salary (paycheck, not equity), even in the Bay Area. But I could well be out of touch with recent developments in Valley pay.
  - prostoalex 14y ago
    Restricted stock units are treated as income, so while not technically "in salary", tax implications are the same.
  - Cookingboy 14y ago
    What prostoalex said, while it's still rare, but for senior engineers who work for companies that give out a lot of valuable RSUs such as Google/Apple, etc, it's very possible for them to make more than that amount.
  - jspthrowaway2 14y ago
    A lot of people at Google are north of $500k, I've heard. We're talking engineering and product, not management. I mean, what would you pay someone like Ken Thompson? There are the outliers like him, of course, but I've also heard that even the less-known folks do well. Though I've heard all of that from Xooglers, it remains anecdotal. I also remain slightly old-school when dealing with other peoples' salary and give them respect; I'll freely tell you what I make (if permitted legally), but I understand people are not as open as I am and I try to respect their privacy.
tansey 14y ago
Carried interest is just one of the loopholes that hedge funds exploit that should be closed. When I worked for a quant fund, we were making at least one trade a day, but because we were trading futures contracts we were mostly paying long-term instead of short-term capital gains.
jspthrowaway2 14y ago
The first thing I thought of when this bill cleared was the recent news regarding how much Apple pays Tim Cook[1], said to be the highest-paid executive in the country (in total, not just salary). His big RSU grant isn't going to begin vesting until 2016, but he now makes $1.36mm and more in incentives annually (in salary, which is Arrington's point) so presumably this deal will affect his taxes quite a bit. I'd be curious to know just how much to put things into a little bit of perspective. [1]: http://www.macworld.com/article/2023491/apple-gives-tim-cook-51-percent-salary-increase.html http://www.macworld.com/article/2023491/apple-gives-tim-cook...
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hkmurakami 14y ago
What's striking to me is how he doesn't even have a grasp of the basic numbers that affect his returns. This speaks more to a "I am so rich and I made my money so easily that I don't care what I get taxed at" attitude. >Nothing the government agreed to in the last few days actually affects the asset wealthy in this country. The increased tax rate on dividends and capital gains definitely affects the "asset wealthy" in the country. In fact, both the top income tax rate and the dividend/capital gains tax rate for those making over $400k has increased by roughly the same amount [1]. However, complete inaction by government would have increased the dividend tax rate even more, so that it would have been considered ordinary income (43.4% top rate) [2]. The legislation passed on 12/31 and 1/1 by Congress definitely helped the asset wealthy. Oracle pays a 18c dividend per share, and Larry Ellison owns roughly a billion Oracle shares. The dividend tax savings he'll receive from this legislation is massive. [1] The top income tax rate goes from 35% to 43.4% (39.6% + 3.8% health care tax) and the top dividend/capgains tax rate goes from 15% to 23.8% (20% + 3.8% health care tax). If person A makes $100MM in salary and person B makes $100MM in dividend/capgains in 2013, their relative tax rate increase compared to 2012 is about the same: 8.4% increase vs 8.8% increase. [2] http://www.atr.org/trillion-obamacare-tax-hike-hitting-jan-a7393 http://www.atr.org/trillion-obamacare-tax-hike-hitting-jan-a... [3]http://www.bloomberg.com/news/2013-01-02/bipartisan-house-backs-tax-deal-vote-as-next-fight-looms.html http://www.bloomberg.com/news/2013-01-02/bipartisan-house-ba...
- ww520 14y ago
  Thanks for explaining. Very informative. Is the dividend/capital-gain increase across the board? Or is it bucketed progressively like the income tax rates?
  - _delirium 14y ago
    My read is yes, it's bucketed (corrections welcome, and my numbers are only for single filers): Below $35k income: the 0% capital-gains/dividend rate is retained Between $35k-$200k incomes: the 15% rate is retained Between $200k-$400k incomes: PPACA adds a 3.8% capital-gains surtax, but the 15% base rate is retained, effectively raising the marginal rate to 18.8% Above $400k incomes: the base marginal rate rises from 15% to 20%, plus the 3.8%, for a total of 23.8%
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aneth4 14y ago
Is there somewhere the detailed effects of the deal are spelled out? I see conflicting reports over such things as whether the 20% capital gains rate applies to everyone and which income the 3.8% surcharge applies too.
jacoblyles 14y ago
It amazes me at how far to the political left is Silicon Valley. The startup ecosystem depends on the recycling of the profits from successful ventures into new angel investment, venture capital funds, and bootstrapped ventures. An extreme example is Elon Musk, who famously netted $180 million from the Paypal sale and put every last dollar into founding Space X, Tesla, and Solar City. I'm assuming that money was taxed at the long term capital gains rate. If the cap gains loophole were closed, either Space X or Tesla would have been stillborn. Yet Silicon Valley regularly supports candidates and policies that would place large burdens on the entrepreneurial ecosystem. We have plenty of examples of high-tax, high-regulation economies around the world with no startup scene. You can't grow one by punishing success and preventing innovation. The deal that happened today means the top California cap gains tax is going up ~11% this year (PPACA, cliff deal, prop 30). That's 11% of new capital for startups being diverted from Palo Alto to Washington. (And yeah, I'm flagging this article because I don't like seeing pure politics on hacker news. But I'll participate while we're having the discussion)
- Cookingboy 14y ago
  Or maybe because for every Elon Musk who uses his money to create more opportunities for the market there are more Mitt Romneys who abuse the loopholes and use the money for more horses and car elevators. I love Silicon Valley due to the fact that people here actively CREATE wealth by producing ideas/products/companies with real, intrinsic values, which is a pretty big contrast to many of the folks on Wall Street.
  - jacoblyles 14y ago
    Unfortunately, raising the taxes on the Wall St. guys is going to hit Silicon Valley too. The carried interest rate is probably less relevant for SV than the long-term cap gains rate. California cap gains going up by 12% this year (prop 30, PPACA, and the cliff deal) means that 12% of new capital for Silicon Valley startups is going to be diverted from Palo Alto to Washington.
    - justincormack 14y ago
tezza 14y ago
Capital gains is a tough one because the "gain" could just move to a foreign asset CrunchFund could start being denominated in Pesetas, Roubles, Euro or Sterling. The interest deduction makes the effective rate of circa 15% internationally competitive. There is still plenty of room to budge 5% say, but beyond that would get limited returns and capital rehoming. http://accf.org/news/publication/an-international-comparison-of-capital-gains-tax-rates http://accf.org/news/publication/an-international-comparison...
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dllthomas 14y ago
If his tax rate (and those of people similar and better off) did in fact jump from 15% to 20%, then that sounds like this particular policy change (tax the rich a little more) was successful and does not, in fact, apply only to the "income rich". "Tax capital gains much less than ordinary income, even on other people's money" is a seperate policy decision, which was the situation before and is the situation now. In fact, the gap closed very slightly - tax rates on the top income bracket went up 4.6%, whereas tax rates on capital gains for high earners went up 5%. One thing that is bugging the hell out of me is the news coverage. They continually throw numbers around without being at all precise about what the numbers mean. I saw an op-ed, in the last run, arguing that $250k didn't amount to aaaalll that much once you take taxes out of it so let's not raise taxes on those making around $250k - except the $250k figure everyone was throwing around was post taxes; in pre-tax income $250k was simply not a any sort of interesting point. Now, we're hearing that capital gains is going up for people "making more than X", and the like - is that pre-tax? post-tax? is capital gains counted toward that? These things hugely change the character of the situation, and I flat out can't get it from the press, and that is absurd. Similarly, "Extend the Bush tax cuts for people making more than X" - that's not what anyone was talking about; they were talking about extending for everyone the Bush tax cuts on the first X dollars of income.
- smsm42 14y ago
  I would assume $250K and other figures relate to AGI (adjusted gross income). That's how taxes are usually based. As to how to calculate AGI from nominal salary, there's a reason there are 1.7 million accountants in the US :) US tax code is one messed up piece of spaghetti code.
  - dllthomas 14y ago
    For the $250K figure, you would be wrong. When that number was being cited, the top tax bracket started at something north of $350K ($366something, IIRC, but I may not) which wound up being $250k after taxes. This is, of course, precisely what is bugging me.
jpwagner 14y ago
If there was no "carried interest loophole" people would have no incentive to invest money in their own business. Wouldn't this be a bad thing?
- vidarh 14y ago
  The number of companies started in any number of countries around the world with substantially higher tax rates demonstrate that people clearly do still have incentive to invest in their own business even if they pay more.
  - jpwagner 14y ago
    this is not really a convincing response; starting a company doesn't have to be capital intensive and you could do it with someone else's money.
    - vidarh 14y ago
      You did not make any claims about the amount of money invested. You made a blanket claim that closing this loophole would remove the incentive to invest in your own business. This would translate to investing "someone else's" money too, as that investor or lender would presumably be looking for a return. More personally: I've co-founded several companies. Never once was tax loopholes or tax levels at all any part of my consideration or the discussions I've had with co-founders or various VC's about whether or not the business was worthwhile. At most taxes would be some line item buried somewhere in a spreadsheet amongst other costs of doing business. Maybe it affects amount of capital available in the market, but it certainly does not take away the incentive.

119 points by ssclafani 14y ago

pg 14y ago

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

mattdeboard 14y ago
Why?
- pg 14y ago
  Because people running funds are the beneficiaries of it.
  - aneth4 14y ago
    He does specification call this out - that something must be truly egregious when the beneficiaries of a law call for its repeal. What's your position? Should we discount investment taxes to encourage reallocation of capital and tax earned income highly to discourage value add labour, or stop asking actual workers to suck it up because they can't flee like capital can?
jspthrowaway2 14y ago
I thought the same thing. I think he anticipated our thoughts when he wrote (paraphrased) "it's so egregious, I benefit from it and I want it to end." Maybe, just maybe, I misjudged Arrington a bit.
- jacques_chester 14y ago
  I believe it's perfectly legal to donate any amount of money to the US government. So if he wants to pay more tax, he can. He may also rearrange his tax affairs to increase his tax liability. Same thing, but with the exciting frisson of potential coercion (gosh!). He doesn't seem to be doing either of these, however. Possibly because that might lower his social status vis-a-vis others of his kind. So actually, he's prepared to make a great personal sacrifice ... if everyone in his class does too. It seems less impressive when you put it that way, but that's human nature.
  - arn 14y ago
    It's not as selfish as you try to spin it. There are any number of political and economic policies that you might favor, but that only make sense in aggregate. I might favor more NASA funding, but I'm not going to write a check and donate to NASA. That doesn't make my desire for more NASA funding any less earnest than someone who wants less funding for NASA.
    - jacques_chester 14y ago
      It is exactly as selfish as I spun it. That's what "I won't give you X without receiving Y" means. I'm not judging, I'm exactly the same. I'm much happier if everyone else is beggared at the same time in the same way.
      - arn 14y ago
        Not sure if selfish quite captures it. It's more practical consideration. I'll give you X, if everyone else is also giving you X. Otherwise, my X won't make any difference.
        jacques_chester 14y ago
        Looking at again: it's a variant of the prisoner's dilemma. If everyone moves, nobody is worse off. If you move on your own, you are worse off. If everyone else moves and you don't, you're best off. Unsurprisingly, the dominant strategy is to write blog posts saying "we really ought to amend the taxation laws" :D
        jdotjdot 14y ago
        I don't find this to be negative, though.
  - eli_gottlieb 14y ago
    Oh shut up with this already. Private property is just as coercive as taxation in the first place. You do not have a God-given right to make hundreds of thousands of dollars by investing millions of dollars and pay nothing towards the upkeep of society. Basic freaking social contract theory, and, in fact, basic law: financial instruments and corporations could not exist as they do except by government fiat. Second, yes, he will make the sacrifice if everyone else does it. That's sensible. You don't solve large-scale systemic problems by individual action, not even mass individual action, but only by collective action. Again, this is just how the world works.
Mc_Big_G 14y ago
It seems impressive, and but is there really a risk in saying it?
chatmasta 14y ago
Paul, I have a tremendous amount of respect for you. In many ways you serve as a role model to me. But I think you need to be careful calling what Arrington describes a "loophole." Yes, the people running the funds are the beneficiaries of this specific "hole" in the tax code. But have you considered that this could be a loophole by design? In other words, an incentive? In many ways, capital is the eponymous character of capitalism. Capital drives our economy. It feeds our society. It's also a good indicator of our prosperity level. No economist will argue with the fact that capital begets more capital, and therefore we should encourage any mechanism that creates it. Normally I avoid such generalities, but economists accept this as such a simple fact that it would be impossible for them to disagree with it. This "loophole" in the tax code is a great example of an incentive for investing capital. It makes sense to place that incentive in the tax code because investing capital leads to more capital. Policy makers want people running funds to "exploit" this "loophole." The tax benefits are a reward for efficiently "putting the capital to work," so to speak. If we can agree that this "loophole" in the tax code functions as an incentive, then I think we should also agree not to call it a loophole. When we call this a loophole rather than an incentive, we make it appear as though our profession (well, your profession... I'm still in college) is the business of exploiting loopholes. That is not what we value and I think we should respect ourselves enough to avoid this perception. Thanks Paul -- I hope you find time to read this.
- jacalata 14y ago
  Of course it was created as an incentive, there's a nice justification for pretty much every line of the millions in the tax code, however it is considered a loophole because it turns out that it is really easy to manipulate the structure of investment deals so that all the income is gained as carried interest, and it even more surprisingly turns out people actually do this if there's sufficient incentive, so a lot of people now redefine what would have been 'income' into 'carried interest' in a way that appears not to have been intended when the rule was created. If you really want people to respect your profession (I assume you intend to go into finance?) you should focus a little more on the ethics of what you actually do and less on how to spin it.
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credo 14y ago
It is good, but he most certainly isn't unique in this regard and he is late to the game. For several years, Fred Wilson has written that "carried interest" should be taxed as ordinary income. For instance, see http://www.avc.com/a_vc/2010/05/why-taxing-carried-interest-as-ordinary-income-is-good-policy.html http://www.avc.com/a_vc/2010/05/why-taxing-carried-interest-... (and my guess is that Fred Wilson earns more carried-interest-income than Mike Arrington whose biggest payout was probably the sale of TechCrunch.) I'm sure that many other investors (e.g Nick Hanauer, here in Seattle) have the same (or more progressive) positions Btw on some of the other comments ...this fiscal deal wasn't about cutting loopholes. It covered a lot of other more-urgent stuff. There is no way they could have tackled less-urgent stuff in this bill. However, in the past, Obama has called for cutting loopholes and he stressed that point in his speech tonight. Last year, in October, Romney had also stressed the need to cut loopholes. Cutting loopholes is very hard because each loophole has a strong lobby behind it, but I hope the two parties are able to agree on cutting some of these outrageous loopholes.
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btbuilder 14y ago

There's also the qualified dividend tax rate of 15%. This is justified by the fact that the corporation will be taxed on any income that is paid out as a dividend. Therefore the effective tax rate on the income is the corporation tax plus the dividend tax rate.

whackedspinach 14y ago
Is the effective tax rate on the carried interest loophole just the 15% Arrington mentions, or is it also more? I ask because we can talk about capital gains tax rates and how low they are, but we should always talk about effective tax rates, in my opinion. That was why Subchapter S Corporations were created, I believe.

fossuser 14y ago

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

tobias3 14y ago
Can't you substract the interest from your income?
- prostoalex 14y ago
  Ability to deduct phases out rather quickly (as soon as you hit $300k in income with current bill, looks like).
  - Nrsolis 14y ago
    Not exactly. The student loan interest deduction gets phased out pretty early. It's gone once your AGI is over $75k. ITEMIZED deductions get reduced by 3% of every dollar you make over a specified threshold. That's 300k in 2013 with this bill. It's called the Pease phaseout and its back after being partially or completely repealed in previous years.
    - techsupporter 14y ago
      If you are married, filing jointly, the student loan interest deduction is fully gone at $150,000 of adjusted gross income. Yet another in a long line of reasons why DOMA sucks.
      - Nrsolis 14y ago
        One of many. But I think my main point was that a lot of deductions disappear once your AGI reaches a point where people feel that you don't need the benefit of that deduction. With Pease Itemized Deduction phaseouts, the effective tax rate for high wage earners goes up independent of their marginal tax rate because more of their income is taxed at those rates.

Cookingboy 14y ago

I always thought it's silly for the Congress and WH to be focusing on raising the tax for the high income people (doctors, lawyers, senior engineers, people who are well off but still live off paychecks), whom are already paying a very high effective tax rate. Meanwhile the ultra-rich are mostly untouched by these new laws and people like Romney can still get away with a 13% effective tax rate. The only significant portion of the new law that MAY make an impact on the uber-riches is raising long-term capital gain to 20% for people who make over $400k (so actually now even better reason for CEOs to take $1 salary and get the rest in stocks) and limit deductibles to $250k per family (So hopefully people like Romney can longer claim the expenses on their horses and everything else as deductibles). Well, like MA said, the aspiring rich people took a bullet for the real rich people.

_delirium 14y ago
Side question: are there really senior engineers who make >$400k in salary? I thought you had to go into upper management to break much above $200k in actual salary (paycheck, not equity), even in the Bay Area. But I could well be out of touch with recent developments in Valley pay.
- prostoalex 14y ago
  Restricted stock units are treated as income, so while not technically "in salary", tax implications are the same.
- Cookingboy 14y ago
  What prostoalex said, while it's still rare, but for senior engineers who work for companies that give out a lot of valuable RSUs such as Google/Apple, etc, it's very possible for them to make more than that amount.
- jspthrowaway2 14y ago
  A lot of people at Google are north of $500k, I've heard. We're talking engineering and product, not management. I mean, what would you pay someone like Ken Thompson? There are the outliers like him, of course, but I've also heard that even the less-known folks do well. Though I've heard all of that from Xooglers, it remains anecdotal. I also remain slightly old-school when dealing with other peoples' salary and give them respect; I'll freely tell you what I make (if permitted legally), but I understand people are not as open as I am and I try to respect their privacy.

tansey 14y ago

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

jspthrowaway2 14y ago

The first thing I thought of when this bill cleared was the recent news regarding how much Apple pays Tim Cook[1], said to be the highest-paid executive in the country (in total, not just salary). His big RSU grant isn't going to begin vesting until 2016, but he now makes $1.36mm and more in incentives annually (in salary, which is Arrington's point) so presumably this deal will affect his taxes quite a bit. I'd be curious to know just how much to put things into a little bit of perspective. [1]: http://www.macworld.com/article/2023491/apple-gives-tim-cook-51-percent-salary-increase.html http://www.macworld.com/article/2023491/apple-gives-tim-cook...

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hkmurakami 14y ago

What's striking to me is how he doesn't even have a grasp of the basic numbers that affect his returns. This speaks more to a "I am so rich and I made my money so easily that I don't care what I get taxed at" attitude. >Nothing the government agreed to in the last few days actually affects the asset wealthy in this country. The increased tax rate on dividends and capital gains definitely affects the "asset wealthy" in the country. In fact, both the top income tax rate and the dividend/capital gains tax rate for those making over $400k has increased by roughly the same amount [1]. However, complete inaction by government would have increased the dividend tax rate even more, so that it would have been considered ordinary income (43.4% top rate) [2]. The legislation passed on 12/31 and 1/1 by Congress definitely helped the asset wealthy. Oracle pays a 18c dividend per share, and Larry Ellison owns roughly a billion Oracle shares. The dividend tax savings he'll receive from this legislation is massive. [1] The top income tax rate goes from 35% to 43.4% (39.6% + 3.8% health care tax) and the top dividend/capgains tax rate goes from 15% to 23.8% (20% + 3.8% health care tax). If person A makes $100MM in salary and person B makes $100MM in dividend/capgains in 2013, their relative tax rate increase compared to 2012 is about the same: 8.4% increase vs 8.8% increase. [2] http://www.atr.org/trillion-obamacare-tax-hike-hitting-jan-a7393 http://www.atr.org/trillion-obamacare-tax-hike-hitting-jan-a... [3]http://www.bloomberg.com/news/2013-01-02/bipartisan-house-backs-tax-deal-vote-as-next-fight-looms.html http://www.bloomberg.com/news/2013-01-02/bipartisan-house-ba...

ww520 14y ago
Thanks for explaining. Very informative. Is the dividend/capital-gain increase across the board? Or is it bucketed progressively like the income tax rates?
- _delirium 14y ago
  My read is yes, it's bucketed (corrections welcome, and my numbers are only for single filers): Below $35k income: the 0% capital-gains/dividend rate is retained Between $35k-$200k incomes: the 15% rate is retained Between $200k-$400k incomes: PPACA adds a 3.8% capital-gains surtax, but the 15% base rate is retained, effectively raising the marginal rate to 18.8% Above $400k incomes: the base marginal rate rises from 15% to 20%, plus the 3.8%, for a total of 23.8%

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aneth4 14y ago

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

jacoblyles 14y ago

It amazes me at how far to the political left is Silicon Valley. The startup ecosystem depends on the recycling of the profits from successful ventures into new angel investment, venture capital funds, and bootstrapped ventures. An extreme example is Elon Musk, who famously netted $180 million from the Paypal sale and put every last dollar into founding Space X, Tesla, and Solar City. I'm assuming that money was taxed at the long term capital gains rate. If the cap gains loophole were closed, either Space X or Tesla would have been stillborn. Yet Silicon Valley regularly supports candidates and policies that would place large burdens on the entrepreneurial ecosystem. We have plenty of examples of high-tax, high-regulation economies around the world with no startup scene. You can't grow one by punishing success and preventing innovation. The deal that happened today means the top California cap gains tax is going up ~11% this year (PPACA, cliff deal, prop 30). That's 11% of new capital for startups being diverted from Palo Alto to Washington. (And yeah, I'm flagging this article because I don't like seeing pure politics on hacker news. But I'll participate while we're having the discussion)

Cookingboy 14y ago
Or maybe because for every Elon Musk who uses his money to create more opportunities for the market there are more Mitt Romneys who abuse the loopholes and use the money for more horses and car elevators. I love Silicon Valley due to the fact that people here actively CREATE wealth by producing ideas/products/companies with real, intrinsic values, which is a pretty big contrast to many of the folks on Wall Street.
- jacoblyles 14y ago
  Unfortunately, raising the taxes on the Wall St. guys is going to hit Silicon Valley too. The carried interest rate is probably less relevant for SV than the long-term cap gains rate. California cap gains going up by 12% this year (prop 30, PPACA, and the cliff deal) means that 12% of new capital for Silicon Valley startups is going to be diverted from Palo Alto to Washington.
  - justincormack 14y ago

tezza 14y ago

Capital gains is a tough one because the "gain" could just move to a foreign asset CrunchFund could start being denominated in Pesetas, Roubles, Euro or Sterling. The interest deduction makes the effective rate of circa 15% internationally competitive. There is still plenty of room to budge 5% say, but beyond that would get limited returns and capital rehoming. http://accf.org/news/publication/an-international-comparison-of-capital-gains-tax-rates http://accf.org/news/publication/an-international-comparison...

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dllthomas 14y ago

If his tax rate (and those of people similar and better off) did in fact jump from 15% to 20%, then that sounds like this particular policy change (tax the rich a little more) was successful and does not, in fact, apply only to the "income rich". "Tax capital gains much less than ordinary income, even on other people's money" is a seperate policy decision, which was the situation before and is the situation now. In fact, the gap closed very slightly - tax rates on the top income bracket went up 4.6%, whereas tax rates on capital gains for high earners went up 5%. One thing that is bugging the hell out of me is the news coverage. They continually throw numbers around without being at all precise about what the numbers mean. I saw an op-ed, in the last run, arguing that $250k didn't amount to aaaalll that much once you take taxes out of it so let's not raise taxes on those making around $250k - except the $250k figure everyone was throwing around was post taxes; in pre-tax income $250k was simply not a any sort of interesting point. Now, we're hearing that capital gains is going up for people "making more than X", and the like - is that pre-tax? post-tax? is capital gains counted toward that? These things hugely change the character of the situation, and I flat out can't get it from the press, and that is absurd. Similarly, "Extend the Bush tax cuts for people making more than X" - that's not what anyone was talking about; they were talking about extending for everyone the Bush tax cuts on the first X dollars of income.

smsm42 14y ago
I would assume $250K and other figures relate to AGI (adjusted gross income). That's how taxes are usually based. As to how to calculate AGI from nominal salary, there's a reason there are 1.7 million accountants in the US :) US tax code is one messed up piece of spaghetti code.
- dllthomas 14y ago
  For the $250K figure, you would be wrong. When that number was being cited, the top tax bracket started at something north of $350K ($366something, IIRC, but I may not) which wound up being $250k after taxes. This is, of course, precisely what is bugging me.

jpwagner 14y ago

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

vidarh 14y ago
The number of companies started in any number of countries around the world with substantially higher tax rates demonstrate that people clearly do still have incentive to invest in their own business even if they pay more.
- jpwagner 14y ago
  this is not really a convincing response; starting a company doesn't have to be capital intensive and you could do it with someone else's money.
  - vidarh 14y ago
    You did not make any claims about the amount of money invested. You made a blanket claim that closing this loophole would remove the incentive to invest in your own business. This would translate to investing "someone else's" money too, as that investor or lender would presumably be looking for a return. More personally: I've co-founded several companies. Never once was tax loopholes or tax levels at all any part of my consideration or the discussions I've had with co-founders or various VC's about whether or not the business was worthwhile. At most taxes would be some line item buried somewhere in a spreadsheet amongst other costs of doing business. Maybe it affects amount of capital available in the market, but it certainly does not take away the incentive.