Tim Sweeney: Tax bill would likely end founder control of independent companies
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First, and primarily, Tim Sweeny states: "If this tax scheme had been place, I’d have been forced to liquidate nearly my entire ownership." This is absolutely false.
The proposed law (legislative text available here: https://www.finance.senate.gov/chairmans-news/wyden-unveils-...) would not apply the tax scheme to Epic Games. At all.
See Section 491, which applies the new tax scheme to "tradable covered assets", and Section 497 which defines "Tradable Covered Assets". Those are defined assets traded on established securities markets or readily available on secondary markets. Epic Games is a privately held company, and not traded on established securities markets or readily available on secondary markets.
Additionally, the law allows each person to designate up to $1B of normally "tradable covered assets" as "nontradable covered assets". Which means if this law did apply to Tim Sweeny, it wouldn't have impacted his holdings by as much as he implies, as $1B of his assets is removed from his "assets" at the start of the calculation. This significantly reduces the amount of shares he would have to liquidate to cover his take burden.
Sweeny's twitter thread doesn't tell the whole story, and this comment chain has been treating it largely as fact. I wanted to add context and correct some of those points, so we can have a reasonable discussion.
Sounds like a great way to import rich people and exploit poor people by capping their level of home value.
Thanks for all that hard work on the house, sorry it's getting repo'd and auctioned. Next time, don't try to make a place to live so high quality!
Property tax should be paid on square footage of the boundaries. Impose a property sales tax with progressive residency penalties or some other extractive mechanism, but have the common decency to let people invest in and improve their own homes.
Sure, Georgism has a lot to recommend it (more or less exclusively taxing land), but that's not happening in the US any time soon.
SF is not going to tax your house more because you went from Home Depot subway tile in the bathroom to Murano hand made glass from Italy, whether you file a permit or not. One of my children just had their house electrical system upgraded from knob&tube to contemporary romex, all under a permit, and I don't believe it will have any impact on their property taxes whatsoever.
If you did in fact add a room or enlarge the building, then it's worth more and will/should be taxed more, no? The taxes represent a small additional part of the total cost of the changes, spread out over years.
California Prop 13 causes some serious market distortions.
Thanks
Property taxes are also essential tools against speculation, since your asset naturally depreciates, and the more you bid it up, the more you pay (as a counter example where speculation rules the day because property taxes are absent, see China).
Well dang I’m so relieved that it’s a measurably less severe amount of bullshit.
So this law would lead to a proliferation of privately held companies as billionaires avoid the stock market and other tradable covered assets?
It's not only traded on established securities market, it's also "readily available on secondary markets".
Basically, if there's a significant number of shares trading hands between parties on an ongoing low-friction basis it's going to be subject to the tax rules. Which means a company that wants to have a really large pool of investors wouldn't be able to skirt this by just not listing.
I think this law could affect the number of IPOs at the margins, but I suspect it wouldn't be the fundamental consideration for a lot of companies.
I think if this law was paired with one that treated putting shares as a collateral for a loan as a taxable event (that is, if you use your shares as the collateral for a loan, those shares are taxed as capital gains at the value that they were assigned as collateral) it would mitigate most of the "IPO avoidance" concerns, since another primary tax avoidance strategy would also be shut down.
But suppose it were publicly held, with Sweeney holding majority ownership. Why would that distinction make his criticism of this tax scheme invalid? It seems to me his criticism is still perfectly valid, it only applies to a smaller set of companies.
If his criticism applied to every company and every founder in the country, it would be devastating and the law shouldn't be considered at all.
If the criticism would affect the control of only a single company, then it's a much smaller concern.
So, saying: "this criticism is quite a bit smaller in scope than it was being presented as" is a significant change.
> Why would that distinction make his criticism of this tax scheme invalid?
I didn't say his criticism was "invalid". I said that one factual claim he made was wrong (which it was), and that the commenters here were overlooking some of these mitigating factors.
It doesn't mean we should entirely ignore the concerns that he raised, but I think we should evaluate those concerns in a complete and measured way. By the same token, I don't think raising a "valid" criticism also totally dooms the proposal. It's possible that there are other mitigations we can apply, but fundamentally every tax structure has to balance the good with the bad. We need to decide if the benefits of the structure outweigh the downsides.
Is it possible that this tax scheme would require the founders of some companies to sometimes sell shares to cover their tax burden? Yes, it's possible.
Is it possible that the amount of shares those founders would have to sell could impact their control over the company? Yes, it's certainly possible.
How many companies that are founder controlled will be forced to no longer be founder controlled because of this tax scheme? Based on the legislative text, I suspect it's a very small number and might be 0, but I grant that it may not be 0.
I guess one can do the mental exercise of consider what would have happened had this law been in place already to Bill, Jeff, Sergei, Larry, and Mark.
Ignoring whether it's a "good thing" or "bad thing": Mark owned 22% of FB shares at IPO in 2012, 4 years later the market cap was ~$500B, so assuming he kept 22% ownership throughout, he went from ~20 to ~$100B of wealth, meaning over those 4 years he'd have to find how to pay for an extra $16B tax bill (20% of 80B gain). Unless his salary was set to a couple billions a year, he'd definitely have to sell some of the stocks.
As a way to protect himself from this dilution in ownership, what could he do?
- Setup a complex class of shares (like F class described somewhere else in this thread)?
- Not go public?
The Mark, Jeff etc of the world are obviously the extreme outliers, but the same would apply to "smaller fish" (billionaires still!), Including Tim Sweeney if if ever wanted to take his company public.
If your priority is continuing to own your creation, then by all means, keep it.
If the setup disincentivises the creation of Z/B/G/etc's, I don't consider that a detriment to the overall society.
First, I think a “dilution in ownership” for founders is possible as an outcome of the tax structure.
My quibble is mostly that the dilution will affect fewer companies that was presented, and will be less dilution than was presented. Specifically, I think it’d be a small enough amount that it’d flip the control from the individual founders to not the individual founders.
In the FB example, it’s worth noting that as of 2019 Facebook already had two classes of shares (class A, held by public investors, and class B held by FB executives, which have 10x the voting power), which (again, in 2019) gave Zuckerberg total control of Facebook.
So, insofar as dual classes of shares already exist, that certainly seems like one option. Zuckerberg can sell class A shares for his tax burden, but keep class B shares. That would dilute his ownership to some extent, but his voting power would be diluted significantly less.
Other options could be paying the tax burden over 5 years instead of a single year (which is in the legislative text), which’d let him pay his tax burden with something like hundreds of millions per year.
Another option instead of selling stock would be to take out loans collateralized by the stock, and use that to pay the tax burden. This would effectively allow them to pay the tax burden over (say) 30 years, which again makes it easier to cover on salary alone.
Or, they could forego the benefits of being a public company (or being a private company that’s readily tradable on secondary markets). There are real downsides to that, though.
To your point, though, I think it’s fair to say that this tax law may dilute the ownership interest of billionaires to some degree. I think it’s less likely than Tim Sweeney was suggesting to wrest control out of founder’s hands (though obviously still possible, especially for any founder that is just barely holding on to 50% ownership).
Obviously shareholders who are all equally affected by this would find this to be a fair deal. Likewise these companies exist because of the vision of the founders (or at least, that's a good argument to make. See Yahoo vs Google for example, or even Yahoo by itself)
The point that I agree with Tim the most is that this legislation only affects individuals, not corporate owners. I'd absolutely want to apply it to those owners as well. But, an investment group would not be taxed the same way as individual owners, and so might be less inclined to approve such payments.
Also, since each individual can exempt up to $1B in assets, it would only be those individuals that hold a massive amount of the company that would typically be liable for the tax burden. So, an early employee that has $900M of Facebook shares wouldn't receive any of the tax-payback money that Zuckerberg would receive. Because the exposure would be fairly selective, it seems marginally less likely that enough shareholders would be equally affected at a company to find it to be a fair deal.
But "doing something" while doing nothing. That, I imagine, is the intention.
any tax rule can be circumvented, because the US allows international share ownership ... which they in fact do:
https://www.forbes.com/sites/danielmitchell/2012/05/11/faceb...
So this needs compromise, talking. The main talking point of these founders seem to be that they want to maintain control of these companies, and choose their successor. Do we care about that with this legislation? Why not give them that?
Borrow against his stock holdings to pay the taxes, at interest rates far below the rate of stock appreciation. (That people already do this—but not for taxes—to perpetually avoid realizing gains while enjoying all the benefits of the gains is central to the explicit motivation of this bill, so its kind of a major oversight to ignore it as an option for paying the taxes.)
But its not, for a reason, and there are existing reasons why companies don't tend to go public while still in the meteoric valuation growth phase.
And when companies are public, so that stock is a tradable asset subject to the tax, you can borrow against it; with sustained rapid appreciation, the interest rates will be substantially below the rate of appreciation, so there is no reason to liquidate assets to pay stock. Without sustained rapid appreciation, liquidating sufficient stock to pay the taxes won't force people to liquidate the bulk of their holdings, even over a long time.
- Tax capital gains >1m a year as regular income.
- Fix loopholes that allow for equity as collateral for perpetual loans without ever selling the underlying.
- Remove step up in cost basis on inheriting assets.
- Tax stock buybacks at same level as dividends.
- Don't bring back SALT deduction.
Pretty easy to justify. Why should capital gains get favorable tax treatment over income, especially for wealthy who have this as a primary income source? Overall, proportion of assets allocated to investment capital would not dip due to change in tax, where else would they put the money?
Buybacks are effectively a technique to consolidate wealth primarily for the CEO and board of a company, who are paid primarily in equity comp. Very few companies do buybacks for legitimate operational reasons, like purchasing stock when it's undervalued to reduce operational expenses re dividends. It's mostly a buy at any price to juice valuations. I'm not against companies returning money to shareholders, but buybacks shouldn't be tax advantaged vs dividends.
SALT is a direct handout to wealthy homeowners. The fact that this is even in the spending bill shows how far the narrative of fixing wealth inequality has deviated from the actual legislation.
I suspect Congress doesn't do these things because it would actually impact their own finances. And of course they need unilateral agreement on any approach.
my impression is that the step-up cost basis is there because you've already paid the estate tax when the assets were transferred to you? otherwise you'd end up getting double-taxed.
I'd prefer some simpler overall approach though. Removing step up in cost basis alone obviates the need for an estate tax, as eventually assets would be sold and tax revenue generated.
But important to do some research into how often inherited assets are kept permanently and gains never realized (thus tax never paid).
Just on gut instinct, I would guess most who inherit wealth eventually sell off any assets. I recall it tends to be that most accumulated wealth is lost by the third generation.
The estate tax is still due. The federal estate tax is 40%.
If you could remove estate tax and cover by removing step up in cost basis, is probably preferable (but contingent on assets eventually getting sold, requires some research)
State policies differ, indeed. Almost all discussion of estate taxes in this thread has focused on or been exclusive to the federal estate tax.
This citizen-driven state law affects slightly more than 2% of the US population, in theory.
In fact, median household income for WA in 2019 was about $78k, median household net worth in 2019 was about $400k, and median family net worth in WA in 2021 was $865k.
So in reality, even within WA state, almost nobody is paying the state estate tax. Here's the Seattle Times from 2019 on the incongruities in state wealth distribution. But notice that even in their numbers, home owner median net worth is still only $900k, less than half the state's estate tax threshold.
https://www.seattletimes.com/seattle-news/data/seattle-house...
Drawing a conclusion that it is "almost nobody" is completely unwarranted.
> About 200 estates per year in Washington pay taxes out of 45,000 deaths – less than half of 1%.
http://www.opportunityinstitute.org/wp-content/uploads/tax-r...
It seems likely that this number has increased since 2006. But by how much?
The same report noted total estate tax revenue at $100M. Adjusting for inflation, and using the total revenue number from 2019 ($297M), it would seem that total revenue has just about doubled. If we make the egalitarian but hardly realistic assumption that the gain in total revenue number has been driven by an equally distributed gain in the value of estates, then it seems that a reasonable back of the envelope guestimate is that in 2019 or thereabouts, roughly 1% of annual deaths trigger estate tax liability.
[ EDIT: in addition, this page from the WA OFM seems to show that whatever the revenue from the state estate tax, it is so low that it doesn't even get it's own category in a chart of state revenue sources:
https://ofm.wa.gov/washington-data-research/statewide-data/w... ]
It's not nobody, but it's a hell of a lot closer to "almost nobody" than "this is a government policy that significant numbers of ordinary people have to worry about".
[EDIT: this page from the WA OFM suggests a possibly notable increase for 2019-2021 estate tax revenue, among other increasing sources of revenue. It's not clear that the increase changes the accuracy of my final paragraph (pre-edit)
https://ofm.wa.gov/about/news/2019/09/state-revenue-projecti... ]
>When a person dies, their assets could be subject to estate taxes and inheritance taxes, depending on where they lived and how much they were worth. While the threat of estate taxes and inheritance taxes does exist, in reality, the vast majority of estates are too small to be charged a federal estate tax—which, as of 2021, applies only if the assets of the deceased person are worth $11.70 million or more
(Investopedia; https://www.investopedia.com/articles/personal-finance/12071...)
And hence they apply to billionaires, which is the topic of this page.
Almost all mentions of the estate tax in this thread has been generic whining about the fact that there is an estate tax. For almost all US persons, there is no estate tax.
I was talking to some people sufficiently wealthy that this is a concern, and their point is that the only reason some don't transfer their assets like this is fear of their own children. Unless you really are a farmer, or small business owner, the estate tax is completely optional if you trust your kids.
In 2019, there were only 2,570 estate taxes filed.
> Almost all mentions of the estate tax in this thread has been generic whining about the fact that there is an estate tax
There is also whining among people that they need to spend so much on accountants and lawyers to avoid what is essentially a completely bypassable tax.
So you can see how socially it is not a good use of our human capital to create this enormous tax avoidance industry, and how it would be much better to pass laws that didn't need to do things like value privately held businesses or artwork in order to determine your tax liability.
The proposed law under discussion here explicitly excludes privately held businesses and artwork.
Because we have an extremely complex tax code.
But seriously, eliminate all corporate taxes and replace that with a 10% VAT.
Treat all income the same -- I don't care whether it's a long term capital gain, or a meteor filled with gold crashing into your yard, don't distinguish at all. Put it all into a single bucket, get one number, look that up in a progressive rate table. Pay a percentage. No deductions of any kind for anything. Not for mortgage, not for kids, not for school, not for charity, not for solar panels, etc. But only tax income, not assets.
That would eliminate 99% of tax prep work.
We need to stop using tax code to implement policy. Taxes should be taxes, and if the government decides to pay people to encourage them to install solar PV/have children/buy new cars/invest in bitcoin/whatever, then the government should send them a check to do so.
So we're mostly in violent agreement, except that if corporations have any of the rights of people (and likewise, if people can somehow claim to be corporations), then I want them taxed just like people.
In terms of treating a corporation the same as a household -- so that it pays taxes on all revenue, the problem is the economic distortions. There are just some businesses - like grocery stores -- that have high turnover and low margins. Other businesses have low turnover and high margins. And the tax code should not really penalize one at the expense of another. E.g. groceries just don't last, they have to be sold quickly. Furniture lasts a while. The reality of that natural difference trumps any appeals to logical symmetry in treating corporations the same as households.
Except it's super easy to cheat on the left hand side, but hard to cheat on the right. VAT taxes get paid, payroll taxes get mostly paid, but corporate profit taxes - not so much.
Unfortunately most progressives don't understand this point and keep thinking that corporate profit taxes are good while VATs are bad, and they are kinda confused about payroll taxes.
Then you try to tell them what matters is tax incidence and their heads explode.
Now let's say I still buy the stock at price A, but instead of selling I hold until my death and my heirs inherit. They pay the estate tax, yes (presuming that my total wealth is massive enough to reach that level), but they pay it as a % of value B- at this point no one owes the government any of that (B-A) tax.
Is that "double taxation"? Well, it kinda depends on your perspective, and this is a situation where perspective seems to be determined by bank balance. If you are wealthy, of course you feel that it is double taxation- it's two separate bites of taxes on the same underlying asset! If you aren't, then what you notice is that somehow this death has created a situation where the government never got it's cut of that (B-A) difference, so this is avoiding taxes.
While capital was transferred, value increase was never really monetized. Would it not be fair to say that it will be taxed only once it turns into money, against the B-A gains, and A is taxed according to normal inheritance rates.
Of course, this has a huge practical issue of knowing what A was, which could be a while back.
So why not put the burden of establishing a basis (A) on the person seeking to claim its benefit — who, in this case, is also best-positioned to gather such evidence?
Should they keep poor records, they lose the benefit of that basis, and will instead pay taxes on (B-0).
As for knowing what A is, if you don't know it you can always fill in 0 and pay slightly more tax than you should, to be safe, so you don't caught in an audit. As of 2011 the IRS requires all brokers to track and report the cost basis for all purchases- that is, any purchase made after 2011 when you sell it they will tell you and the government what the value of A should be.
because the person who should be paying that cut is dead! You don't tax the dead.
Who we tax, and what way, is entirely a choice made by a society. I routinely pay sales tax out of the income that I paid income tax on, and pay extra tax when I buy alcohol- those are all decisions made by society that they were the socially correct way to pay for everything we jointly need as a society. That's all taxes are.
The modern estate tax was created in 1916. In 1906, then President TR gave a speech supporting this kind of tax as a way to try and reduce the power of dynastic wealth- to keep American society from being ossified, and to make sure that the current generation of talented people could amass wealth too.
The modern income tax was created in 1909 as part of an attempt to clear the way for prohibition- a significant part of the Federal budget was paid for with alcohol taxes, and they needed to replace that hole in the budget[1]. For the first three decades it hit only a tiny percentage of the richest, until World War Two when it was expanded and covered a greater percentage of the population, as the Federal government massively expanded and needed more money to pay for its massive size[2].
But those were all the results of political choices, and taxing the dead makes just as much sense.
[1]: Similarly, women's suffrage was also, at least in the US, largely a proxy battle over prohibition- it seems to have been a widely held assumption of everyone in politics in 1910 that as soon as women's suffrage was achieved prohibition would follow immediately afterwards (in fact, prohibition passed two years before women's suffrage). This is why the largest anti-suffrage organization had as its honorary chairwoman Mrs. Adolphus Busch, matriarch of the Budweiser fortune.
[2]: Adam Tooze's book _The Deluge_ has as its basic thesis that the US Government was too small, and had too limited state capacity, which was a major cause of all of the problems of the 1920's and 1930's.
Why not? If someone owes a bunch of taxes when they die, their estate should still be on the hook for it. I don't see any reason that money owed to the government should go to someone's heirs instead just because they happened to die at a specific time
but the money wasn't owed - because the gains were never realized, so the person (who died) never got to enjoy the consumption of that money, so therefore, it doesn't seem fair to take tax from somebody who would not be alive to defend themselves from it.
The heir receiving inheritance should get taxed - on the whole value (B in the OP's nomenclature). But the heir should not have to also pay B-A capital gains, which is a tax that would've been levied on the now dead, had they decided to sell instead of dying.
There's nothing fundamentally wrong with "double taxation," no rule that says every dollar must be taxed exactly (or at most) once. Sales tax is also "double taxation," for example. It's a useful heuristic for determine what should and shouldn't be deductible from a particular tax base but it's not a hard-and-fast rule.
My own country has a famous issue with double taxation as I know it: diesel/gasoline have a specific tax and then VAT is calculated on top of original_price * gas_tax, instead of the original price.
So if the gas tax goes up 1% we end up paying more than 1% because it also the increases the value of the VAT.
If you increase long term rate from 20%, to roughly 40% (top income rate), you'll generate roughly 200B a year in additional revenue. Of course changes in tax law will alter behavior, but we can say likely 100-150B+ per year. We can assume the large majority of these gains are from those above the 1m threshold.
Facebook is doing ~60B in buybacks this year. Taxing that at 20% nets 12B a year in revenue from Facebook alone. Dollar amount of total market buybacks is much higher, obviously. So we can say this likely generates 100B+ per year.
SALT deduction alone costs 100B/year to reinstate
So how does 300-450B a year not cover a 1.5T spending bill over 10 years?
What logic are you using to assert this isn't sufficient? Or are you just writing it off without any research?
Stock buy backs will end, they'll just pay it out as dividends instead. So $0.
SALT deduction has already been capped, no change there.
It's like the wealth tax in France that they expected would bring in billions brought in a few percentage of that.
There's 0 chance that capital gains will drop from 1T to much less than 500B, or that buybacks go to 0. You think people will suddenly never sell their assets because the tax rate is higher?
Dividends are already taxed at 20% for most people, yet companies still pay dividends. So why wouldn't they do buybacks at a 20% tax rate?
Even if you cut projections in half, it's more than enough to fund.
And it seems like you're not aware of the legislation. The budget bill brings back the SALT deduction, which will reduce tax revenue by 100B/year.
That single provision alone is almost enough to fully fund the (pared down) bill.
And I don't get why you'd tax stock buyback. That's a key way company's control their equity. Take $10B to buy $10B of their own stock and you'd make them pay $2B in taxes? Really?
The reason you tax buybacks is because you presumably care about wealth inequality. Buybacks by and large are mechanisms to increase the wealth of shareholders in a tax deferred manner. Dividends are not tax deferred.
Ideally legislation would differentiate between "operational buybacks" where the buyback is actually justified by fundamentals and "indiscriminate buybacks" where the goal is to increase the value of the equity regardless of efficiency of the buyback. If a company has ROIC of 20% and a cashflow yield of 3%, it's pretty obvious that the buyback is indiscriminate and not rooted in any sense of the best allocation of capital.
Of course impossible to differentiate these two things in legislation. But we can say 90% of the money allocated towards buybacks has nothing to do with operational efficiency, and acts more as a tax deferred transfer of wealth to shareholders. From the governments perspective, encouraging dividends over buybacks makes a lot of sense.
US has the same top marginal dividend and cap gains rate so you'd make dividends much more tax efficient as a way to return money to investors [0].
[0]: https://en.wikipedia.org/wiki/Share_repurchase#Tax-efficient...
Dividends are "double taxed" today and buybacks are not.
Not sure where you got your information, but it's wrong. Your source confirms what I'm saying, so maybe try reading it again.
I agree that raising the value of the share leads to a deferred taxable event, just a question of whether that deferral is permanent or not.
Presumably it would be realized at some point.
There is also a compounding effect to deferring gains, which leads to higher wealth concentration. e.g. you make gains on the portion of your investment that would be taxed, because dont owe the tax until you sell.
Also, would you give a credit for share issuance?
1) if company A issues 100 shares in January, and buys back 150 shares in February, then would company A accrue a tax liability on 50 shares, or 150 shares, and how does A's tax liability change? What rate does the liability accrue at? What if it's more than 12 months -- can you bank this somehow?
2) if company A lends $100 to company B, and company B buys $100 worth of company A's shares, then would company B incur a tax liability, and if so, what is the liability?
3) Is this a general tax liability incurred when a company buys shares of any other company?
4) Is this a general tax liability incurred whan a company buys other instruments -- preferred stock, long term debt, etc, of any other company?
5) Does this tax on corporate purchase of financial assets also extend to banks or is it just the non-financial sector?
6) What if a hedge fund buys shares in company A, do they incur a tax liability?
7) Is a company allowed to retire its own debt prematurely under this plan without incurring a tax liability?
8) Can a company do a repo or reverse-repo of its own shares without incurring a tax liability?
9) If instead of buying back its own shares, a company were to buy gold or shares in another company, would that trigger a tax liability?
Thanks!
Because the income has already been taxed when it was the corporation's profit.
But it wouldn't matter anyway, given GP's point. Taxes on corporate income are not taxes on the capital gains of those who hold corporate stock.
The stock price can deviate for a time from the current profits, but it will inevitably move back to what the overall profit is.
The reason is simple. The gains in value of a company are when (revenue > expenses), i.e. it comes from profit.
> Taxes on corporate income are not taxes on the capital gains of those who hold corporate stock.
Yes they are, because they reduce the value of the stock (and hence the capital gains) by the same amount. There's no free lunch.
People who buy (or used to buy) "blue chip" stocks in the hope of collecting a nice monthly dividend payout certainly see things the way you're describing.
But there are plenty of people who buy stock because they believe the stock price will increase for reasons that may or may not include profits. The idea that "gains in value of a company ... comes from profit" is some sort of glorified 1850-1970s view of how stock prices vary. Once we allowed for derivatives, amongst other things, this sort of simplistic approach to stock trading has become more and more of an anachronism.
To use amzn as an example, though they are hardly unique, lots of people bought amzn stock because they belived that other people believed that the stock price would increase.
We have entire sub-sectors of stock trading that use high level math and leading edge technology (and or day-trader gut feelings) to try to earn from fluctuations in stock pricing that are best a derivative of profits, but more typically 3rd order effects.
You appear to believe that this is some anachronism. It is not. The people who believe it is not based on (expected future) profits are in for a rude awakening. If the expected future profits don't materialize, the stock tanks.
Why do you think TSLA jumped when Hertz ordered a ton of Teslas? It wasn't based on the value of that deal, it was based on the EXPECTED FUTURE PROFITS from the legitimizing effect on Tesla sales from Hertz' vote of confidence. People expect other rental fleets to now be buying Teslas. And those expected future profits just got priced in to the stock.
Of course, they could guess wrong. But the two numbers, stock valuation and profits, will inevitably converge.
ANY news that affects future profits is going to affect the stock price. All those mathematical models are just attempts to predict just what the magnitude of those effects will be.
Not realizing this is like looking at the thermometer today and drawing a conclusion about climate change.
This is just false. We live in a world where stock trading occurs based on at least 3rd order derivatives. My belief about her belief about his belief can drive me buying or selling stock.
I don't have to believe anything about future profits, I only have to believe that you believe that somebody else believes something about future profits.
But I don't even have to believe that. I can simply have an expectation that I can surf the volatility of a given stock, without regard for its "underlying causes", and make a profit doing so.
You don't actually think all those hedge fund quants do is some fancy computation of expected future profit, do you?
> The people who believe it is not based on (expected future) profits are in for a rude awakening. If the expected future profits don't materialize, the stock tanks.
The people who are no longer playing the simplistic game are already gone when that happens.
What do you imagine it is based on? Collector value? The position of Mars in the sky?
> I can surf the volatility of a given stock
You can make a profit in Vegas with your system, too, but you'll lose in the long run because the math is inevitable.
> You don't actually think all those hedge fund quants do is some fancy computation of expected future profit, do you?
Hedge fund long term results struggle to match the S&P 500. The owners of the hedge fund, however, do far better than their customers. All those commissions, fees, percentages and loads.
I put my money where my mouth is, and it's not in hedge funds.
> are already gone when that happens
2008 Oops!
1. executing a trade on breaking news ahead of the other guys
2. finding an unknown correlation between Event A and the stock price
The thing about (2) is once someone does find a correlation, that knowledge spreads out to the other hedge fundies, negating the advantage.
And then it's back to future profits. It always goes back to future profits. Bill Gates was asked once if he followed MSFT. He replied that he didn't, he just focused on making Microsoft profits and MSFT took care of itself.
I also remember a CEO who said at a company meeting that he'd adjusted the books to "what Wall Street was looking for". The stock promptly tanked. WS wants profits, not manipulation.
P.S. did you see what MSFT did yesterday? It jumped up quite a bit. Because of profits beating expectations. Not because of a 3rd derivative.
But look, the point is that there are two fundamental reasons to buy a stock. One is to collect dividends paid to stock owners (so called "blue chip" stocks). The other is because you believe the price of the stock will rise. (For the big players, there's also the issue of corporate control, but that's not a factor for most investors, even many institutional ones)
There are many reasons why the price of a stock will rise. One of them could be more people wanting in on the dividend payout, and them being willing to pay (a bit) more than the current price. That could happen due to demographic changes (ie. shifts in the number of people who want dividend paying stocks), it could happen due to a change in the expectation of what those dividends will be (as in your MSFT example).
But it can also (and demonstrably has) happen(ed) that the price rises because derivative beliefs about the likely future price. And that's precisely what happened in the case of amzn and dozens if not hundreds of tech startups over decades: there was never any profit (and in some cases there never would be any profit), but there was a belief about either:
1. that future profit would be above a certain level
2. the number of people who believed in 1, and so would drive the price up
3. the number of people who believed in 2, and so would drive the price up
4. [ repeat as deep as you think feasible ]
It makes no difference (except for tax purposes) if the dividends are paid to shareholders, or if they are retained and the stock price goes up by the amount of the dividend. As the differing tax treatment of capital gains and dividends changes, companies change their dividend payouts to match.
> But it can also (and demonstrably has) happen(ed) that the price rises because derivative beliefs about the likely future price. And that's precisely what happened in the case of amzn
The future price reflects expectation of profit. Amazon actually creates quite a bit of profit, they just plow it back into the business.
> The value of a corporation is inevitably linked to its profits.
> Again, it all boils down to expectation of future profit.
Maybe you feel these are equivalent statements. I don't. I think they are fundamentally different. People's expectations about a company's future profitability are, to me, entirely different from a company's actual profit. Blue chip companies have stock values that are tightly tied to their actual profit, unless there's some reason to think they might be on the verge of some sort of breakthrough that will make the stock price climb dramatically (because of anticipated future growth). Non-blue-chips have stock values that have a substantial component derived entirely from 1st, 2nd or 3rd order expectations about profit, and this can move stock prices dramatically even though there is no actual change in the company's profitability.
So, if you had only said "it all boils down to (1st, 2nd or 3rd order expectation of future profit", I'd agree with you. But you started by saying "the value of a corporation is linked to its profits", and I can't agree with that except for blue chip (type) companies.
And if not, why not?
My take on this is that the capital gain was not actually generated all in one year, but by taxing it as ordinary income, you are putting it into a higher bracket as though it were all generated in one year.
As an example, say your father builds a successful company, and runs it well for 40 years before selling it for $10 million and retiring. By taxing the entire $10 million in one tax year, almost all of it is in the highest tax bracket, which is anything above $500,000 for single filers. But the actual average amount earned per year is only $250,000, which doesn’t reach the highest tax bracket at all.
There are ways to balance this, of course, e.g. if you did exactly what I did in my example, and applied the income tax bracket based on the average gain per year of the securities sold. Something like that would still take care of billionaires “paying their fair share,” since you would have to divide by a lot of years to get billions of dollars in gains into a lower tax bracket.
At a 6% rate of return and a 25% tax rate, after 40 years, even a 100% deferred tax rate is financially preferable to a 25% immediate tax rate, ie: I make more from the interest on my deferred tax than on my entire principle.
It sounds fair, but aren't lower capital gains taxes used to encourage investment? And if we get rid of that incentive on income > $1 million (at least, can they still offset losses?), then would that lead to some adverse consequence (like much lower investment overall as direct income generation becomes preferred at that point)?
It will lead to reduced liquidity though. E.g. holders of assets are likely to sell less frequently to avoid the higher tax burden.
Stock market is a risky place to put it for sure, especially if the upside is taxed more aggressively.
> What are you proposing re: direct income generation?
They will invest more in private businesses and just take a salary, which is also taxed as income.
They get paid every quarter by the company, and can just live off of passive distributions.
If they follow what you're proposing, they pay the higher tax rate anyway. But also don't think that's really feasible at very high net worth.
The SALT deduction benefits people in high tax states which happen to also be states where democrats hold political power. Many of them ran on restoring the SALT deduction. It benefits states that have high tax rates not exclusively 'wealthy' home owners.
The vast majority taking the deduction are going to be well off homeowners. But yes for sure, high state income tax and other factors play in as well.
Another consideration is that maybe having sole control of a massive pot of cash or financial instruments by an individual is just a Bad Thing. Consider how Zuckerberg structured FB so that while he it's a public company, the bulk of the stock is non-voting so he has de facto sole control of the firm. No matter how destructive of shareholder value or public goods his executive decisions, it's virtually impossible for anyone else to overturn them barring some novel legal line of attack.
I have no particular feelings about Tim Sweeney/Epic, but would the economy or the gaming world be worse off if he no longer had founder control? If he's great at his job I presume shareholders would want to keep him on as CEO and would compensate him handsomely in cash money.
It only really requires that shareholders trust the owners of the special class shares.
agreed. that should 100% be a taxable event and it's totally absurd that it's not. and i'm sure there's a lot of... lobbying that will never allow that kind of law to pass.
And I'd bet if it was a strategy employed effectively by the 99% it would be vigorously labelled as tax evasion and dealt with accordingly
That loan still has to be paid off with separate, regularly taxed, income.
Also this is a strategy used all the time by the 99%. It's called a second mortgage. This proposal would mean that taking out a loan against the equity in a home would become a taxable event.
The first $500K in residential capital gains aren't taxable. I sure hope your second mortgage is less than that.
Taxing the securitization of assets should cause a step up in the base cost of the asset. So it doesn't reduce the amount of tax you owe, it just changes when you owe it. (Unless you avoid the tax by dying).
What they are arguing is that individuals should be taxed at the event of first utility (that is, realizing value from the gains). And then the tax is paid, so not paid again, or offset, later.
And what we're really talking about here is individuals using equity loans for the majority of their income.
Similarly, stocks (or things like gold) that one owns have some worth, and using it as collateral for taking a loan against it is a completely valid thing to do
Any assets, above $100M, used to collateralize a loan are taxed as if they are realized capital gains at the time that you collateralize the loan.
I don't think the loan itself should be taxed, but if you use assets to collateralize a loan, those assets should be taxed as if they're realized income—since by taking the loan you are now "realizing" the value of those appreciating assets.
you bought house for $600K cash (for simplicity). Some years later the house appreciated to $1.5M, and you take out a $1M loan against it - you are obviously realizing a $400K of the value of the house as otherwise those additional $400K can only come from thin air. So those $400K of the realized value of the house (not the loan) need to be taxed with the house adjusted cost basis becoming $1M. If you sell the house later for $1.5M the remaining $500K would get taxed as the difference between sale proceeds and the adjusted cost basis.
It's how the entire banking system works. Taking out loans against collateral deposited in the bank.
People also take out a loan every time they use a credit card. Is that income, too?
They'll come after your assets. And it's very hard to get a credit card without assets.
I put up $100k of stock for a $100k loan, I do nothing, turn around and pay the money back, and now I have a tax bill? If I repeat this process, I can have an infinite tax liability with no realized gain or net income. Am I missing something?
Also, you only tax people in this way if they're over a certain level of net worth/income.
It would be easy to avoid this infinite tax liability by not taking out an infinite amount of loans…
IMHO, if the CEO's decisions are destructive of public goods, shareholders aren't the ones we should go to. We should be able to stop the CEO via government powers.
>but would the economy or the gaming world be worse off if he no longer had founder control?
Shareholder activism has a very double edged record. Their interests aren't necessarily the public's interest or the company's. Maybe they like dividends now rather than investment - their incentives definitely point that way. Giving them more power is unlikely to end well.
All companies once they reach a certain size (including Tesla, SpaceX) have a Senior Leadership Team which decides on the critical decisions affecting the company.
This personality obsession is really only perpetuated by people who haven't worked in business and don't realise just how much of a team effort it is.
Someone on this site mentioned Pournelle's Iron Law of Bureaucracy: https://en.wikipedia.org/wiki/Jerry_Pournelle#Pournelle's_ir...
And the CEO is the counterweight to that oligarchic rule. You see this, for example, in the constant battles that kings wage against the nobility.
There is a really great possibility that america shoots it's future economic growth in the foot with something like this, just because it's future superstars companies are not led by their great founders.
May I present Steve Jobs, another obvious example? Ray Croc who built McDonald's from a single location into a world empire.
Steve Jobs at Apple is a perfect example, since it was a publicly traded company that Steve Jobs didn't control. However, he was still able to be an extremely effective leader as the CEO.
It's possible to be CEO, and exert control over a company without literally owning >51% of the voting shares.
A good leader can "control" a company without having legal control over it. That's exactly the point about Steve Jobs.
The assertion is that: It is possible to be a dictatorial executive CEO, without having 51% of the voting rights of the company. This is the corollary of "losing control of the voting rights of the company doesn't automatically imply that the company must be run by committee". Steve Jobs proves both of those assertions to be true.
But people like Avie Tevanian, Tim Cook, Bertrand Serlet, Bob Mansfield, Johnny Ive, Dan Riccio etc. all played critical roles in turning Apple around.
iPhone simply isn't a success without all of the above functioning at a high level.
But there's no doubt who was in charge and who set the direction. From everything I've read about Apple, it was Jobs who was in command, and everyone else followed.
Because it's never been the case that Steve Jobs was in charge and everyone just fell in line. It's always been consultative and has always been the leadership team making the decisions. It's in fact how most companies run.
Especially given Steve was not 100% during most of his time at Apple.
A senior leadership team without a key decision maker is fundamentally lost and seeks only self preservation through short term goals.
Here's another example: every government on Earth. All have a single key decision maker at the top. In democracies they can be kicked out, but they have total control while they're in power.
This isn't remotely correct.
a) All democracies I can think of are derived from the Westminister system where there are branches of government e.g. House/Senate who need to agree to get laws passed. Pretty far from total control as Biden is experiencing now.
b) Many democracies e.g. Australia don't have the PM/President be directly elected and instead are appointed by the winning party. Thus their power and control is limited to what is gifted by the party and can be withdrawn at any time at which point a new leader is appointed. Again pretty far from total control.
No, they don't. A system with a council with a chair with no significant additional decisionmaking power over other members is not unheard of.
For example, Bezos only owns 16% of the voting stock of Amazon, Musk only owns 22% of the voting stock of Tesla yet neither are in any danger.
Also, it's worth considering that not everything great is good, so perhaps a braking or governance system (in the sense of an engine) is worth requiring on any enterprise sufficiently large to become a juggernaut.
> it's worth considering that not everything great is good, so perhaps a braking or governance system (in the sense of an engine) is worth requiring on any enterprise sufficiently large to become a juggernaut.
Yeah, let's just throw SpaceX in the trash heap. Nevermind that NASA, the organization run by committee, has failed to make space accessible and routine.
The "braking system" is already in place. It's the free market. Once the "juggernaut" fails to please the customers, it goes down the tubes.
Musk controls enough shares that he could get rid of Shotwell at any time, or reduce her power, but he chooses not to.
The fact that Musk can get rid of her at any time speaks for itself. It doesn't mean she's a committee, either.
I've long suspected that the reason McCartney and Lennon wrote great songs for the Beatles, and not-so-great ones afterwards, is because each was willing to tell the other when their work was crap. Afterwards, they just had sycophants who'd tell them every note they wrote was fantastic.
How many shares of Apple did Steve Jobs control when he was the CEO?
This is just a ridiculous argument that companies can only succeed if the Founders/CEOs have absolute voting control. There are many examples of shareholders being more than happy to put their votes behind whatever the CEO wants as long as they believe in the CEO.
e.g. having 49% equity only requires ~2% of remaining shareholders to agree with any of your decisions.
If you're making remotely justifiable decisions, you're likely to get a decent chunk of shareholders supporting pretty much any position.
Also it's common to stack the board with allies who you can trust to vote in your favor/support your decisions.
So doesn't require much equity to have de facto control. But there will likely be a big difference in influence between, say, 10% and 20%
I suspect it would be harder to stop this strategy than it might seem, because someone could happen to make me a large personal loan at a low interest rate when I happened to have a large portfolio with them. If the numbers are big enough, it makes sense to do.
If you treated all loans as income, but got a deduction for making payments... Maybe you could make it work. Although, that's kind of rough for mortgage and auto loans.
One quirk of that is that regular Joe could then get a loan against their cost basis in their portfolio and still have no taxes. E.g. they bought 10shares of $X at $100 and now it’s $200. A loan secured against those shares would not be taxable up to $1000 and the portion between $1000 and $2000 would be taxable. This still stops mega billionaires from never paying taxes because the cost bases on their shares are usually very low.
>I think everyone needs to read the bill and calm down. "Gains on private assets -- including harder-to-value assets like real estate, art and private companies -- would escape the annual levy, and only be taxable when sold. "
>Every time a company’s value doubles, the government would force founders like me to sell 25% of our stake to pay the government. Epic’s value has doubled 8 times in the past 5 years. If this tax scheme had been place, I’d have been forced to liquidate nearly my entire ownership.
Epic Games has always been a private company.
Think about it. 1 Billion. A person who lived 100 years would have $27,397 a day to spend. Including as a newborn infant.
At Bezos levels? roughly $5.3 million a day.
What could you do with 5 million a day? Well for the first 3 months of your life as a newborn, not much probably.
But as an adult certainly, you could find ways to spend it right? Great. Society would love to see some cash splashed around. The economics people always love to see money sloshing around society.
So why can't these people simply stop accumulating and start letting it flow? They'd get to enjoy it. Their society would benefit from it. It'd be good for everyone.
The more these people are forced to spend down their wealth - however they want to! - the better.
If the government takes it, what are they going to spend it on? Foreign wars, jails, lavish mansions for leaders?
But quite honestly, if somebody makes a successful business, wise investments, or works their ass off building an empire, who's to say they can't enjoy all the wealth they've brought in?
Bezos may be filthy rich, but because of the countless hours of work he put in (don't tell me he didn't work nights and weekends while his employees worked 9-5) so you can enjoy groceries on demand, 2 day delivery on almost anything you want, and great video streaming. Stop using the services he created if you want his wealth to go down.
I never mentioned the government taking it.
I want them to enjoy the wealth they have! Not as a big number, but as use of that number to buy/experience/do things. Bezos can buy 5 Ferraris a day for the rest of his life if he wants to for all I care. Just use the stuff.
Bezos is indeed rich, and no doubt worked long hours. But it wasn't the hours he did.
#1 Median wealth american = $121,760 Bezos wealth = 196.1 billion
If it was just the hours then (median wealth american work hours) x 1.6million = bezos work hours.
If the median american worked a mere 1 hour a week, then Bezos is working 1.6 million hours a week. Seems kinda tough to fit into the schedule...
No, he has leverage. And in this thread I am not even questioning whether he should have that leverage. Just saying, he's got money, he should spend it.
And I do try to avoid Amazon as best I can. But it is embedded in computing/supply chains and there's only so much anyone can do.
#1 https://www.forbes.com/advisor/investing/average-net-worth/
This really isn't how the real world works. It's easy to design rules that would work acceptably if no humans were involved, but in reality this would ensure there are no sole owners of companies with control. Sooner or later, every CEO does something that "conventional wisdom" doesn't agree with, and if he doesn't have corporate control, he's out.
Yes, this would "hurt" gaming and the economy, because it would change the ownership of companies for the worse. If every game company was Bethesda, mediocrity and micropayments would rule the gaming world, because every company would pursue whatever strategy is perceived to be "obvious" to make shareholders' money increase.
If this tax had existed when Doom came out, Id software and the effects it had on gaming as we know it would never have existed.
On a side note, the people here commenting that companies could just pay a salary to their CEOs large enough to cover the wealth tax apparently have never owned or run a company. Any company being forced to pay out liquid cash equal to 20% of its stock valuation would go under. The usual killer of small to medium companies is cash flow.. having enough money to buy what you need to keep producing and paying bills until your customers pay their bills.
Also, if they're trying to tax theoretical gains, are they also going to pay out when companies' valuation decreases?
In corporate performance, you get what you measure. If the tax is charged based on companies gaining value, companies won't gain value.
That plus the fact that certain corporations are exempted from it (hedge funds) makes it a non starter.
1. Whatever happened to increasing tax rates, like pretty much every other country? Why these weird gimmicks?
2. A much greater cause of elite wealth accumulation is running deficits. Deficits are when you want to spend on social welfare but don't have the courage to pay for it with taxes. So you make both sides happy and increase spending while running up deficits. The reason we've seen this astronomical increase in top incomes is because of massive deficit spending.
3. Any tax bill targeting billionaires is going to fail since they can give up US citizenship and offshore whatever they want. If you are serious about soaking the rich, you need controls on capital flight. But that goes against the neoliberal project of globalization. Commitment to that project is going to make any soak-the-rich effort not work. It will end up hitting the upper middle class that can't offshore -- they are the real targets.
4. Envy-based politics don't work. There is a dangerous game being played here. You want to inculcate solidarity and national purpose, but again that goes against the liberal project that only tells us who we are supposed to hate based on their race and/or class.
5. If you have a low interest rate policy, then you are going to make a lot of billionaires much richer via capital appreciation. That's not the fault of the billionaires. If you want to reduce that, then raise interest rates. All these billionaires will become much poorer. Because this is all just paper wealth.
6. The Original Sin of the left is trying to mess with prices instead of incomes. Tax incomes, not repricing of wealth.
But they'll also get taxed out the wazoo when they do so, so it won't really avoid the problem causing them to leave in the first place.
This is less of an issue for those who inherited wealth, since a lot of it might already be in offshore trusts. Company founders don't have an easy out.
This is, frankly, an extremely dangerous misunderstanding because it's austerity and slack labor markets markets that have immiserated the non-rich. Deficits themselves are never the problem.
Look mo further than the pandemic checks causing us to live in a time of renewed labor unrest rather than a second great depression.
Also debt financing is a charade. Read https://www.jstor.org/stable/40981939 which spells it out clearly.
Honestly, that's not much of a rebuttal.
If you believe in Ricardian Equivalence, then sure, the future deficits are matched by private savings to offset future tax liabilities. Well, what do you think an increase in networth is other than an increase in private savings?
But if you do not believe in Ricardian Equivalence, then the deficit spending is an increase in net-wealth, which again shows up disproportionately on the balance sheets of the wealthy.
So there is really no way around it. Merely calling this "wrong" and "dangerous" is not an argument -- when a government wants to pay benefits but refuses to fund them with taxes, then given that taxes are disproportionately paid for by the wealthy, you are going to have distributional effects.
This is just the flip-side of the old Keynesian saw about balanced budget multipliers.
I really don't see how this is controversial except for the crowd that wants more spending but knows there is not the political will to fund it with taxes. Then this is an unpleasant side effect that they don't want to think about, but that doesn't make it "not true".
> But if you do not believe in Ricardian Equivalence, then the deficit spending is an increase in net-wealth, which again shows up disproportionately on the balance sheets of the wealthy.
My whole point was that this is not necessarily true, and depends on the form the spending takes place. Did you miss that?
Even if a UBI eventually trickles up, we must not conflate solvency and liquidity. The boss has power because the worker's consumption is more time sensative than the production. A good UBI takes away that coercive power not (just) by increasing worker savings, but by making an income floor. (Stock vs flow).
That's like giving people the ability to go longer without food and water so long as their nutritional needs are still met on a (longer term) average.
Nope, I didn't miss it, because it's not relevant. Giving money to poor tenants ends up in the pocket of landlords. Letting poorer people buy iPhones ends up in the money of shareholders and is realized as an increase in Apple stock price, etc.
When you have a small group of the people disproportionately own the capital stock, then giving people more spending money absolutely ends up benefiting those people disproportionately.
> Even if a UBI eventually trickles up, we must not conflate solvency and liquidity.
Neither is being discussed here. I am saying that if you have an economy in which people earn unequal incomes which, you know, must happen given that people make unequal contributions to society, then things like supports for the poor have to be funded with taxes, otherwise this will drive more inequality.
And given that the wealthy pay by far the most taxes, then deficit spending disproportionately benefits the wealthy.
Concretely stuff like UBI and a JG at least in the first order takes away a power of employers now amount of nominal inequality can give back. And if the limits to spending are real and not nominal, and rich people don't spend their wealth so much, taxing them hardly makes a difference w.r.t those constraints. Conversely, if they do spend it, easy to levy consumption taxes will be less recessive.
If you want to continue to the debate, I think need to you get more precise about what exactly is bad about the nominal inequality you speak of. I think that is the only way to reconcile our analytical frames.
Also consider that there is a lot that MMT does not address, in its maniacal focus on whether it's possible to fund government programs without paying for them with taxes. There are other problems, like assuming savings demands are inelastic, but let's just focus on the distributional aspects.
One of the main drawbacks is that ZIRP or massive deficit spending is always and everywhere correlated to increasing wealth inequality vis-a-vis nations that have more balanced budgets.
Then consider that none of the social democracies that have large safety nets use MMT principles and all of them run fairly balanced budgets for a reason, and that reason is not lack of knowledge about fiat currencies. Really there is a lot less here than meets the eye, and you pay a big price for adopting these kinds of policies.
ZIRP is also a great way to privilege land over productive investment, because when you increase the duration of assets, then you want more stable assets whose value is guaranteed at the expense of more risky (productive) assets.
And it's a great way to drive down the marginal product of capital -- a good example of all these effects playing out would be Japan. Rapidly increasing inequality, small businesses are starved for loans, but tons of free money for incumbent bureaucracies and housing, and hugely inefficient large corporate bureaucracies.
By the way, it's no accident that Warren Mosler is a wealthy former hedge fund guy. It is literally the utopian economic policy of Finance, because MMT is clear that it does not want banks subject to discipline on the liability side of the balance sheet (Mosler owns his own bank and would like lower funding costs), and folks like Mosler even advocate eliminating income taxes entirely and funding the government -- oops, I forgot to say "anchoring the currency" -- based solely on a property tax. So this is a mix of forced savings, inefficient business, rising inequality, and credit allocated towards non-productive industries at the expense of productive industries.
Anyways, if you want to create a feudal society, then this is a good way to do it. But don't worry, there will be a job guarantee in there for you.
I mean really, would would you want me to say in response? Mosler would need a time machine to con Abba Lerner or Kalecki.
> Then consider that none of the social democracies that have large safety nets use MMT principles and all of them run fairly balanced budgets for a reason. That reason is not lack of knowledge about fiat currencies.
A good reason? The Euro is constitutionally ordoliberal and fucking over Greece in a way that makes the even Krugmans cringe doesn't look like deep wisdom to me. German nuclear policy is also insane, fwiw. I don't see the EU as being especially enlightened at all, I just saw a better and stronger legacy of the postwar era than over here, and better voting systems on the national level.
I can well believe they don't get it same as over here by and large, and the left fringe is only "wiser" in the anglosphere as a consequence of being radicalized harder by pan-Anglo austerity. That's certainly not an accelerationism worth being proud of.
> ZIRP is also a great way to privilege land over productive investment, because when you increase the duration of assets, then you want more stable assets whose value is guaranteed at the expense of more risky (productive) assets.
So do the hardcore form LVT where we essentially, and instant-auction keeps self-assessments honest.
> Anyways, if you want to create a feudal society, then this is a good way to do it. But don't worry, there will be a job guarantee in there for you.
FWIW I am clearly not a 100% MMT orthodox person because I kept on bringing up UBI in a positive light. I do want to reduce working hours and the cultural valorization of work too and so I find pure JG kind of aethetically abhorent, even if it could put preasure on the workweek.
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To sum up, I fully grant that unchecked unequality could allow a new powerful elite to suddenly end the JG or UBI. But a world in which either of those are possible in the first place is a) quite different b) should allow for the type of politics that also go after wealth / massage private property / undemocratic workplaces / whatever your boogieman is.
But I believe that in great powers not savaged by war, there can't be good politics without tight labor markets, so to the extent there is a economic--political chicken and egg problem, Post-Keynesian ideas like this provide when of the few forseable bootstraps.
If we fail to do so, we will get to that neo-feudalism you fear by austerity anyways, as lax labor markets make capital investment including maintainence uneconomical, and we barrel towards a less productive more dysfunctional society.
That's a little extreme. It's fair to argue that giving money or benefits to poor people may not directly reduce inequality. More importantly, since progressive taxes do reduce inequality, it follows that the same level of spending with lower tax rates results in higher inequality than the spending with a balanced budget up to inflation.
But it also has positive externalities, such as improved public health. By contrast quantitative easing, almost by definition, has minimal externalities, although I'm partial to the argument that subsidizing real estate prices tends to increase inequality. These externalities disproportionately accrue to the poor because rich people tend to manage their personal environments in a way that insulates them from the winds of the societal landscape. Sometimes these are not easy to account for financially but that does not impugn their value.
So deficit spending on the war in Afghanistan, for example, is probably worse for inequality than deficit spending on education.
If so....then what's the problem?
One possible answer is "well, the Rich have more risk tolerance, so they can just summon a catastrophe to improve their relative standing in a negative-sum situation with little pain" I think that's a fair argument. Do MMT, and the rich try to sabotage undoing global warming so they can rule the roost in some max max situation sure. But such analysis means we have to broach Solvency vs Liquidity as PP didn't want to. A UBI-empowered workforce can also more and safely easily go after the rich with pitchforks and shear numbers, strike at the plants that arm their body guards, not treat them when they are sick in the hospital.
Keynes and Marx disagreed on many things, but did agree on C-M-C vs M-C-M. In regular-enough times, firms are slaves to nominal values: boost aggregate demand and they will not be able to able to boycott and resist. But also, workers are not slaves to rich people's unspent inert savings if empowered by means external to private emplyment. "Nominal dollar power" works better on the former than the latter.
So far, it's showing signs of being both.
UBI is a non starter for at least the next three or four decades except in limited cases. Education of all the rural ("red state") voters has to happen before anything like that would be possible to enact... right now their perception that other people are having an easier time in life because they're given things that the first group had to work for is reason enough for them to have put Trump in power.
I live in New Zealand and a billionaire here can have a lot of land but otherwise we just don't have the infrastructure to support that ultra high end lifestyle. They would basically be average people with nice toys and a big house here.
I guess my point is that you lose a lot of the perks of being rich by leaving the USA. If you are happy without them then maybe the wealth tax doesn't impact you anyway and you stay where you are
Instead, we want to make economic policy based on what will do the most good, not what we think of as being "fair" or "equitable".
The idea of "fairness" says you should shut down gifted programs because they don't support "equity" -- another name for fairness. The smart policy is to have gifted programs even if the result does not seem fair to you. Because that improves living standards for everyone. Having those people drive innovation in the economy is a good thing, even if they are not racially balanced according to whatever bucket system you are using. Constantly worrying that someone else might have more than you is a great way to create an impoverished society, even though that is what the Plains Ape brain worries about.
Now we already disproportionately tax people -- quite a bit. There is no need to disincentivize entrepreneurship in order to satisfy our base instincts for "fairness". If you want to raise marginal rates -- fine, do that. If you want to eliminate the preferential tax treatment for long term capital gains, fine, do that. I'm happy treating all income the same and taxing it according to a single progressive rate. But I would not support taxing paper wealth or unrealized gains merely as a result of repricing of assets. There are other tax reforms that are less harmful to capital formation.
What you're describing is the failed mentality of the early 1980's : the idea that the wealthy are "better" at capital allocation than everyone else. What it leads to is not some utopia, but simply bigger yachts, and more expensive sports teams, and more expensive land, while the human capital of the poor goes neglected and untapped.
What does the most good for living standards is the government investing in humans and households without capital. More broadly distributed capital, in other words.
So modern economies are not constrained for money, since money is just paper you can print.
But we are not talking about financial capital, but real capital. E.g. entrepeneurs taking big risks to start businesses instead of just getting some cushy sinecure. And the problem is that although the government can print money, Elon Musk can't. He has to risk his own money and his own time, in order to place big bets. He is the one working 14 hour days, creating new fields, while everyone else tells him it's a crazy idea that will never work.
As you start to punish those people and become angry at them for succeeding (ignoring the massive survival bias) they start saying screw it, and don't make those big bets, or move to a different country and place big bets there.
And it is the ability to organize production in innovative ways that is scarce in the society, not paper and ink to create money. So we should focus our economy on rewarding and encourgaging that type of entrepeneurship, and fostering the growth of productive ecosystems, because that creates the surplus wealth that gives value to the government's paper and ink.
Technically you two own the same thing, but you'll get fucked by taxes and he wont.
Why would you be taxed on something you you already paid tax for to buy?
Renting out the house? Sure, get taxed. Selling the house? Sure, get taxed on the price difference. You're growing weed there? Sure, got taxed on profits from that. Otherwise, you never own anything.
I got tired of reading the daily play-by-plays, but something to do with appeasing Kirsten Sinema's objection to a more straightforward tax hike.
Very few people are going to give up US citizenship. A lot of these guys can't even stand living in Florida; they're not going to hang out in the Caribbean for the rest of their lives.
I live in one of those countries,... I used to live in another country, that had a red star in the flag, I haven't moved, but I now live in another country... which again has new parties with red star flags.
Every time I hear "tax the rich", the same thing happens... the poor already pay almost zero tax, so nothing happens to them. The rich open a company two countries away in one direction, and register their car two countries away in a different direction, and in the end, pay very little tax. And me? Earning an above-national-average engineering pay, but way below "rich" enough to make such manipulations worth it? I get fucked with new taxes.
In an ideal world, both people like me and people like bezos would pay a same amount (percentage) of tax for every dollar/euro going from our workplace to the crap we both buy, but somehow i get taxed as fuck, and Bezos doesnt ( https://www.businessinsider.com/jeff-bezos-did-not-pay-incom... ).
So how about we first tax Amazon and Bezos at the same rate we tax the local mom and pop bookstore, and their owners paychecks, and then continue from there.
2) I don't agree with your reasoning here.
3) The US is pushing extraterritoriality pretty well, and the nations of the world have agreed to try to eliminate tax havens. Pretty soon there won't be an "overseas" to go to.
4) I don't accept the terms "liberal" or "conservative" to mean what most of the people who use them mean. As labels, they promote sloppy thinking. I consider the authors of this tax to be the Democratic party, who have already proven they are far too establishment to be allowed to continue to exist.
5) Not really possible, because raising those interest rates has other effects. Rather than taxing theoretical company values, tax purchases, VAT- style.
6) You're treating "the left" here as if it's a hard and fast definition of a group of people. Politics in the US is far more complicated than that. There may be some truth to what you say here if you are talking about specific groups of people, but just equating Democrats/the authors of this bill to "the left" isn't accurate, and that sort of inaccuracy perpetuates political partisanship and extremist thinking.
Doesn't this open up the possibility of debt slavery of the entrepreneur, to the government ?
If my stock in my biotech startup goes thru the roof and i get taxed X, i could perhaps sell some stock to cover. More likely, though, I will get into an installment plan with the IRS since the gains are so massive its going to be tough to sell so much stock without a discount, to pay the IRS off.
Next year, FDA does not approve my device, and my stock tanks to near $0. Now even if i sold all my stock, I can't even pay back the IRS for my tax debt.
I now have lost my company, but I have also incurred massive debt in the process. And if I am not mistaken, IRS debt is not dis-chargeable in bankruptcy.
Am I reading this wrong ?
He lost his home and last I saw was living in an RV.
Stock options are the same as having a cash payment, which is then immediately used to purchase the stock.
It's correct to tax stock options when they vest.
> By the time the tax bill was due, his stock was worthless
if you could not afford the tax bill with free cashflow, you need to sell to cover. Not selling means you're taking the tax debt owed, and gambling it on stocks. It sucks that your friend lost everything - often people who have vested stocks don't think about the consequences of what they're doing, and just go for the greediest (and most risky) option of holding and hoping.
That was the way things used to be, but Congress had changed the rules.
Quite a few people have been caught unawares by that.
"Complexity is one reason European countries, including France, Germany and Sweden, abandoned broad-based wealth taxes. Many of the rich dodged wealth taxes by exploiting carve-outs or moving. The very rich will find ways to avoid confiscatory taxes, but bad tax policy distorts investment. Sweden abolished its wealth tax in 2007 following an exodus of capital and business tycoons. France repealed its net wealth tax in 2018, estimating that some 10,000 people with 35 billion euros worth of assets had left in the previous 15 years for tax reasons. The government was losing revenue from income taxes that the wealthy would have paid."
https://www.wsj.com/articles/the-democrats-wealth-tax-mirage...
The fact is, those wealth taxes were repealed. Because they didn't work.
Second, the article does not say that "the wealth taxes generated less revenue than the ordinary income taxes would have." It says that "the government was losing revenue from income taxes that the wealthy would have paid." There isn't a comparison there. Sure, the government was losing some revenue from income taxes, but nothing on the order of magnitude of the revenue brought in by the ISF. Those who are extremely wealthy actually do not tend to pay much in income taxes, especially outside of the US where top salaries are significantly lower.
Third, the assertion of widespread capital flight in France is provably false. If we look at French national accounts, the larger a fortune (and therefore the greater percentage of which is made up of financial assets), the more it grew relative to smaller estates (which are predominantly composed of property). Under the hypothesis of capital flight, we'd expect to see exactly the opposite.
Fourth, the effectiveness of the wealth tax had nothing to do with its repeal - it had to do, in large part, with the specific politics of the internationalist-global coalition that Macron spearheaded.
Fifth, even if capital flight becomes an important concern (and I do believe it is important, simply not at the level that is often cited), there are plenty of ways it can be circumvented, especially given the very different dynamics of the US tax system and the US place in the world.
The loss of income tax revenue from the departure of the wealthy was twice as much as the revenue generated from the wealth tax from all of those who didn't leave. Therefore the tax was a net negative, hurting French finances to the tune of 7 billion euros of lost revenue as a result of the tax[2]
"The revenue it raised was rather paltry; only a few billion euros at its peak, or about 1% of France’s total revenue from all taxes. At least 10,000 wealthy people left the country to avoid paying the tax; most moved to neighboring Belgium, which has a large French-speaking population. When these individuals left, France lost not only their wealth tax revenue but their income taxes and other taxes as well. French economist Eric Pichet estimates that this ended up costing the French government almost twice as much revenue as the total yielded by the wealth tax."[1]
> Those who are extremely wealthy actually do not tend to pay much in income taxes, especially outside of the US
In France they certainly do, but they did not pay much in wealth taxes due to the difficulty in collecting the tax.
And here we have the main problem. Perhaps there is debate about how many tax refugees left and how much capital left the country -- that's fine.
But is the purpose of the tax to hurt the rich or is the purpose of the tax to raise money?
There is no debate about how much money the tax raised, regardless of whether you agree with Pichet's study. The money raised is known and was just 5.2 billion euros in 2015[2]. For all of France - a nation whose 2015 GDP was 2.2 Trillion euros. And this was a tax valued at 0.5% for all wealth above 1.3 million and an extra 1% for wealth above 10 million euros (so two rates of .5% and 1.5%). So even if you disagree that the net effect was negative because you don't agree with Pichet's methodology, there is no disputing the tax was ineffective at raising money.
[1] https://www.bnnbloomberg.ca/france-tried-soaking-the-rich-it...
[2] https://www.investorschronicle.co.uk/education/2021/02/11/le...
This is what happens in Russia, Eastern Europe, Saudi Arabia, and other corrupt oligarchies. When a business gets successful enough, the oligarchs of the countries show up and offer a deal that the person running the company can't refuse and force them to sell to the local oligarch gang at a bad price.
If they wanted to raise more tax revenue, they could just raise the top marginal income tax rate up to 98% or raise capital gains tax rates and not totally screw up things by forcing the confiscation of companies from their founders.
> If tax revenue is too low, just raise the top tax brackets. (Sweeney)
That was the original proposal [0]. Republicans and moderate Democrats shot it down.
Part of me thinks this is the "crazy" option, to actually get motion on increasing top rates and capital gains.
Complaints about those ideas shrink when this is the current alternative.
[0] https://www.nytimes.com/2021/05/28/us/politics/tax-rising-on...
Raising cap gains rates and/or increasing top marginal income tax rates are not very effective ways to achieve this goal.
[1]https://www.nasdaq.com/articles/blackrock-expands-china-foot...
> stock tanks to near $0
means you get all your paid tax back.
No, among other reasons, because its not going to happen, just as it doesn't with the taxes on realized capital gains and losses, where losses can offset gains, and if there is excess a certain amount of regular income, and if there is still excess (or not enough taxable regular income to use the full offset) end up as carryforward losses that can be used as future-year losses, but don't result in negative liability on their own.
> if the economy goes to shit, the government has to come up with money to stimulate the economy AND pay back all the capital gains taxes they collected during the boom times
If they were to write the law so that unrealized capital losses resulted in tax refunds, that would be stimulus, not an extra thing on top or stimulus. It might not be optimally targeted stimulus, but that rarely happens, anyway.
As a founder, my only assets were the stock of my company . I don't own any other stock, certainly none that would go thru the roof over a year or 2.
If the company goes south after a hot streak, I end up with excess unrealized losses that I can't use, because I have no other assets with unrealized gains to book against my carryforward losses.
The only other option that comes to mind is that if you take a significant loss, you get to retroactively get refunded from a previous year. This actually doesn't seem that intractable, it shouldn't be all that complicated to implement.
It makes having all your eggs in one basket (very slightly) worse than the generally bad idea it already is (if its a billion dollar basket so that you qualify for this treatment in the first place.)
But if all your eggs are in that basket, either the company bounces back later or you are wiped out anyway, so its not that much of a change from the status quo in that respect.
Not that I like the proposal, mind you
- Is it a publicly traded company? Or do you readily trade shares of it on the secondary market? If not, then you wouldn't owe any taxes under this scheme, which only applies to "tradable covered assets" (leg. text is here: https://www.finance.senate.gov/chairmans-news/wyden-unveils-...)
- Are your personal shares of the company worth > $1B? If not, then you also wouldn't owe any taxes under this scheme, which allows you to designate up to $1B of normally "tradable covered assets" as "non-tradable covered assets".
You don't have to unless your company is publicly traded (or has shares readily tradable in a secondary market), and your personal shares in the company are worth in excess of $1B.
> More likely, though, I will get into an installment plan with the IRS since the gains are so massive its going to be tough to sell so much stock without a discount, to pay the IRS off.
No, you don't have to do that. The law allows you to carry-forward your first payment over 5 years. That's different from a payment plan, because if the stock goes to 0 in year 3, you no longer owe anything.
So, I'd argue you are reading it incorrectly. Tim Sweeny gets a fair bit wrong, and I'd highly recommend starting with the actual legislative text (available here: https://www.finance.senate.gov/chairmans-news/wyden-unveils-...) to get more details on the law.
Now, of course, I'm exaggerating, but only a little I think. And, of course, this happens on both sides of the debate... but the side in power right now is the one making taxation proposals. Personally, I support your idea by and large. An amount that scales to the degree of the transaction ensures that big transactions pay larger amounts and that everyone has a stake.
The rate of "billionaire hate" would need to be astronomically higher among millionaires than non-millionaires for millionaires to make up any sort of the majority of people complaining about income inequality.
On top of that, NPR polling suggest about 45% of top 1% income earners on up to about 65% of low income earners (>$35k household) are concerned about income inequality, which flies in the face of the idea that it's mostly jealous millionaires complaining up. A majority of every income segment in America other than the top 1% believes this is a problem.
Broke people everywhere may harbor resentment toward the ultrarich, but it wouldn't be the national dialog we're having if millionaires in Congress and their millionaire friends in media didn't find it politically advantageous to turn billionaires into boogeymen.
Our whole economic system is itself grounded in the vicious promotion of the parochial interest of the capitalist, née mercantile, class, rooted in their envy of the privileges previously enjoyed by the feudal aristocracy, dressed up as virtue.
The capitalist class is now in the position the feudal aristocracy was in when the movement toward capitalism was young, for much the same reason.
https://www.researchgate.net/publication/249882612_The_Econo...
That used to be called saving and it was considered a good thing. Lower consumption would be better for the environment as well.
Putting cash under your mattress just takes it out of circulation.
They do: the more money a bank has, the more they can loan.
That's the reason countries have made regulations that I sure money you deposit in your bank (FDIC in the USA?) : if banks screw up with crazy debt, your money is still safe. In Mexico one way it works is that banks must keep x% of the lent money available.
This is the whole reason the VAT taxes value added, not the whole transaction.
I have to wonder whether you’ve even looked at existing tax systems, or spent any time sketching out what the consequences of yours might be.
Yes. But maybe having a long chain of suppliers is worth a tax penalty.
The vertically integrated company has a stronger incentive to stay solvent.
I’m thinking particularly about construction businesses here.
“introduce tax on debt creation (when the bank gives you the money).”
> If not, how do you tax billionaires who never sell their stock and just get loans with their stock as collateral.
Depending on how serious you are about taxing gross transfers, giving a collateral interest is also a transfer of interest in money, so you could tax that, too. Valuing the collateral interest could be tricky, though.
I'm not sure who originated this "loans are an infinite money cheat" narrative, but I've been seeing it all over the internet recently and it's simply not true.
Any transaction tax would need to take that into account.
If so, that's clearly a problem.
If not, that's definitely a different set of problems.
Everything seems simple at first, and then it isn't. Every change in taxation rewards some behaviors and punishes others. Either your proposal would result in more tax revenue or less, either of which is a problem for someone, Maybe many someones.
The most obvious issue with the tax structure you describe--aside from who controls which entities--is that it is one of the most regressive tax policies I can imagine. Those at or near the poverty line would now be paying a percentage of everything they earn, while those earning far more would be paying that percentage on only a small subset of their earnings. Considered another way, while this seems mathematically equal, it's most burdensome on those with the least ability to afford it.
If that's the case, then what prevents billionaires like him from creating "Tim Sweeney angel fund LLC" and have that entity retain control of Epic?
Then since this entity is private, couldn't it defer that tax at the time it sells the entity?
With the whole deferred tax scheme that applies to assets not traded on an exchange, i.e. a "deferral charge meant to replicate interest payments on taxes that went unpaid each year, together totalling a tax capped at 49%" as described in https://www.rollcall.com/2021/10/27/wyden-details-proposed-t...
The only way to avoid this is being a foreigner.
Effectively, what they'll accomplish with this tax is either:
1) Letting only foreign billionaires control American companies; or 2) Force American entrepreneurs to waive their citizenship (which, in practice, is #1).
So, yeah, it seems these politicians are either blind or are legislating against American entrepreneurship, in favor of foreign billionaires.
Maybe it's because I'm not in the room, but this feels incredibly slapdash for something so incredibly important.
Most of the up and coming interesting industries that have been happening in the last ten years are mostly happening outside of the USA, and this trend will only continue as it becomes harder and harder to operate there.
USA is winning on rockets and EVs but that is 100% because of one person and not wider US policy (and I assume most of his production of the latter will be non-US within 5 years).
Two of those three (TSMC & Intel) are building fabs in Arizona due to political pressure, hefty subsidies and geological stability of the area (reducing the number of defects in chips).
I'll believe it when I see it if the things actually start producing chips within a couple decades.
https://www.allaboutcircuits.com/news/semiconductor-fabs-dot...
https://www.phonearena.com/news/construction-of-tsmc-5nm-fab...
The US has been far ahead in space since the 1960s, and advanced work in space is by NASA (and contractors). SpaceX has advanced orbital launches.
The US is the leader in many, many industries, including IT.
This language was proposed by Wyden at least two years ago, and has gone through multiple rounds of refinements. (For example, the original text didn’t exempt private assets.) It’s not unrelated because income taxes are how we pay for general expenses in this country. (Granted, limiting it to billionaires always struck me as a way to make it palatable for a lower, e.g. $10mm, threshold.)
Income taxes pay for almost everything; should they only pay for things related to income? I don't understand that.
And my point is I would expect something more thought through than trotting out each legislator's favorite pet taxation overhaul. A few days to consider amongst the options doesn't really seem like enough time, but I guess we're still talking about "a framework" so there will be more time. They're not attempting to pass any of this right now.
[0] - https://www.taxpolicycenter.org/briefing-book/what-are-sourc...
So when I say this all seems slapdash, I mean that I'm thoroughly unimpressed with the way by which these taxation plans are coming out of the woodwork. Feels like an episode of West Wing, the one with the Cartographers for Social Equity.
> from what I can tell, most of these ideas come from academia, but without much rigor or data to support these new taxation plans, and the legislators who support them do so for largely un-scientific reasons (e.g. has a good hook for a title)
Can you give some examples? I think it's too easy to deride everything and everyone; some are good and some are bad ideas.
I agree that policy inevitably goes through the filter of politics, though I think that's essential: The economists who designed the policy cannot know the needs of people in District 9 of North Carolina, and human nature is to designate inconvenient needs of others as nice-to-have, but unnecessary category. (That's how, IMHO, so many policies benefit the wealthy but not working class or poor: It's wealthy people making the policies.)
Of course, that can go too far. We won't get perfect laws.
I don't really have time today to compile a list of proposed tax legislation and their sources (or what I think of those plans), but reading through just the Wyden proposal [0], I can already see more of the "this guy agrees with me politically" crowd coming out than any real example of what Wyden bases this plan on. You've got the bill text, a summary of each section, and a summary of the bill, but no "and here's why we think this". Just the usual "WORKING AMERICANS NEED THIS" filler text that every bill has.
My point is that the "filter of politics" is exhausting and not necessary (to this degree). I do not think it's okay to propose legislation without explaining why it will do what you say, rather than some other thing. We're needlessly rushing the process
[0] - https://www.finance.senate.gov/chairmans-news/wyden-unveils-...
> My point is that the "filter of politics" is exhausting and not necessary (to this degree). I do not think it's okay to propose legislation without explaining why it will do what you say, rather than some other thing. We're needlessly rushing the process
I agree with all that, other than rushing the process. These bills have been discussed for a long time, the tax debates are old (even if not appropriately explained), and the impact of delay is substantial, including reducing the chance of getting anything at all done. The alternative may be 'nothing'.
Hah! Literally exactly the thing I'd like to build (productize my process, attach relevant metadata for filtering/sorting, imagine being able to "dial in" your partisan feed to get a sense of what each wing is saying) when I somehow do find some time. I've been spewing ideas at my wife about it for over a year now, but life circumstances threw me in a different direction temporarily.
Entrepeneurs aren't going to not build a company because of some specific tax treatment that only applies whilst they are wildly successful.
No SpaceX, no Tesla, no iPhone, etc.
Selling masses of stock to pay the tax will push the value of the stock down. That has a large effect on the company's ability to raise capital.
As for the entrepreneur, he'll have much less capital to invest.
It's a fantasy that one can extract endless billions from a company and its investors without consequences.
Most entrepreneurs would be overjoyed to be a billionaire and have to pay that extra 15%. Seems like they'd be the lucky ones. Seems like a billionaire or an aspiring billionaire complaining about such a thing would be pretty weird.
The parent you replied to mentioned wealth being locked up to avoid capital gains taxes. There are other pros and cons, I'm sure. Do you think this new tax on billionaires means that less people will be trying to become multi-millionaires?
Note that I'm not happy with the current tax system, and this seems like another kludge. I also don't know that we need to coddle or incentivize wealth maintenance, it's not an end in and of itself.
Even worse, you're taking the money away from the most effective investors.
It eliminates the risk to established entities to be disrupted.
And most entrepreneurs are not, nor will never be, billionaires who are subject to this extra tax. That being the case I wouldn't think that this will put a dent in overall entrepreneurship. It might have the opposite effect, where there are numerically more entrepreneurs making capital allocation decisions, which might be better for society than having fewer people (billionaires) controlling an ever increasing amount of capital.
I grant that tax changes like this have numerous conflicting effects, sometimes unpredictable. Perhaps their will be another art bubble...
I don't think that it's a good thing that we structure our society for the convenience of those who can amass money. I'm definitely not fond of kludgy taxes like this one, but I also don't understand why so many jump to the defense of so few billionaires.
And Steve jobs did t inject money into apple when they were creating the iPhone.
So you’re entire point has been pretty much invalidated
No Jobs money => no Pixar => no Next => no iPhone
Neener neener!
The only reason my high school educated 80 years old mother in declining health can stay in a home, and county, she feels somewhat safe is because of prop 13.
Her biannual property taxes are still a big deal when they arrive.
I've said this before, but I'm beginning to think if you didn't live through the craziness before Prop 13, you won't ever quite get it.
Prop 13 has been the only blessing most homeowners have been given.
If you want to put income limits on the gift of prop 13 fine, but doing away with it completely would be evil. By income limits I mean the guy making $600,000/year, and a huge bank account, could probally still survive without prop 13 protection.
The 80 year old lady, or man, surviving on 1/2 widower's blue collar pension is another story.
(I'm for means testing on all programs. I'm also for tieing all societal fees/fines---speeding tickets, registration, patent fees, etc. to 1040 income/assets wealth.)
Stop calling people evil just because your grandmother isn't the center of their policy concerns.
I didn't think we reached the point where people are arguing that things that make housing more valuable disincentivize building more homes - but here we are.
It is zoning restrictions, EIR, etc., that disincentivize housing.
https://www.kqed.org/news/11700683/too-few-homes-is-proposit...
But if you own a home in California, you are incentivized to maintain prop 13.
It's funny how hard it is for people to understand something when it cuts against their personal interests.
At the sale, the appreciation becomes realized as capital gains income. There are some rules making a portion of gains tax-exempt for a typical homeowner, but the remainder of a large appreciation is taxed as income. There can also be a sales/transfer tax on the transaction, which is of a comparable rate to the annual property tax rate.
The third significant event is inheritance, where the house could pass to an heir without a sale and have its basis updated to current value. This is when the appreciated gains can really go untaxed.
Wealth inequality is a good thing too. People who work harder necessarily live better lives. If you want to start stealing their hard work to give to the lazy, you're going to find that the hard-working flee the country à la the USSR.
Nothing is stopping someone from employing their wealth to build a yacht, fifteen McMansions, and a thirty-foot solid-gold Mothman statue just after getting off of a six-month prison stint for a billion dollars of ecological damage (all purely hypothetical but I would assert entirely plausible); that people exist with the right to exchange a colossal amount of wealth to be allowed to waste an equally colossal amount of actual effort and resources is the problem.
I won't say nobody has an issue with individual people being allowed to direct huge amounts of funding, but I would assert that more people recognize that extravagant waste for the purpose of status should not be scaled to the extant degree of wealth disparity.
This isn't to say that I would accuse the majority (or even very many) individuals in positions where they're able to leverage a lot of wealth of anything specifically this egregious, but rather that because they're able to control many resources because their efforts have enormous leverage (and therefore are worth more to the system they operate in), they can consume orders of magnitude more resources to gain comparably minuscule increases in personal utility.
In addition, because of how valuable their leverage makes their effort, when they cause damage whose negative value is on the scale of individuals, the disparity leads a system that's self-interested to forgive them much more quickly--if someone can get 1% more value out of 10 billion dollars' resources than anyone else, that system doesn't have any purely value-driven reason to replace them in their position if they should murder someone and its negative effects never amount to more than a couple million dollars' loss in value. From any ethical standpoint that holds "death at the whims of billionaires" incompatible with "certain unalienable rights", this is a problem.
I'm not making the suggestion that those who are wealthy should divest themselves of their wealth and donate it to charity, the point I'm intending to communicate is that such leverage shouldn't act as a pass to engage in unethical behavior.
There is no evidence that rich people work harder than poor people. In fact the opposite is far more likely to be true given the unique stresses of manual labour.
And there is no evidence that the driver of success is providing for their offspring. There are a whole range of factors at play.
It's not about working hard, it's about working smart. I.e. leverage.
For example, my patio door kept getting stuck. I spend a lot of time with a file and chisel trying and failing to get it to fit properly. Finally, I bought a grinder for a few bucks from the pawn shop and had it fixed in a couple minutes, and it looked a lot better, too.
But you earn orders of magnitude more.
Income and wealth aren't solely functions of who worked the hardest and they never have been.
Genuinely smart people with genuinely valuable skill (like Musk or Jobs) would work equally hard whether their offspring were set to inherit 10 million or 10 billion dollars.
Do you believe people without children have no motivation to work hard?
The words "CITATION NEEDED"— in bold 72 point-font flashing letters—spring to mind.
Do you have any data, or other evidence, to back that claim up?
Don’t take my word for it. How many fourth generational heirs do we see among America’s wealthiest billionaires? Essentially zero.
This was used recently by an MP.
That being said I agree with your thoughts, however:
> How many fourth generational heirs do we see among America’s wealthiest billionaires? Essentially zero.
This is probably true but I'd like to ask the question: how many of them simply inherit a lot of money without any of the fame associated with it, and just go unnoticed? I've met such a person, actually.
EDIT: https://www.bbc.com/news/business-36009963 - this is what I was thinking about.
So, you pay gift taxes instead.
Unless you use fake business transactions.
Quite a few. Not sure how long you would make four generations, but let's say 100 years.
There are the obvious famous families; Ford, Rockafellers, Du Pont, Mellon, Mars, Hearst, SC Johnson ("a family company"), etc. But there are a number of billionaire families that aren't recognized much outside of their "home towns" because they started mundane things like retail stores or own mineral rights.
That's not even getting into families whose wealth has diluted, but whose descendents are politicians, actors, or otherwise notable / influential people.
Granted, most billion dollar businesses are <4 generations old, but more sophisticated investment vehicles exists for preserving wealth than existed even 50 years ago.
Plus, that money may get divided and spent over time, but it’s usually invested. It’s not like after 100 years it’s the same amount of money adjusted for inflation, if the next generations didn’t mismanage it.
Well, arguably it's the step up in basis that enables generational transfer without taxation.
> US budget deficits don’t require a radical confiscation scheme like this. We already have a very effective progressive tax system which applies the same rules - but different rates - to everyone. If tax revenue is too low, just raise the top tax brackets
That, together with closing the step-up-in-basis loophole, are the simplest ways to more equitably raise revenue.
Instead they get liquidity through loans backed by their shares, on which they of course have no tax.
I agree that taxing based on unrealised gains is not a good solution, but I don't see how raising the top bracket solves that either.
The one loophole here is that if you don't pay your loans back until you die, then your heirs have to pay back the loan. But there is a special "step up in basis" provision where your heirs wouldn't have to pay capital gains tax on the rise in the value of your shares (but you would). Close that loophole and then you'd have a fair system.
I've long held that there should be public liquidity in all companies over a certain valuation and the company should not be allowed to bar you from selling the stock (though it could retain right to beat any pending offers)
It's asinine that companies are allowed to treat equity pay as pay, and IRS can tax it as realized (AMT), but the worker does not in fact have any instrument with which to pay the bill.
Edit: Also this is a really smart tweet IMO
Give yourself a salary that pays for your wealth tax obligations. You don't have to sell anything.
The valuation would grow slower due to burn rate, but the ownership % would not change.
Sometimes the bet pays off, very very well. Take for example Musk. You can say whatever about him, but it's extremely clear he has a vision, and does pretty much anything to get there. I'm not sure tesla or spacex would've survived 2018 with someone else at the helm or if a shareholder revolt happened. Just by that metric he is already worth dozens of billions to the rest of the shareholders.
Zuck is also a good example of investors trading off votes for a more wall st. independant, steadier long term eadership.
Now keep in mind those are exceptions. Having supervoting shares orbmultiple classes of shareholders is very often not a good thing and usually leads to less value being generated.
Accountability to shareholders is usually good and very important to ensure sane corporate governance. Which is why CEOs and founders absolutely love having ever less powerful shareholders and we end up in situations like now where even the crappiest IPO has absurdly overgeared supervoting classes. Who doesn't want to buy in a deeply in debt, cash burning ipo with very questionable growth who's founder has a perpetual 80% of the votes?
https://www.ft.com/content/993e4c11-8729-3168-a280-69e1d400b...
If they already have control, they'll want to keep that control.
Investors (VC, etc) have made 20x or more on their investment already and no one is going to go on a fight with successful founders, for a variety of reasons but primarily, they don't care how a company performs in the long run because their fund has already sold their stake and closed already.
The person controlling the company potentially has a much greater and longer lasting influence on the stock price!
Epic isn't going to be part of the S&P when it's private anyway, so obviously that's not a top concern for Sweeney.
Teslas market cap is 1030m on 31.5m of revenue. GM is 79m on revenue of 122.5m. That's 50x the market cap per revenue.
If having too big of a market cap relative to revenue is wrong, then you're basically saying that companies should not invest too much in their future, just use their money to sell as much as possible right now.
You know who else has extremely high ratios of mktcap/revenue? Pharmaceutical companies trying to cure diseases that have no available cure. Is it wrong to try to cure those diseases?
Unless you think it's higher quality or in a different area... but the whole world is going toward electric cars and autonomous driving. Tesla AutoPilot comes in a distant second to GM according to Consumer Reports: https://www.cnbc.com/2020/10/28/gms-super-cruise-tops-teslas...
Tesla build quality also ranks low, even according to Elon: https://www.cnn.com/2021/02/03/business/elon-musk-tesla-qual...
It's kind of the reason Toyota has a monopoly on hybrids: they have a patent on the best kind of hybrid system. Ford held a similar enough patent that Toyota entered into a license agreement with them.
Getting a 20 year monopoly on key EV/battery tech will be worth an unimaginable sum.
I don't agree with Telsa's valuation, but I can appreciate why investors support them at their current price.
They will always be quite disjoint when viewed with an single/small number of revenue data points.
Also what if it had been in place during the dotcom boom and bust?
There's a reason CEO's at this level take $1 in salary.
Is there some specific critique you have of what OP has said ?
That statement could be interesting if you’re a rockstar. If not, then not so much.
A. you'll maintain ownership
B. you wont have to pay taxes on the gains
Tons lot of founders care about 'A' a lot more than is "rational".
It sounds okay, but the USA will miss out on a lot of potential wealth and tax revenue from people who choose not to grow their companies into huge multinational corporations.
All the FAANG companies are American. What country wouldn't like to have just one of them?
A healthy economy needs both.
After Japan was burned to the ground in WW2, the US sent in academics to structure the economic recovery. They thought big business was bad, and only allowed small companies to operate. The economy flatlined.
Finally, they allowed big business to resume operations. The economy went straight up until 1990 or so when it became moribund for other reasons.
This complaint I've heard my entire life about the dominant companies of the day that have since collapsed of their own accord. Companies like RCA, IBM, Sears, Kodak, etc.
10 biggest companies by market cap 20 years ago:
GE Cisco Exxon Phizer Microsoft Walmart Citigroup Vodafone Intel Royal Dutch Shell
and today:
Apple Microsoft Alphabet Amazon Facebook Tesla Berkshire Hathaway TSMC Tencent Nvidia
How many businesses has Amazon whipped out in the retail space by leaning on the profits from the cloud division?
Just the other day we saw documents from the DOJ’s lawsuit against Google for anticompetitive behavior. In the those documents we saw internal communication about a desire for Google to use their dominance in the browser space to create the web into a walled garden [0].
Google turning the web into a walled garden will simply create opportunity for others.
How's Intel doing lately? Nvidia ate their ice cream.
Cisco and Intel could do no wrong prior to 2000.
If you're lucky you'll have enough common stock to sell off. But eventually you'll run out.
See: https://techcrunch.com/2020/08/21/palantir-three-class-votin...
"Palantir wants to push the envelope further though with a three-class structure that would prioritize Thiel, Karp, and Cohen above all others. In Palantir’s model, there would be a Class A share with 1 vote, a Class B share with 10 votes, and a special “Class F” share with variable votes.
Class F shares would share 49.999999% (six 9s in the decimal – I counted twice) of the voting power of Palantir at all times, regardless of the underlying ownership of shares. Important to note that that is not a “majority” and thus they will not have literally a controlling stake in the public company."
I'm going by wiki data here, which says they had 18 stores and annual revenue of 9 million in 1968. If they had stayed private they were probably clearing a million dollars a year, give or take. To get from there to billions they had to raise outside money, specifically by selling stock and debt to someone else. That is by definition "not owning it anymore" because they're selling (some of) it to raise funding.
Like I said, there are no mom and pop billionaires. To get from millionaire to billionaire requires outside money. And yes, that includes tech companies. I know tech founders like to write false hagiographies for themselves after the fact about starting XYZ in a garage, but dig far enough and you usually find it was more like "garage + 25 million from Sequoia Capital," like Google.
Bloomberg is another example.
The idea that it would apply to everyone, and be 20% was literally laughed out of the debate on implementing a national income tax as a "crazy conspiracy", it took less than 50 years before that crazy conspiracy was reality.
There is little reason to believe history will not play out the same, and it will not be long before this expands beyond the evil billionaires you despise soo much to those mom and pop stores you seem to claim love for...
Changes in law often result in changes to how companies operate, they're not forced to stick with status quo.
you wanna take a loan against your stock? you pay taxes on that loan.
you wanna sell your stock? you pay taxes on the stock you sell.
you just get your salary from the company and never sell stock? you pay taxes on your salary, and not on stock that are doing nothing.
That’s exactly the problem —- loans aren’t income, they’re debt, and debt isn’t taxed. Worse yet, the ultra-elite can carry out “buy (or ‘found’), borrow, die” strategies that let them pass the debt onto their kids, who can sell the securities at a tax advantage due to the stepped-up basis loophole.
but they aren't.
and now we wonder why some "loopholes" are closed and some are not.
It’s hard to fathom FB, Amazon, Tesla and SpaceX becoming the behemoths they are without a dictatorish stock holder with absolute control. Amongst those, certainly Musks’ contribution from an electric car and space exploration standpoint are societally argueably positive. Tesla and SpaceX simply would not have happened without him.
Can you honestly point to Bezos and say he is "worth" 196,100,000 times more to society than the Amazon warehouse worker who has $1000 in the bank?
Did he put in 190 million man hours more than the Warehouse worker?
Did he have ideas that were 190 million times better? What kind of IQ would you need to pull that off?
It a matter of good ideas, some long hours no doubt, right time, right place and leverage the work of many thousands of others.
Smart work, but not worth 190 million times his lowest paid.
This level of wealth inequality is indicative of a broken system.
No one knows how much someone is "worth to society". Not me, and not you. Not even Bezos. This is not even a well-defined question.
But what we do know is that this is not what money measures, and attempts to politicize that -- to create some algorithm that decides what someone is worth to society, and then pay them according to that algorithm, always lead to terrible outcomes.
In the same way, we don't know how good or evil Bezos is, and neither is money a measure of good points net evil points.
The sooner we abandon these weird discourses around money, trying to endow it as some kind of metaphysical tally, or make it conform to some metaphysical tally, the better.
And money doesn't measure that, nor serve as a cosmic measure of morality.
If you remove wealth as being an indicator of worth to society, then Bezos has one less reason for such wealth.
The only reason he has the money is that he played the game well. But society makes the rules of the game and I think they should change.
I agree with Tim's tweet and the article: not sure it will actually bring more money. It might bring much less.
Essentially the fundamental assertion this breaks is that the stock market is going to stay the same. This might be a great tool now for predicting stock upper value: you are the majority owner and have to decide if you are going to do a buyback or liquidate corporate stock. If your paper value is close to a billion of money you will never see but will pay taxes to, I think you have a strong incentive to keep control of your company and screw the rest of your investors, who would love a buyback as that is the tax effective way of making money of stock right now. Maybe dividends will do a comeback? Regardless, I would be surprised if some stock -- say tesla -- remain high.
So a lot of small investors / average Joe get to declare tax losses so that a big fish that has greater control on the stock price might declare wins???
I am missing some clause I guess. I am not touching IPO implications as that is anothwr minefield and a lot of other threads are discussing it
Are those markets liquid enough to support large sales by the owners though?
As long as he has no legal fiduciary duty, it seems like an obvious thing to do. It's definitely what I would do.
And in 4 more years the new tax laws could be anything.
I wonder if this is the kind of thing CNNs might be good at simulating some day.
If LLC company does not qualify as a "corporate investor" like Sony or Tencent (from Tim's examples), is there a structure that does?
Assuming a wealth tax gets through, couldn't the wealthy just take out a loan at near 0% against their stocks to pay the bill?
Could they get away without selling any stock at all?
Especially in an inflationary environment that many people think will get even more inflationary and a Fed that seemingly won't let the stock market crash.
> I think everyone needs to read the bill and calm down. "Gains on private assets -- including harder-to-value assets like real estate, art and private companies -- would escape the annual levy, and only be taxable when sold. "
So this wouldn't have even applied to Epic Games?
If there's no huge incentive for an investor once a company makes it to hold their stock, every successful company will be led by corporate hedge funds/investment firms.
First, this creates a perverse incentive for founders to stifle the growth (or more specifically, in private companies: valuation) of their companies in order to avoid a high-tax event. This may actually be something the Board would approve, in some companies, because this high-tax event would involve the dilution of founder control; companies grant founders tons of shares for a reason, its because they're assumedly doing something to deserve it, and if the Board wanted those shares in someone else's hands they would have done that in the first place.
Second, this is again especially true for private companies but also applies to public ones: it adversely impacts American companies and American founders. We are a global society. If a strong, American company is forced to sell a significant portion of their shares, either on the public market or through private investors, in order to pay a large tax bill, who is going to buy those shares? Investors, generally, which includes entities both domestic AND FOREIGN. These taxable events will move significant wealth out of American hands and into foreign investment entities who are not subject to the same laws.
Third, many people don't realize that the total valuation of the stock market outweighs the total value of all US Dollars in circulation by ~30x (~$50T vs ~$1.5T). Tim could not be more right when he says that he's not really a billionaire, and Musk is not an almost-trillionaire. Stock wealth ISN'T REAL, and I don't just mean that in nebulous, floaty terms, I mean it in very physical, real, "If Democrats try to make stock market wealth real, they will destroy the economy, full stop, there are literally not enough US Dollars to represent the wealth of the US Stock market in real terms." Because taxes are paid in US Dollars, not in TSLA shares, these taxable events will reify a MASSIVE portion of fake-wealth currently tied up in the stock market, which is already significantly inflated due to the Fed's QE over the past decade.
Fourth, this is basically a "Delaware C-Corp" situation; the only reason this tax bill would generate so much income for the US Government is because it is new; billionaires haven't prepared for it. So, it'll make a ton of money, ONE TIME. Looking into the future, its unsustainable; it creates a massive incentive to offshore personal founder wealth, and possibly even citizenship and corporate headquartering. With COVID accelerating remote work, there's a ridiculously real possibility of companies, in the near near future, being founded outside the US, but still accessing as much US talent as they need. The USG can tax the middle class people who work for the company within their borders, but the rich founders? They're on an island. Ayn Rand was an idiot, but she wasn't wrong about everything; rich people will do anything to escape a tax bill.
But the dumbest thing, above all else, is how fucking self-servingly idiotic this bill is. I know our policymakers all share one brain cell, and Biden has been using it a lot recently, but this is beyond reproach. The democrats need money to pay for social programs. That isn't wealth redistribution; its a handout. That money will come from taxing American businesspeople, forcing them to sell shares, which will then be bought by other corporations and investment entities, and the wealth gap will just keep getting bigger and bigger; on the one side are average Americans who can't breach into the INSANE wealth inside corporate America, but are at least kept going on food stamps and free childcare. On the other side, people still insanely rich, just a little bit less so, and their companies are now owned by Tencent and the CCP.
The better path forward for some kind of wealth redistribution bill is something which creates incentives for companies to distribute significantly more corporate shares to more employees. I don't know what that looks like, specifically, but: Every single employee of every single company should see a portion of their compensation be represented as shares in the company, even if its just a handful, from the Waitresses serving tables at the Cheesecake Factory to the CEO who plans strategy. Ultimately this benefits the company, at least in some way, because it aligns financial success at every level, it benefits employees because its an additional vector for compensation which is anti-inflationary at a macroeconomic level (unlike a minimum wage increase, which is absolutely still necessary, but I don't feel is enough), it benefits tax revenue because many lower-wage roles will liquidate these shares very quickly (if possible) (a taxable event), and it benefits US political policy because it keeps ownership of many American corporations in the hands of Americans, rather than foreign investment entities.
1. While there might be attempts to "juke" 409a valuations, a tax on capital appreciation still makes founders wealthier if their stock holdings appreciates in value. They might get 75 cents for every dollar of appreciation due to taxes, but it's irrational to think there isn't an incentive to continue growing their companies and wealth.
2. In order to maintain control of their companies, and avoid taxation, it's possible for companies to create separate classes of voting, non-voting, and sometimes super-voting shares. Even though only one of GOOG and GOOGL holds voting power, they still trade relatively closely in value.
3. Founders of privately held companies can choose who they want to sell their shares to. It's possible they might sell them to closely-tied venture capital firms or pension funds. I don't know why you're so concerned about foreign purchasers, when they already have the ability to purchase public and private companies. It's not like anything is changing in that regard.
4. The amount of currency in circulation might seem relatively small, but pales in comparison to the $29 trillion held in savings accounts and Money Market Funds. The NASDAQ had $300 billion in transactions on Tuesday October 26th, so dollar liquidity is hardly an issue. https://fred.stlouisfed.org/series/M2SL https://www.nasdaqtrader.com/Trader.aspx?id=DailyMarketSumma...
5. It's possible that some existing billionaires will attempt to avoid these taxes, but it's hard to expect that future founders will have the foresight to prematurely sacrifice founding their business in a country that attracts investment and talent.
It's certainly possible, but if founding a business in the USA is a common characteristic among billionaire founders, it's hard to imagine entrepreneurs who aren't yet billionaires will take their business somewhere else due to the potential future tax consequences of becoming a billionaire.