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> Epic Games is a privately held company, and not traded on established securities markets or readily available on secondary markets.

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.

Yes, but the strength of the criticism is really dependent on the number of companies that it applies to.

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.

> 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.

"Not go public" seems most sensible to me, from both sides, being a Zuck/Bezos/Gates/etc, and being the rest of the economy and society with Z/B/G/etc's in it.

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.

> As a way to protect himself from this dilution in ownership, what could he do?

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).

What is to prevent "franking" of capital gains the way dividends are franked (ie. every shareholder gets paid back whatever capital gains taxes they would need to pay to keep their stocks/control stable) ?

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)

I don't think anything would prevent it, but I doubt many companies would have equally affected shareholders.

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.

If it only affects individuals, it's trivial to circumvent. Have a holding company under your control "owned" by a bunch of people (who are well paid for that role, but have no control. You could even do it the middle eastern way and use extended family for that). Besides, I'm personally much more worried about Blackrock than I am about Bezos, or any billionnaire.

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?

> As a way to protect himself from this dilution in ownership, what could he do?

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.)

I don't know, I think we should trust the ultra-wealthy guy when he says that paying his fair share of taxes will hurt the little guy.

> But suppose it were publicly held,

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.

Its not like companies that are listing to the stock markets have any value left. Most of them are just using it after they've burned all their rounds of funding to hopefully dump the picked over carcass on retail and pension funds. So the less they CAN dump, the better.

> Epic Games is a privately held company, and not traded on established securities markets or readily available on secondary markets.

So this law would lead to a proliferation of privately held companies as billionaires avoid the stock market and other tradable covered assets?

Maybe, but there are a lot of factors that drive IPO decision making and I don't think this would be a huge one.

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.

There are lots of factors that drive IPO decisions, preferable treatment on capital gains is definitely one of them. You become taxed merely for holding shares (as a sort of share deprecation), then you won't do that if you have better options, so they will flock to better options. Building a private company is something they can do much more easily than anyone else, why wouldn't they? The complete avoidance of shares would then make the tax law meaningless.

For now. Tomorrow is you paying capital gain on your home each year. What happen to be able to deduct inflation from capital gains?

I mean, it's fair to say: "hey, where might this go in the future", but when discussing what this specific proposal is today, I'm suggesting that we have a more factually sound starting point.

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.

Today, you pay property taxes based on some assessed value of your home every year, and in most municipalities, your home gained value. You're already paying tax on the gain in value of your home, what would be so different about paying tax on the gain in value of other illiquid, capital holdings?

So if you make improvements to your house over the course of a year, and/or the property value in the region goes way up, you could face an unpayable tax bill and lose your house. I don't have much sympathy for renters complaining about gentrification, but property tax laws like this are hot garbage.

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.

If you can afford the cost of the improvements, the chances of you being unable to pay X% (where X is likely a single digit) taxes on the value of those improvements is ... small.

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.

Also, notice that most property tax assessments are based on purely physical exterior-visible aspects of a home. If you convert that rats nest of a bathroom into a wondrous home spa, in most places no tax assessment change will follow.

Only if you don't file any permits, correct? I'm not aware of anywhere that won't reassess on major improvements. Which is partly why SF Bay area housing is so terrible - none of the owners want to trigger a reassessment, as in many cases it may increase their tax bill 10x.

I have not lived in any municipalities where doing remodelling that doesn't chnage the number of rooms or enlarge the total footprint of the built area would change tax assessment.

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.

FYI - the house I’m renting, if it got reassessed at market rates, would go from $3600/yr in property taxes to $23000/yr in property taxes. Which for all but the most lavish upgrades would swamp the cost of the upgrades pretty quickly.

California Prop 13 causes some serious market distortions.

I just got the form from the county for this for some improvements to my house, so I can answer. Permits for "improvements" are sent on to the county tax assessor, and they send you a form basically asking for the value of the improvement. Note that "maintenance" doesn't count, only "improvements" (and then only specific improvements; e.g., adding solar doesn't count). The value gets added to your Prop 13 value, but does not trigger a complete reassessment. So it's unlikely that any improvement would result in a 10x tax bill increase, unless you've owned the property for a long time (meaning that your Prop. 13 value was significantly less than the real value of the property).

The property I’m currently renting has an assessed value of $248k. A nearby comparable house just sold for $2m. It’s not unusual around here for that to be the case.

That means that your landlord would have to spend $2M on improvements alone in order for their tax bill to 10x.

Looks like you’re right! Ref for those curious [https://leginfo.legislature.ca.gov/faces/codes_displayText.x....]

Thanks

House price inflation happens not because people "invest" in homes but because of the market. It is to a great extent driven by low interest rates.

You already pay property taxes on your property each year. It is a non-trivial percentage of the house's value (~1% where I live).

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).

The bigger point it misses is that this will never pass, at least not without massive loopholes allowing the ultra wealthy backers of these politicians to pay practically nothing. It's a stunt. The people voting for it will be able to claim they've been struggling with all their might to go after the capitalist fatcats, and the people voting against it will be able to say they've protected you from communists, and they'll all be heroes.

Yep, unfortunately it is all theater

“This significantly reduces the amount of shares he would have to liquidate to cover his take burden.”

Well dang I’m so relieved that it’s a measurably less severe amount of bullshit.