Now, it's late, so correct me if I'm wrong in my thinking here:
If twitter magically gained $3 billion in additional valuation, and all employees cashed in all their options, all at once, it would result in a "huge" tax bill of .... $13 million or so. Compare to the ~$270 million in capital gains taxes the employees would have racked up when they exercised their options.
Yeah, I think that Twitter could live just fine with that. Making a large and loud public fuss is cheaper, of course.
In light of all that, I think "huge" is a misleading word to use.
(Assumptions: a full 30% of the company as employee options; directly translating a higher valuation into the strike-vs-share price spread that's actually taxed.)
The difference between the two cases is that the employees are being taxed out of money they have (if they exercise and sell) whereas the company is being taxed based not on revenues but on the appreciation of its stock. So a company whose valuation shot up in advance of anticipated revenues could find itself with a bill it had no money to pay.
More generally, a company whose valuation shoots up but which is unable to find cash to meet shorter-term needs is Doing It Wrong and doesn't deserve the higher valuation.
Musing about this tax in general, without specifically debating:
I think payroll taxes of any form are one of the worst kinds of tax, so from that point of view we can agree. (Somehow I don't think you'd agree that significant increases on taxes for the wealthiest are a better alternative, though.)
But, if you're going to tax wage and salary compensation, then it's more than fair to tax options and other forms of compensation, too -- otherwise you end up with a regressive payroll tax, which punishes poorer workers & companies at the same time as being far less efficient at raising the needed revenue.
(edit: Part of my post was in response to something I hadn't noticed you'd edited out, so I snipped it belatedly.)
Why is no one suggesting applying the 1.5% when cash exchanges hands? Everyone is either suggesting keeping the 1.5% as is, or scrapping it completely for stock options. But surely a middle ground allows cash for taxes as a small percentage of cash from profits?
That's why in my imaginary example a post or two ago, one of the more fantastical & unlikely parts of it was a full 30% option pool all being exercised at once.
Hence, (and I apologize for any inaccuracies in paraphrase) the post you are replying to is recasting the tax as a potential cash-flow issue, rather than a great and unfair ongoing burden: because it's not.
Separately, I do not think the tax is unfair. Tax has to come from somewhere, and if SF can show a nicer environment for employees and founders to live in, then they can charge a higher price for the environment. Tax competition takes care of testing whether this is a wise decision, and there is plenty of tax competition in the region surrounding SF.
To me, tax becomes unfair if it is arbitrarily applied to some people, but not to others, e.g. letting Twitter and Zynga off, while taxing other start-ups.
Well, that would explain a bit of the whining, but I will need a nice solid citation before I believe a word of it.
First, because I cannot fathom how it could possibly work: What's a qualifying "valuation event"? What if another event comes along and the valuation has dropped -- is the company entitled to a refund, then?
Second, because that would be the only tax scheme I've ever heard of, except maybe some proposed & hair-brained wealth taxes, that directly taxes unrealized gains. (Wealth taxes I'm aware of that actually exist tax unrealized gains under simple growth assumptions, not based on any sort of actual valuation.)
Third, because if that were the case you'd think that the vocal opposition would be able to articulate it more clearly.
> To me, tax becomes unfair if it is arbitrarily applied to some people, but not to others, e.g. letting Twitter and Zynga off, while taxing other start-ups.
Exactly the problem that the options tax was introduced to solve, as well. If there is a tax on employee compensation, why shouldn't the executive compensation of $1 salary + $300 million in options be taxed at the same effective rate as the janitor's wages?
(N.b.: I think a payroll tax is dumb, but a regressive payroll tax is dumber!)
(Edited a bit for clarity & removed a side comment.)
Why should a company with lots of tax gains not have to pay the same taxes on them as the company next door? Certainly they were familiar with the tax code and its consequences when they set up shop in that city.
The whole article reads me as simply "big successful company wants to avoid paying taxes."
http://news.ycombinator.com/item?id=2331182
the problem that the companies the law applies to aren't necessarily rich; they're not being taxed on their revenues, but on their valuations, which reflect investors' hopes about their future revenues. So they're effectively being asked now for money they don't have yet.
But in any case it would not be "special treatment" to exempt them; this is one of those laws that is so weird (zero other cities have it that I know of) that the only reason it has stayed on the books is that it has not actually been enforced in the past.
Second, most events that would cause such a huge rise in valuation are accompanied by a huge influx of cash. There may be some tiny edge cases, but a gangbusters IPO ain't one. The bill is due once a year, and imagining a company being without the cash for it stretches my imagination to the breaking point.
Third, "being asked now for money they don't have yet" is the entire reason the company is selling equity in the first place. They can surely budget for an extra 0.015 of an already proportionally tiny amount.
Fourth, they aren't taxed on valuations but on, to coin a term, their employees' realized compensation. This may be based on valuation, but justifiably so, since compensation is compensation.
Hell, a company with bottomless greed and a deep commitment to nickle & diming could probably find a way write the tax bill into their options contracts.
Fifth, the weird part of the law is that it is structured as a payroll tax rather than as an income, capital gains, or wealth tax.
Otherwise it appears to be a very honest attempt to fairly tax different forms of compensation in a non-regressive way.
I faintly recall a discussion of when you should accept dilution (which a tax is) if it raises your chances of success. I tend to assume that startups locate in SF rather than the non-SF bay area for reasons that they feel give them more than a 1.5%*employee equity higher chance of success (shorter commutes for your people, etc.).
More generally, it's only going to be the very large companies that want to exercise their option of exit for this reason: moving sucks and nobody wants to do it. By the time it's millions of dollars in taxes (i.e. valuation > $1bn or so) you'd think about it, but I'd guess not before. So it's not the greatest idea from a tax equity perspective: a tax only the extremely wealthy find it worth their while to dodge is still regressive. Lame capitulations to keep the few companies with this high-class problem in the city are probably correct from a utility-maximizing perspective, if kind of morally distasteful.
By the way, anyone who's been seriously thinking about opening an office in SF should try to lock in lease terms this week. See http://www.scribd.com/doc/50842673/101155-economic-impact-fi...