New law lets you defer capital gains taxes by investing in opportunity zones
recode.net
recode.net
e.g. Bob bought Apple stock for $50 a share back in the day, and sells it for $200/share. He defers his taxes until 2026. Instead of paying capital gains tax on $150/share, the cost basis is adjusted by 15% so in addition to benefiting from the time value of money, future Bob will only be taxed on $142.50 of capital gains. Bob can buy a house in an "opportunity zone" (from scrolling around the embedded map, there's plenty of million dollar+ houses in these areas. There's also lots of sports teams and stadiums in these areas, so maybe Bob buys an NFL team or a parking lot next to their stadium), rent it out for 10 years, sell it, and not have to pay any capital gains tax on the appreciation. Definitely not a bad deal for him!
How are profits from these investments treated?
Can you "swap til you drop" like with a 1031 exchange?
I would also like some information about this.
+1 for investing in distressed areas; self-nominated with intent or otherwise.
If it's capital gains only, -1 on requiring sale of capital assets in order to be sufficiently incentivized. (Because then the opportunity to tax-advantagedly invest in Opportunity Zones is denied to persons without assets to liquidate; i.e. unequal opportunity).
A [AFAIU]: "Because you don't have capital gains; only regular income" (~="Because you're not an accredited investor")
Unfortunately it's not as easy as parking money and riding off into the tax free sunset. As I mentioned down thread, we should hopefully have the first set of regs from Treasury even as soon as tomorrow which will clarify a lot of the loose ends as written in the initial legislation.
Some of what we're waiting to see is whether or not that basis improvement includes the land value or if you can split that out. If the home Bob purchases for $300k is on a lot worth $250k, does he have to spend the full $300k to improve it, or just $50k to improve the basis of the structure?
Lots of details to still work out but hopefully we'll know more shortly.
(also that assumes the people ever sell it to someone in the area - if we're talking real estate, there's no reason for them to not just sit on it forever and turn it into a rental or Airbnb or whatever)
That isn't too say throwing money at a bad neighborhood is guaranteed to succeed but it gives a far better shot than letting the area simmer in stagnation.
If you improve a small lot to be a duplex or an apartment complex, you increase the supply of housing.
The latter wouldn't raise the net price of housing, but would still be a worthwhile investment. It depends on what local policy is, namely if building new housing is illegal or not.
-- The Richest Man in Babylon
Buying real estate for personal use would seem like undermining the spirit of the OZ legislation. I don't think it will fly...
IANAL (or a CPA), but it seems like a good-faith attempt to invest in an OZ should not incur penalties later. Disclaimer: you are taking about the IRS, so logic/fairness may not apply.
Also: why would personal investment be against the spirit of the OZ legislation? It seems to focus on getting the property developed, not why it is developed.
This depends on the penalties that the Service/Treasury aims to collect and their ability to tie-up and/or seize one's assets.
There's a 3rd option: How about the IRS knocking never? I say that in jest as I know you have a 1:3 chance in getting audited just through the normal course of business. I suppose it depends on your risk tolerance.
Granted there are other regulatory issues that will limit a lot of this activity to accredited investors (via Reg D private placements), but OZ regs have nothing to do with a persons net worth or income.
As other posters have commented, the benefits are three fold - deferring your gain until the end of 2026, a 10% step up in basis on the gain if you hold for 5 years, an additional 5% step up if you hold for a full 7 years, and an exemption on tax for the appreciation of the assets you've invested in if you hold them for 10 years.
Here's a link to an ebook we just put out if anybody has interest in reading how it will work in the real estate space - https://www.realcrowd.com/blog/2018/10/the-real-estate-inves...
(I'm a socialist in part because of the market's inability to effect change, such as investment in OZs, which doesn't have a sufficient monetary reward but has significant societal reward. Some people call this a "market failure")
But why is that better? Why have a massive inefficient government spend a vast sum of money when instead it can just defer some tax collection, letting these investors take the risk and optimize for success?
Where money is being thrown around by government, in general, there are laws in place to make sure that money doesn't flow into the bureaucrats pockets somehow. But to do that, they add layers and layers of checks and processes. The side effect is that they're not very fast.
And then there's the issue of not having attracted the hungriest talent on average, due to not offering very good salaries, because of the whole avoiding looking corrupt thing.
And then there's the whole personal motivation of private investors to profit, whereas government investors have no such motivation (if they're not corrupt). So there's just no very good motivation to do a great job.
There's a whole slew of reasons they don't make very good investors relative to private investors.
The market is highly regulated in large part due to the notion that "manipulation" occurs (spoiler: it does, but manipulation always fails on its own eventually and the crash is typically made worse by regulators). Restrictions are made on who can invest, when and how much to the point where it's not a surprise that average wage earners avoid doing so - most of the worthwhile options are only for millionaires or higher. No wonder so many think the markets don't work - they can scarcely be considered markets!
Allow people to be educated and learn how to handle their finances rather than being protected from all danger to the point of being locked out, and you'll have informed individuals capable of handling their own affairs. Let Johnny touch the stove to see that it's hot and he'll learn right quick!
Socialism just wants to save everyone from themselves without looking in the mirror and realizing how dysfunctional it is itself. Forced collectives self destruct; voluntary cooperation survives and thrives, but it takes effort and time instead of a quick fix.
This is some extreme oversimplification of 1-human behavior and 2- how easy is it to teach people immediate need denial for long term benefit. No matter how many times you tell people the parable of the ant and the grasshopper, it's still just a story. It's not how the human mind works (generally).
On the inverse end, I could point out how every "self made man who didn't need help from nobody and just smarted his way to the top" was likely helped in countless circumstances that have nearly nothing to do with his direct actions. Humans are great at creating narratives, regardless of whether there is actual causality.
Socialism wants to save everyone from a biased, unfair, inequitable system, understanding that a herd is stronger than an individual and that spreading risk across the board means fewer catastrophic events for the individual. The goal is to lower the upper limit and raise the lower limit. It's not an attempt to pander to poor foolish baby people who can't do a finances for themselves, it's saying that there's no reason for a civil society to allow some to suffer debilitating hardships at the hands of a system they were forced into through circumstance alone while others reap unjust rewards. It's not perfect, but leaving "the free market (tm)" alone and not regulating leads to slavery and child labor and private paramilitaries protecting corporate kings as the past has shown.
I do agree that it is easier to be lazy and obtain instant gratification than delay it for great reward but it can be learned by anyone if the cushy safety net of socialism is removed. Everyone has something that motivates him to become greater than what he is now; it's just a matter of discovering what that is - often he has to find it himself. One-size-fits-all socialism destroys this freedom.
>every "self made man who didn't need help from nobody and just smarted his way to the top" was likely helped in countless circumstances that have nearly nothing to do with his direct actions
Correct: nothing happens in isolation. However, mindset greatly changes the likelihood of an outcome. Without being able to cultivate and learn outside of indoctrination institutions, the world would be static and soulless.
>The goal is to lower the upper limit and raise the lower limit.
This is the core: give those whom are lazy a cushy retirement and shackle people who dream big so they can no longer fly.
Slavery and child labor comes from power vacuums that are created by control freak communists/Marxists/socialists who keep things from changing and improving. The rest go along because change can be scary and we all want stability. A face of true evil is the deception that we all must be equal - we are not. We have borders, both conceptual and physical - doors on our homes and personal space that we want respected; yet socialism cries that borders are bad and we need to take care of everyone regardless of our own situation... and let's use other peoples' money to do it since we don't have any. Crabs in a bucket.
I know you mean well because I was in your shoes after the dot-com collapse. The difference is that I've seen the hypocrisy - there is no perfect system but socialism is a slow, agonizing death.
No thanks. Any society that does that is not free or fair, it is hell.
You don't need socialism, that's a crazy stretch. All that's needed is proper guardrails and regulation to ensure safety and prosperity.
If this moves some money into these underdeveloped areas, after a 10 year stock market bull run, then great. Most of the investments will go to zero, but the ones that don't might have a good impact for the people living there.
Are there actual numbers somewhere?
some of the zones are legitimate opportunities. A lot of them -- and the ones most likely to attract investment -- make it patently clear that this is a low-risk give-away.
https://streeteasy.com/building/235-adams-street-brooklyn/14...
Even worse, the zones are chosen by governors and the rules for selecting them are extremely lax.
I know enough about the local politics of where I grew up to know that at least one of the OZs makes literally no sense and is 100% a kickback to a major gubernatorial donor.
And, of course, the 401k/pension plan, or company that the 401k/plan owns, could easily invest in the OZ if they so desired, if it made financial sense separately from the individual tax break.
[1]https://www.barrons.com/articles/opportunity-zone-funds-to-d...
also it is irrelevant, as every single listed company will benefit from it, making no stock differentiation in price.
(Note, this is not to express an opinion on the GP!)
A 1% decrease on $50,000 income is going to be less than the same percentage decrease on $500,000.
Of course, you could argue that "progressive" tax take care of that, but it only serves to drive away a portion of high meet with individuals to the point where tax revenue generally doesn't change much anyway while it can actually increase the overall burden on lower income earners.
Better solution: goodbye income tax.
Much like open source software where individual usage is free, only consumption/sales and corporate taxation has any legitimacy now.
Businesses need a commerce-positive, safe environment for such activity. In order to attract that, no income tax is an excellent incentive. Businesses, which are fictitious entities, support the services needed to entice localized growth; as population grows, so does business activity and revenue, thus tax revenue for services as well.
Of course, any system is prone to corruption filling the power vacuum so eventually it would fail. However, so long as individuals are as unencumbered as possible, people can opt out rather than continue to be abused.
Additionally, taxes serve as a psychological leash and intellectual substitute. Financial/investment education is virtually non-existent in the US and it's generally misguided or even wrong in some instances. If individuals are coddled and promised to be taken care of, they become unprepared for difficult situations.
Let a dog be a dog and let a person be a person, not a slave.
Untrue; consider, e.g., the adoption of EITC if it didn't already exist. It's a pre tax decrease, but wouldn't benefit the wealthy (in first order effects) at all.
Or abolishing payroll tax and transferring equivalent amounts into the various trust funds out of general revenue, a pre tax decrease that would slightly benefit the wealthy (because Medicare tax), but disproportionately benefit those whose income was primarily from labor, which isn't the wealthy.
None of that changes the fact that tax breaks will be greater in absolute numbers for wealthier individuals than for those earning less. Play games to fudge numbers so all is not equal as much as you want - those with resources avoid participating in socialistic wealth redistribution.
No income tax is far simpler. Do you know what the cost for enforcement of individual income tax is? Hint: think astronomical.
Go after about 140 million individuals vs working with approximately 28 million businesses? Do you think business or individuals are more professional? Who had the bright idea to create such a logistical nightmare?
You can keep working with an insane system if you want but people with resources do what people without resources would eventually do in the face of direct taxation, whether financially or physically - leave.
I do know what the cost of enforcement of individual income tax is, at least in a sane system with effective witholding and most people not submitting stupid tax returns every year: about 1.25% of money raised (https://publications.parliament.uk/pa/cm201012/cmselect/cmtr..., table 7).
And the simpler you make the system the cheaper it is (this is NOT flat rates - calculating graduated taxes on income is basically free) - you can see this from the "National Insurance Contributions" line on the same table, which is an effectively zero-complexity additional income tax which costs a third of a percentage point of money raised.
So not astronomical. Really quite efficient.
I like how you've pointed out the amount relative how much theft^H^H^H^H^H "tax" revenue is brought in rather than the absolute amount of:
£3,673,797,000
That's pretty astronomical to me. I'm sure you'll find other ways to break it down and try to refute but it still doesn't change the waste of time taxation incurs.
My stance will not change from the perspective that income tax is more destructive to low-income earners than it is to the wealthy, and that it drives away wealth.
Let's just settle this as "we won't agree" since I have more productive things to spend my time on than arguing over what shouldn't exist in the first place. Pray for Brexit or go down with socialist Europe.
Further, paying capital gains at say 50% on 10% returns for 20 years is better than paying 0% capital gains on 6% returns for 20 years.
When capital gains are taxed as income the whole chunks of the monetary system go away.
Take the recent corporate tax cut, which made companies flush with cash. Companies could invest that in 4 main buckets: pay down debt, invest in growth (r&d or acquisitions), pay out bonuses to workers or buy back stock/declare dividends.
Let's say the company has 1,000 employees and gets $1 million in new cash flow from the tax cut. They have little debt and no direct acquisition targets so they are now deciding between giving all employees a $1,000 bonus or buying back $1 million worth of stock.
Since bonuses are taxes at regular income rate and dividends/capital gains are taxed at 15%, the tax efficient way to put that money to use is through buybacks or dividends. The people making the decision are likely executives with high salaries (income tax rates) and large stock portfolios. They will only pay 15% tax on those dividends compared to the bonus option where they would likely pay at the highest income bracket.
Who gets the short end of this dynamic? Workers who helped create that revenue, but can't afford to buy enough stock to get $1,000 of benefits. The tax code has disincentived the company from rewarding its employees in favor of rewarding its investors. Again, people who are already wealthy tend to be the investors rather than those who typically labor for their income.
Then rational investors will avoid risker share investments in new companies it will reinforce the position of incumbents who will be forced to pay out more in dividends and become bond proxies.
So, it's going to be rational with a 0 or 50% capital gains rate with some portion of your portfolio. Further, increasing capital gains makes it harder to keep up with inflation thus pushing people to make riskier investments.
PS: Try modeling a portfolio of bonds with different yields and risk premiums vs different tax rates including inflation.
Investors will seek alpha wherever they can get it. If there is a flight into "safer" investments, the market would adjust and the returns of those "safer" investments would fall. If investors want alpha returns, they will take risks. This is a fundamental truth of investing.
Are the incumbent's positions not reinforced in today's environment? There are 3,618 publicly traded companies today compared to 6,407 in 1987 [1]. Is that a sign of positive competition? Today's capital gains rate is the lowest since the Depression [2]. Yet, entrepreneurial activity is at generational lows [3].
[1] https://www.bloomberg.com/view/articles/2018-04-09/where-hav...
[2] https://www.cbpp.org/sites/default/files/thumbnails/image/ca...
[3] https://money.cnn.com/2016/09/08/news/economy/us-startups-ne...
Including heartbreaking scenes of crushing poverty like this: https://www.google.com.au/maps/place/DLA+Piper/@37.4595117,-...
if accurate I think this is a problem with many of the incentives that are provided, maybe providing the tax incentive would be better directed towards saying to take advantage of this opportunity you must provide something that the public can use?
EDIT: Or worse yet there will be organizations whose sole purpose is to take in billionaires money, do as little work as possible, and generate enough paperwork to ensure the billionaires qualify for the tax incentives.
So, to my way of thinking, an unintended consequence would be some no-name schmuck being the one to systematize and beat the known quantities at the game. (IMHO)
In order to do this, the company would have to develop a workable, repeatable model of how to economically improve an "opportunity zone". There's some evidence that this is a very hard problem, notably that social service agencies have been trying to do it for more than 100 years. But sure, if a company can find a solution, that would be great.
The danger is that the company would find a solution that somehow followed the letter of the law but not the spirit, like finding an investment with nominally high returns that doesn't actually improve the lives of the people living in the opportunity zones. That's definitely a danger, and possibly a likely outcome. But another possibility is that there are fairly straightforward ways to improve the lives of people in these zones that haven't happened because the people in them don't have the capital to do it. If that's the case, then incentivizing outsiders to put in that capital should be a good thing. I don't know what will happen, but it seems like it's worth a try.
It would be nice if the program was well managed, because good management could probably reduce and mitigate the negative gaming-the-system outcomes and promote the good ones. But I don't have a lot of confidence in Congress to do a good job with updates, so I hope the original bill was written well enough.
E.g., there are census tracts in Cambridge/Somerville with six figure median incomes that are categorized as "opportunity zones". There are also a lot of census tracts in that area with much lower median incomes hiding an incredible amount of future earning potential (e.g. Harvard and MIT students, and esp. doctors doing their residencies at top hospitals).
Tax-free money flowing into those areas isn't going to help poor folk. It's going to fund the development of $3k/month luxury apartment buildings for housing young professionals who are priced out of buying anything, because billionaires are buying everything site-unseen in cash at $50k above asking. Don't believe me? Go on apartments.com and check out the rents/amenities of buildings that already exist in these "opportunity" zones.
And to be clear, I'm not super opposed to gentrification. However, I don't see any good reason why building luxury apartment buildings in some of the hottest rental markets in the country should be a tax-free activity.
If these were downtrodden areas starving for a cash infusion, this give-away of tax dollars might make more sense (although IMO is likely to do more harm than good). But you can be pretty damn sure that a sizable chunk of this money is going to flow into census tracts where not even a six figure salary can get you anywhere close to a down payment.
And even in areas that are legitimately run down, an influx of tax-free money competing with locals for housing stock is a good way to torpedo the sort of sustainable local wealth accumulation that happens when normal folk who live in the neighborhood are able to buy housing and storefronts.
So I'm very concerned for every area that is categorized as an opportunity zone, and pretty peeved that building luxury apartment buildings in fucking Cambridge is going to be a tax-free activity.
e: And I just looked around my home town in the midwest. There are big corn fields marked as opportunity zones, even though they're kind of out of the way and there are many other areas that would make a lot more sense to redevelop and where a capital infusion could actually create new opportunities. I happen to know the current owner of those tracts is a long-time supporter/donor to the current governor of that state. Unsurprisingly, turns out governors choose these "opportunity zones".
So, yeah, that's what this is: kickbacks to state-level political donors provided in the form of tax subsidies for billionaires (or at least millionaires).
We already have a similar program for EB-5 visas; the definition of economically challenged area is often an up-and-coming area gerrymandered to include just enough poor people.
Source with rather clickbaity introduction: https://www.citylab.com/equity/2017/05/kushner-companies-rea...
Anything purple on there is designated an OZ.
I'm worried that this has good intentions but will have unintended effects; it's entirely possible that turning on a fire hose of money would just wash the existing residents away. While on paper that would improve the income level and whatnot of a census tract, you really just shuffled people around the metro area, most likely to a place with worse access to jobs and stores and whatnot. It's important that we increase housing at a macro level, but we also don't want to strand people by suburbanizing poverty.
This is the opposite of deferring capital gain taxes - it is pulling capital losses forward. If the startup folds, the marking down is justified. If it is successful, the capital gains when eventually selling it reflect the zero base; so overall, taxes stay the same except it incentivizes capital investments immediately after capital gains.
[edit] source: https://www.policymap.com/maps?i=9964345&btd=6&period=2018&l...
That's why investing via closed end property funds is much better individual properties are very illiquid .
Aside from the crippling poverty outside the doorsteps of all the tech company offices that is. ...
There are multiple co-working spaces within blocks of each other, The Pioneer Collective, Galvanize, Impact Hub, and at least 2 accelerators that I know of are based near Pioneer Square.
Thankfully the poster got it right but the headline from the article itself is very misleading. Deferring taxes != writing off investments.
Also, why does the headline writer take shots at billionaires for putting money to work in economically challenged areas?
I swear some of these people will never be satisfied with the way rich spend their money.
The example that always sticks in my head- maybe this isn't true, but I've heard there are strategies of buying failing companies for pennies, shuttering them, and then writing off their losses on your own taxes. You incurred no risk, you lost no money, and now you pay no taxes. Whether it's actually intended to happen that way, it doesn't seem right, and ordinary people can't do it.
Anyway, I'm not an accountant, but the upset over the tax exploits of the wealthy revolve around the concern that they are managing to exercise the tax code in a way that was never intended to pay less than they were meant to owe. Middle class folks don't wind up in the crosshairs because they generally file very ordinary returns, following both the letter as well as the spirit.
A
How much are the shares of that shell worth if you can use the tax losses to offset profits of a different, profitable business? Somewhere between $0 and $210,000.
it looks like in your example you end up with $1mm, since you didn't have to pay tax on the profits of company B. but if you had just kept the original million and paid tax on B's profits, you would have ~1.8mm? or are you implying that you can buy company A for less than the market cap in the first place?
Remember: this company has $0 in the bank. It's essentially the same as a newly incorporated company, but with tax losses. There would generally be a discount on the value of the tax loss due to historical liability risks of the previous operating business.
The things written above are highly simplified though, and might not give a completely accurate reflection of the situation. There are likely some anti avoidance rules in place to stop this behavior. But this again depends on the country.
Billionaire John Malone (who hates taxes) talks a bit about tax in this business talk at a university: https://youtu.be/v5QfCLeloEg?t=2174.
Also this: https://www.businessinsider.com/what-liberty-really-loves-ab...
"There are some catches here. To use the NOLs (net operating losses), Sirius can't undergo a full change in control for three years. So Malone has to bide his time with his 40% for three years before scarfing up the rest of the company."
This is one such anti avoidance mechanism.
By being smart about taxes, he essentially got that business for free.
Not exactly extreme tax avoidance I'd say. This is quite a well known mechanism.
That's the problem with most of these situations -- people don't understand what's really happening.
Suppose you have a company that started off with $25 million thinking it would turn it into fifty million, but really it turned it into five million. Then the company is still worth $5 million dollars, right? Except that it has a $20M tax loss, which is worth something. When other people have profits they're paying a 35% tax rate on, the tax loss has a market value of $7M, so the company is actually worth $12M.
Which means that's what richie rich who wants to use the tax loss has to pay for it, since the seller can shop the tax loss to the highest bidder and get close to the full value for it. The money isn't going to the rich guy, it's going to the guy with the tax loss.
Which means it's a rule that helps the little guy. If you take a risk and fail, it allows you to at least recover as much of your investment as the big guy with diversified investments would have had as a tax deduction -- i.e. it prevents creating a disadvantage when the little guy takes a risk vs. the big guy. And if you have creditors, the buyer has to make them whole in order to take the tax loss, which makes them more likely to lend to you to begin with.
But people see the result that rich people are getting a tax deduction and clamor to get rid of the rule.
The big problem is that people see and remember companies like Toys R US and Guitar Center that would be JUST FINE if companies like Bain capital hadn't loaded them with debt to pile in tax writeoffs.
Except that their strategy had nothing to do with tax write offs.
In theory what they were doing is borrowing money to buy an ailing company and turn it around, and as long as they succeeded they could have serviced the debt.
What they actually did was fail to turn the company around while charging it hundreds of millions in consulting fees, until it finally collapsed.
The way things were set up, if they succeeded in turning the company around, they would get the profit in excess of the interest. If they failed, they still get all their consulting fees and the lenders are stuck trying to recover their loan principal in bankruptcy.
That situation creates terrible incentives. Either they can be lazy and just collect consulting fees for doing nothing, or they can take big risks with house money and cash in if it pays off or walk away if it doesn't. The people who lent them the money were nuts. They would have been better off buying the company for themselves.
I gather it's a strong buyer's market, in which case this isn't really the saviour of the little guy.
Also worth considering, if these loss deductions always find their way to the guy with the highest marginal tax rate- is that really working as intended?
If you pay $6.9M for $7M in lower taxes, you make $100,000 for free and the little guy recovers $6.9M. Then one of the other million companies with net profit realizes they can net $90,000 by offering $6.91M. This is not what a buyer's market looks like.
Obviously no one is going to offer exactly $7M because they have to cover the transaction costs etc., but that's not even profit -- if they offer $6.95M because they have $40,000 in transaction costs, they're only making $10,000, but they still do it because they're still making $10,000. Until someone else is willing to make $5000.
It's a seller's market because there are more companies with net profits than net losses.
> Also worth considering, if these loss deductions always find their way to the guy with the highest marginal tax rate- is that really working as intended?
This one of the many reasons why graduated tax rates are inefficient as compared with something like flat rate + UBI (which can be equally progressive but doesn't have this problem), because it works that way for everything. The same thing applies to losses incurred directly by the big guy. Or if you create a deduction for green cars, someone paying a 35% marginal rate gets more from buying the same car than someone paying 15%.
But that doesn't apply to corporations anyway. Corporate tax rates largely aren't based on income. If they were, splitting an operation into multiple corporate entities would lower the tax rate and then everybody would do that.
It was an obscure part of the tax code that was never intended to be a tax-deferred saving vehicle until some guy named Ted Benna figured it out. He even suggested it to other clients and they said "no, the IRS will never buy it".
So is your argument that anyone using a 401k is a "greedy tax cheat"?
[1]https://learnvest.com/article/your-401k-when-it-was-invented...
Even that doesn’t sound that bad to me. All of those people have a job, are being paid and are also paying taxes.
Also that sounds like a tax code bug and not a rich people problem. The government is allowed to collect exactly the minimum required by law and nothing more.
Not to be "that guy" but who do you think is writing the tax code, if not rich people and the government officials they help fund? Of course it's a rich people problem, or rather a rich people solution.
I don't like tax credits and deductions at all. I think all of these things are an additional burden on the lazy and the stupid (like me). Using taxes to encourage the public to do something or not do something doesn't even make sense for the political party that keeps harping about making taxes simpler.
Personally, I think all businesses should pay taxes on total revenue. I don't give two ships if you had a revenue of $2B and expenses of $5B. You owe taxes on that $2B. If your business model is low margin, that's your problem. No credits. No deductions. No deferrals.
The current policy isn't based on fairness or logic. It is simply based on who can get their way and by how much.
Tax rates will probably need to go down and this is obviously just a thought experiment because no change is possible as we are too comfortable being hypocrites.
Hell, if you average them over the economic cycle, airlines and car production are low margin.
the effect of a particular tax can be pretty hard to figure out. just because the tax is levied against a certain company or individual doesn't necessarily mean they actually bear the burden of that tax; depending on the situation, they may be able to pass off the burden to someone else entirely. in general though, you can think of taxes as discouraging a particular activity/transaction.
if you directly slap a tax on revenue, you are basically putting the brakes on all economic activity. low margin businesses are probably hit harder than higher margin businesses, but keep in mind that the profitability of the average business varies a lot by industry, so you run the risk of putting entire sectors underwater. unless they are able to pass the tax on to their customers, a grocery store is going to be hit a lot harder by this tax than a semiconductor company, and people are going to be less likely to invest in them. taxing corporate profit is somewhat perverse in the same way, since it serves to discourage efficient allocation of capital, but it does have the nice side effect that it increases the incentivize for companies to spend more tax free dollars on things like employee benefits and wages.
in my opinion, we should probably not tax corporations at all. ultimately all corporate revenue turns into either income for employees or capital gains for investors, so just tax these (progressively) and hike the rates. while we're at it, let's also eliminate as many personal tax credits and deductions as possible.
This sounds reasonable to me As long as the money doesn’t disappear to another country.
But are you surprised that people are more willing to accept tax breaks on the middle class over the rich?
Absent a vocal minority, wealthy people spend their money in ways that make them more money or get them more political power. They don't build communities, they build dynasties.
From an introductory pdf [1]: "A qualified Opportunity Fund is a privately managed investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (the vehicle must hold at least 90 percent of its assets in such property)".
Okay, so here's my prediction: a series of shell corporations will be constructed so that the investors are essentially moving their money around on their own plate. Those funds will then look for the most efficient way to produce a return on that investment, which will probably consist of purchasing real estate, pumping up its value (increasing housing costs in the region), and then dumping it at the end of the 10-year term so that the investors can get out without any tax liability. The affected communities will end up with artificial housing cost inflation followed by a slump that will leave them in just as bad of shape as they are now, at best.
It's raw, seething cynicism, yes, but it also closely matches something that's already happening right now. Communities across the country are seeing artificially high commercial rents coupled with empty storefronts in heavily-trafficked areas because real estate owners have discovered that they can make a little extra money by keeping some of the spaces empty and using them as tax deductions, instead of lowering the rent to market rate and putting a small business in there. [2]
[1]: https://eig.org/wp-content/uploads/2018/02/Opportunity-Zones...
[2]: https://www.dnainfo.com/chicago/20161006/jefferson-park/vaca..., for one example.
They won't all hit that, but the goal will be to get the O-Funds to match similar low-risk long-term investment vehicles and then get out tax-free, and the businesses managing the funds will be under enormous pressure from the investors to make that happen.
Some people will never be satisfied with the fact that there are rich people in the first place.
Investors build something that allows the local economy to bring money into the area - e. g. A factory of something like that with well paying jobs where workers get to keep a good chunk of their value add and a lot of the profits stay in the local economy? Great! Win win.
Investors build something that provides a bit of short term benefit but then leeches money out of the area forever after - e. g. An apartment building, low wage retail, toll roads, etc? Well it'll be great for the investor who now has a new tax free passive income steam on top of the hard assets they built (the road, apartment building, or whatever that they can later sell - again tax free - if they want). Sucks for the city though. Sure it might have been necessary, but the local economy was basically just forced to take out a loan that it will never repay - sending money to already wealth investors in perpetuity for housing or transportation or a place to buy shit.
In either case, and probably more the latter than the former, the already-hilariously-wealthy investor gets to earn fistfulls of money tax free. But only one of those situations really helps out the local economy itself. And in either case I don't see how removing a 10% or so tax on profits and deferring taxes on investment is going to massively change how or whether projects pencil out.
So yeah, in an era where the wealthy already have way too much money and don't need help hiding more of it, and they might not even be helping anyone but themselves, and they're basically doing something they probably would/should have done anyway, and they get to feel good and claim good pr for basically just making gobs of money that they don't need, yeah, I'm not feeling super proud for them or this program.
What would make me happy? Well, if they paid their damn taxes, that'd be a start. Even better if the rates actually have them paying their fair share instead of basically nothing, as is the case with capital gains tax rates today.
I'd also be happy if they spent their money lobbying for common good things - like climate change prevention, universal health care, free college, etc - instead of looser regulations and tax breaks. Some places and people do this, most don't, and some actively and vociferously work against the public good (kochs, bp, etc).
Really though I'll probably only really be happy when we don't have the obscene rates of poverty and semi poverty in the us, and we fix the floundering public infrastructure and services paired with deep government deficits. Obscene wealth is only such if its accrued in the context of millions of people living paycheck to paycheck at best, or being actively in the red month after month more typically. Likewise, it's only really selfish to try and lower your taxes if the common space is currently just ridiculously under funded - the rest of us generally pay our fair share or something like it, but a small minority of people jump through miles hoops and work tirelessly to massage the rules so they get to keep the disgusting level of wealth they accrued on the back of society entirely to themselves.
Fix those things, and they can do whatever they want with their mountains of cash - I'll probably stop caring.
> Q. How does a taxpayer become certified as a Qualified Opportunity Fund? A. To become a Qualified Opportunity Fund, an eligible taxpayer self certifies. (Thus, no approval or action by the IRS is required.) To self-certify, a taxpayer merely completes a form (which will be released in the summer of 2018) and attaches that form to the taxpayer’s federal income tax return for the taxable year. (The return must be filed timely, taking extensions into account.)
> The fund must hold at least 90 percent of its assets in Qualified Opportunity Zone Property
https://www.irs.gov/newsroom/opportunity-zones-frequently-as...
Or, if local zoning doesn't block it, see if you can rent it out as commercial.
There are all sorts of stipulations you need to follow to qualify however - not all of which are fully in place yet from Treasury. We should be getting the first version of the regs as soon as tomorrow (imminent we've heard from folks in DC) and then we'll know more. Things like having to improve the basis of whatever you invest in by 100% within a 30 month period exist, so you can't just buy something in an OZ and park it, you have to actually do some improvement to what you purchase.
The Opportunity Zone program is designed to provide tax incentives to investors who fund businesses in underserved communities.
Investors are able to defer paying taxes on capital gains that are invested in Qualified Opportunity Funds that in turn are invested in distressed communities designated as Opportunity Zones by the governor of each state. Up to 25 percent of the low-income census tracts in each state can be designated as Opportunity Zones.
I find it strange to see such animosity against "the rich" on an forum dedicated to startups from a company that has helped created billions in market cap and mint several new billionaires in the process.
There is a huge difference between someone becoming so wealthy that they and the next 5 generations of their heirs don't need to do any real work for the rest of their lives, and someone figuring out a way to create a sustainable organization that provides real value to lots of people.
It is more than reasonable to want to encourage society to favor the latter over the former.
These ranks change all the time as wealth is created and lost. Very few stay rich through generations, but even then it's always invested in something, like businesses that benefit others.
These same wealthy people are the LPs that fund the VCs that fund the SV startups. It's a cycle.
Actually, accumulated wealth to that extent is almost always connected to anti-competitive practices and monopolizing a space to such an extent that people have no other choice then to do business with you.
Are you suggesting that there be some perfect steady state of companies that are neither too big nor too small and nobody can ever gain or lose in life?
I find that hard to believe, honestly. It seems like the biggest gains are to be made in rent-seeking, milking your customers, monopolising and forming cartels and just outright fraud.
Facebook is Facebook. I find their business model, their dark patterns, and their lies to people and politicians to be an example of what I'm talking about.
Uber basically skirted the laws of every city they operated in as if they had immunity. Not to mention all the other scandals the compan has been involved in or responsible for.
As for the other companies I don't know enough of their inner workings over the years, but I'm not convinced they are squeaky clean at all.
I've already said previously that companies tend toward monopolies and that's when problems begin, but that's on govt antitrust to handle properly. Whether it does is another issue, but it doesn't erase the fact that people have gone from 0 to B by creating companies from nothing and making a large impact of society.
It always seems to be someone else's problem when it comes to wealth adhering to the codified norms of a society.
>it doesn't erase the fact that people have gone from 0 to B by creating companies from nothing and making a large impact of society
How does the adage go? "Behind every great fortune lies a great crime."
>> How does the adage go? "Behind every great fortune lies a great crime."
And there we go. Not sure how that's rational or productive. I guess you'll be first to tell every startup that exits successfully that they're now criminals for what they've done.
Now you're just being ridiculous and I'm guessing you know it.
That doesn't invalidate anything I said and it doesn't support what you were saying very well at all.
Hitmen, heroin dealers and elephant poachers provide value to some people as well, but to say we should encourage those things simply because they provided 'value' is sociopathic.
Those things you mentioned are illegal. Nobody is saying you should do illegal things. But wealth generation is tied to value creation, and your stance seems to be that all wealth generation is from criminal means when that's clearly not true in the slightest. What else is there to say here?
No, I didn't.
You're just struggling to comprehend what I'm saying because in your free-market fundamentalist world view, companies are benign entities of wealth creation and nothing more.
I believe many of the things these companies do should be illegal. Many of them already are, they are just not fined/punished appropriately for them. It just becomes absorbed as a cost of doing business.
Lot of what Google, Amazon, Facebook Uber, Microsoft, Intel etc. have done to stay on top has been illegal but the fines pathetic. Other stuff should have bene illegal and people are slowly coming round to the fact. They all even colluded on keeping wages low, remember?
Of course you can expand out beyond tech as well. Enron fraud, HSBC drug-money laundering, DeBeers atificially limiting the supply of diamonds, Nestle claiming water is not a human right and fucking over Africans with their milk formula. I could honestly sit here all day and reel off instances legal violation after ethical violation after outright greed and exploitation from companies all over the world.
But it's too late now. Even making these things illegal now doesn't strip the companies of the wealth they accrued beforehand. They are entrenched, because the system encourages this with pitiful consequences.
I'm not naive enough to belive legal == moral and illegal == immoral. A lot of laws are lobbied by the entrenched to cement their own positions.
That and the constant attempts at reverting certain policies or actions that would make my QoL demonstrably worse.
These are all facts solidly backed up through studies over the years.
Mobility might have decreased in this country relatively (although without considering the cause) but absolute quality of life has increased with iphones in every pocket, on-demand services for everything imaginable, and white collar tech jobs paying mid-6-figures in one of the strongest currencies.
I have to again bring up the fact that this is on YC forums which have witnessed many people from many countries start with nothing but a few comments and build incredibly successful companies. Compared to the wars, depressions and struggle of prior generations, folks today are at a height of comfort and opportunity never seen before.
If you're not content to remain a crab in a bucket, it might be a good idea to meet some successful and/or wealthy people and learn from them.
Part of improving your situation is observing where the unfairness in the system lies and addressing it accordingly.
Legally preferably.
Of course, by the time you figure it out you'll realize that most wealthy people are not the evil sleaze we expect them to be and you'll take the same actions they do to protect yourself against destructive governments and financial regulations. It's sad that the perspective of those with scarcity mentality regarding wealth are often their own worst enemies.
The reality is that I'm doing fine in my career and managed to escape poverty for many reasons I've illustrated in the past. However what I saw and what I was trying to explain is that I saw my parents destroy their body (and in one case, lose their life) trying to improve their situation in a country that hardly gave a shit. I recall vividly the troubles my family had after my mother had a stroke because insurance companies decided that a stroke was a pre-existing condition despite her being in otherwise good condition.
Maybe you should stop making assumptions about people based on our animosity towards people that have actively made our lives worse in the past.
Of course a toxic environment makes life harder.
Glad you're doing well.
Because they have more money than I will probably make in my entire lifetime.
They are supposed to pay most of the taxes. They own most of the wealth.
It's pretty fucking straight forward.
* The neighborhood is mostly burnt down, derelict, or razed: think of the important stories in your life and where they took place, and imagine those places transformed, not into a high-end sushi bar, but cracked sidewalks and rubble.
* A generation of home owners probably lost the majority of their wealth
* The city lost tax revenue and struggles to provide basic services like streetlights or the enforcement of law.
HN, your viewpoint is clear. Try visiting oakland! It’s getting more photogenic every day.
Gentrification is a consequence of improving economic circumstances. Decay is a consequence of declining economic circumstances.
Public policies can plaster over this fact somewhat, but generally policies like rent control or CA's Prop 13 make things worse rather than better.
I have visited Oakland plenty. It's a terrible place, due at least in part to bad public policy as described above.
Please, stay away from the terrible cities! Would you go so far as to call them shitholes?
Nobody is entitled to live in a certain community for a certain price. That road leads to a planned (and failed) economy.
I’m guessing you’re not.
Finally, there is obviously a huge spectrum between free and planned economy. You can probably fill in the rest of the argument from here.
What exactly do you think happens when an apartment complex gets purchased by a buyer whose plans are to redevelop (either remodel or demolish and rebuild) it for a more upscale market.
> Nobody is entitled to live in a certain community for a certain price.
Whether entitled or not, people are in fact harmed by being forcibly displaced from their home.
Once the building owner and tenant both fulfill that which they’ve agreed to, they can mutually choose to extend renew or not. If the building owner wants to redevelop, they need to wait for leases to run their term or they need to buy out of the lease with each tenant.
When they do that, they’ve fulfilled their end of the bargain. If a tenant wants more than that, they can negotiate (and pay for) lease renewal options. Most residential tenants do not (most commercial tenants do), but should then not be surprised when they don’t have that ironclad option to extend the lease that they didn’t choose to buy.
Yes, that's exactly a downward distribution of pain.
> "Forced" is the wrong term here.
As they are compelled by the actions of others, it is exactly the right word.
> Nobody deserves cheap rent.
That certainly includes the wealthier beneficiaries (the new residents, not the even wealthier investors) of government-subsidized gentrification, who are, after all, getting exaxtly what the poorer losers in that process are losing.
If nobody deserves it, taxpayers shouldn't be paying to transfer it from the poor to the wealthy.
I'm not tracking the argument you're making. Between the frequent revisions of your comments, I've gathered that HN users are bad for not visiting Oakland, but once you discover that we've been there, now you want us to stay away? I thought I was preferring gentrification to decay, but now I'm personally kicking people out of their houses?
Life is hard and unfair. I get it. But if you make choices based on a short-sighted compassion for the disadvantaged that entirely neglects long-term consequences, you will make life harder and more unfair. Exhibit A: CA's Prop 13.
Which, in a market economy, they were most certainly not.
The moral argument around gentrification is a weak one. Gentrification has been happening since cities existed. At some point we need to accept that people should make sound financial decisions.
No, they are forced independently of that.
Whether you view that as categorically wrong may be impacted on views of entitlement, but most of the suggestions I've seen about it being wrong are utilitarian, not categorical, and are thus not dependent on any system of entitlement.
I’m not opposed to consumer protections here.
And not all old things are good. Hell, the oldest human social institutions are arguably the worst. Do you have an argument for its morality?
-- Edit: like this.
"My tax bill went from $8K per year to $32K per year, poor me!" doesn't buy much sympathy when your house went from $200,000 to $800,000 over the same time period.
But we wouldn’t want them to have to pay interest now would we? They should be able to pocket that huge financial win for themselves.
Imagine you're retired and over 65 so you no longer owe property taxes. But you don't know it, the tax bills keep coming and you lose your house. It is still happening in Detroit.
You've lost your job in the 2008 recession (in Detroit with 35% unemployment it was a depression) so you don't have to pay your property taxes until you go back to work. But you don't know, the bills keep coming and you lose your house. It is still happening in Detroit.
You're a lucky one, you kept your job and are still able to pay your now inflated property taxes. But neighbors on both sides of you lost their houses and they're empty. An arsonist sets fire to both of them and the resulting blaze burns your house down. Yes, it's still happening in Detroit.
Limiting property tax increases to RPI + one or two percent would be fairer to the lower income housholds
But, how much money would it take for you to quit your job and leave your home, family, and friends behind? Because that's what it amounts too. Few people are able to sell their newly expensive place and find a cheaper or equal option that doesn't require completely uprooting.
Maybe that's true somewhere (I doubt it, for reasons already articulated in sibling comments), b ut certainly not in CA, because Prop 13.
Fact is, both gentrification and decay suck. I like to use the analogy of strip-mining a landscape, desert-ifying it, and then when the rain comes ... instead of a life sustaining event, it's a flood that removes it.
End result is going to be an entire neighborhood of 3 million dollar condos nobody lives in (but prices have skyrocketed due to the huge influx of money), a huge tax free payoff for millionaires, and next to zero real societal value created.
What exactly is bad about it?
The fact that that the original residents are displaced to a place without those benefits and bear the cost of relocation, while the people that enjoy he benefits are people who could have afforded to get as good, or nearly so, conditions in existing places with them, anyway.
Gentrification is a magnifying downward redistribution of misery, where the new residents get a small gain in exchange for the old residents (particularly renters) getting a big loss.
At what point do I get to lay claim to my house and force my city to allow me to live there for a subsidized price if I can't afford it?
I didn't say anything anout entitlement. I said that a certain change redistributes pain downward and magnifies it in the process.
Hence, the downward distribution of negative impacts.