Facebook’s 99%: Later employees may pay almost double the tax rate
insidefacebook.com
insidefacebook.com
1) Capital gains are already taxed at the corporate level. People seem to intuitively understand how this works at the dividend level (dividends are paid with post tax dollars), but if you do the math, it works precisely the same with capital gains. (Please note: Tax incidence is complicated. Not all the corporate tax is borne by investors. Especially in small open economies like the UK, it's actually mostly paid by the workers via lower salaries.)
2) Speaking of which...capital gains are a tax on investment. Investment leads directly to increased labour productivity. Productivity leads directly to higher salaries. If we want employees to be paid a lot, we want, as a matter of public policy, to encourage investment. At this point the observant will pipe up "wait, are you saying it's good for the workers if we tax worker salaries more heavily than capital gains income?!" Yes, that's exactly what I'm saying, and it's supported by a rich body of empirical and theoretical backing. Heavy capital gains taxes are the precise policy you'd implement if you wanted to keep labour poor and unproductive. (If it helps, consider that investment is saving - it's an accounting identity - and the US has a big problem with low savings rates, which in turn means that they struggle to get enough investment without borrowing from overseas lenders. See the problem?)
3) Finally, investment income isn't just already taxed at the corporate level - it's also already taxed at the personal level too. Imagine two people, Spendthrift Sally and Frugal Frank. Both work at jobs making $200k/year, after tax. Sally spends all her income on consumption, and saves $0. Frank spends 75% of his income on consumption, and saves $50k/year by purchasing stocks which go up in value by 5% per year. After twenty years, Frank has spent $1m total on stocks now worth a cool $1.7m (clearly he follows the buy-and-hold school of investing). He is retiring, and wants to sell them all to re-invest in safer bonds. What tax rate do you think is fair? He made those investments with after-tax dollars. Do we now tax him again on the result of those investments? Don't we want people to behave like Frank, instead of Sally? And if we charge him 15% on his capital gains, he'd end up paying over $100k MORE total tax than Sally. Does Frank, who has scrimped and saved his whole life, really deserve to pay more taxes than Sally, who never saved a penny?
(The analysis becomes more complicated if Frank received the stock as compensation, instead of purchasing it with his salary. But keep in mind that he's still (1) taxed on that initial compensation and (2) is deferring consumption; a responsible choice which we as a society probably want to encourage.)
Sure, a tax rate difference might influence Sally or Frank to spend or save, but Warren Buffet is not going to go on a billion dollar spending spree rather than invest his money if the capital gains rate goes up 5%.
I guess my question is what would the super rich do with their money other than invest it?
If you put your time into something you're equally investing as if you put your capital into something, why if you put mere capital which is recoverable vs. time which is an unrecoverable good should you be taxed at a lower rate?
Employees invest their time into businesses and in return for their investment are paid a salary.
Every time money changes hands tax is paid. If I take my money and invest it into a latte then the coffee shop has to pay taxes on the money received from my investment. Worse yet, if I forget to drink my latte and it gets cold I can't deduct the depreciated value of the asset as a loss.
The only way in which the capital gains rate makes sense is if governments hold labour hostage (silly immigration policies) while capital is allowed to move freely.
I don't disagree with you that raising taxes is generally a bad idea, primarily because the government doesn't invest it wisely, but I do think that having differing rates for labour and capital is silly, especially when a person who invests time is guaranteed to lose their original investment, their time, whereas a capitalist merely has a chance of losing their investment.
1) Sure, but effectively all income is multiple-taxed. Suppose I run my own business, and am paid by a consumer with their money that they earned as wages. If I turn a profit, I then pay taxes on that income. By this logic, I shouldn't have to pay taxes, because the consumer that paid me was using after-tax dollars, so taxing my income from them would be double-taxation, right? The double-taxation argument is simply not very-compelling because there's no one true wellspring of money; if there were, you'd just tax the source and call it good. But reality is way more complicated than that, and money is always taxed multiple times as it moves around the economy.
2) I don't think you're correct about there being empirical evidence of capital gains rates affecting those things. For example, see http://www.slate.com/blogs/moneybox/2012/01/19/capital_gains.... As far as I know, there's no credible empirical evidence that cutting capital gains rates deterministically helps investment or saving, or that raising them hurts those things. Sure, you can pick and choose examples with those outcomes, but you can also find plenty of empirical examples where those effects didn't happen. It's totally misleading to act like that's a settled question in economics.
3) He's paying more in taxes because he ended up earning more money. So yes, he deserves to pay more in taxes than Sally, because he earned more money. Otherwise, you could easily say "Sally decided to work part time and made less money than Fred. Does hard-working Fred really deserve to pay MORE in taxes than Sally?" Yes, yes he does; unless you really think that a poll tax is a good idea, even a flat-tax advocate would have to argue that someone who makes more money should pay more in taxes.
But if you pay yourself a dividend, there is no transaction. If you own an asset, and it goes up in value, there is no transaction. (Capital gains tax is not on the transaction of selling your stock, but on the change in value of the stock; it's only realized at sale. Some countries do charge a transaction tax on stock sales, usually called a stamp duty, which is entirely different.)
More generally, we tax things when they change ownership. (We even tax things when you give them away!) In the case of a small business owner, everything in the business is owned by you. It's yours. You own the business, the business owns the couch, therefore, you own the couch. Ownership is inherently transitive. Even in a large business, everything is owned by the stockholders. Businesses are not people. (Note: At this point, people usually bring up Citizens United, despite the fact that the decision does not claim that businesses are people. Try reading it; it's actually pretty interesting.)
Thought experiment: Can we tax you on the rent you are implicitly paying yourself for living in your own house? Why or why not? And if we can't tax you on the value of the rent your house is providing you, why can we tax you on the value of the things your business is providing you? (Well, obviously, we can do it because the law says we can. But morally, the difference seems remarkably theoretical.)
Further thought experiment: Should you be taxed if you hire yourself as an employee? I'm actually torn on this one. Logically, the answer seems like it should be "no"; it doesn't matter if you hire yourself as an employee for a salary, or work for "free" in exchange for equity. Intuitively, it feels to me like it's okay to tax an owner on his salary but not his dividends. shrug Guess I'm not that logical. :)
2) Yglesias' post is suggestive, but doesn't really prove anything. As I said, there's a LOT of research on this point, and saying, as he does, "Germany added a capital gains tax, and their savings rate didn't immediatly change" does not really tell us as much as he thinks. Germany has also been noted for extremely low wage growth recently. Clearly the result of underinvestment caused by their pernicious capital gains tax, right? I doubt it, but it's no more implausible than Yglesias' argument.
Shows you how out of the loop I am about Facebook, I didn't even know who this was
Dustin Moskovitz has a 5% stake in Facebook, which for an $85 billion company would equate to $4.25 billion. That's around $157 million for every year of his life.
(if I understand it right, he only will pay 15% tax on that - and Forbes says he has 7.6% stake, not 5%)
RSUs are only expensive if they vest when the stock is expensive, exactly the same as with options.
In either case, the earlier they vest, the lower taxes are (due to capital gains tax rates)
The only way I can imagine the article making sense is if Facebook gave employees delayed vesting schedules beyond the usual 25%/yr, and so stock grants vested later (at higher market price) than they would otherwise.
Yes?
The taxable event with options is the date of exercise (or the 83b election), not the date of vesting. The option owner has control over the date of exercise, meaning they can delay exercise until after the vesting date.
An RSU, having a "strike price" of $0, "exercises" (and therefore is a taxable event) the instant it vests.
In both cases, the gain (the surplus of fair market value over exercise price) is ordinary income and taxed as such.
In both cases, the gains (or losses) after the initial taxable event are capital gains, and the rules are not as simple as for stocks, but basically, for employees with typical vesting, hold the shares for a year after exercise and these gains are long-term capital gains.
Most reporters have never heard of the 83B election. tl;dr = Zuck already paid the tax on his options for exercise, at par (0.001 $/share is typical.)
The tax system is truly brain-damaged.
No, it is not. This sentence in bold tells you they do not understand: "Zuckerberg will be paying taxes on $5 billion in gains from exercising options." If you don't understand why that is different than my comment, then you don't understand the issues of the 83B election also.
Now, odds are you a smart person. And that is my point: It doesn't matter how smart you are; The vagaries of the tax law are so numerous and extreme and obscure that you can only come to the conclusion: The tax system is truly brain-damaged.
83b election essentially says: Dear IRS, I know I received all these unvested unexercised options, but I want you to tax me on them as though they were all exercised when I received them. You do this in the year they are assigned to you.
Since this is before the company actually takes funding, the shares are worth some stupidly low number ($0.001/sh). So 1M shares is $1000 of income. Since he was not making much money, that amounts to maybe $200 of income tax on 1M shares.
When he goes to exercise the options, no income tax is paid because he already paid it! He can use those share for ALL SORTS of collateral for the future. As long as he doesn't actually sell the shares, no income tax is due.
With that in mind: My experience is that it makes sense to go the 83b route before any funding rounds (when the price is 0.001 $/sh).
After that, there is usually decent money going out the door to the IRS. Since such a tiny fraction of startup shares are ever worth a damn, it just isn't worth the time, money or hassle.
I think the vast majority of people would expect a billionaire to pay a higher tax rate than an upper middle class person. I wouldn't call that nonsense.
If not being jealous and covetous of those who make more than I do puts me in the minority, then I guess that's where I'm at. Sadly, I believe that to be the case.
And where I live, I pay state income tax, buy a car and buy sales tax, and then every year after that I pay property tax on the value of the car. It's a triple tax!
I'm not really sure why capital gains is such a problem. And truthfully a lot of capital gains (maybe even most?) are not doubled taxed. If you buy stock with after-income-tax money, then yes you pay that tax twice. But if the capital gain is derived from equity compensation a lot of times you don't pay income tax so it is only a single tax. That is what the Buffett rule is all about (and this article as well).
Thinking that a progressive tax system is a good idea has nothing to do with being jealous and covetous of those who make more than you. If you disagree with a progressive tax system go right ahead and support your case, but you're not going to do that with bs arguments nobody is making.
Keep in mind, capital gains haven't always had a lower tax rate than ordinary income. There is no rule of nature that says it has to be that way. We could make the capital gains rate 0%, or 0% up to $200,000 and then 40% for everything over $200,000. Or we could make more than simply 2 rates based on the length of time it took for the gain. Or we could make it any number of other options.
Which one of these is preferable for economic or philisophical reasons is a good question. Warren's Buffet's secretary is no different than Joe the Plumber - they are a personification of the policy. It's hard to latch on to abstract reasoning but easy to see when presented as a comparison of two people.
Of course they are playing by the same rules. Rich and poor alike get preferential tax rates on capital gains income the same way that rich and poor alike get tax breaks on private jet ownership depreciation. Anything else would be class warfare.
Discouraging long-term investment through high capital gain is not a good solution.
There presumably are other ways to reach these same results, but that's the policy choice we have made. I don't see it as much as valuing "mere" ownership over labor, just that we've made certain policy choices as to what incentives we want in our economy.
That's where you're wrong. Different ways of getting it, but it is still USD.
If you want to see what labor looks like without access to capital, check out rural Africa.
In reality labor and capital are completely symbiotic. At least until the robots take over.
Anyone with even a passing familiarity with the US tax code will quickly understand that this is not possible. Seriously. So we know that at least some of what she's claimed in wrong. And since Bosanke won't release her tax returns, that's really as far as we can go.
In short, the "Buffet secretary" talking point really has no evidentiary value for either side. We simply have no idea what she makes or what she pays; all we know is what she's publically claimed is wrong.
Also, this debate really depends what you mean by "millionaires/billionaires". And "taxes". And "tax rates". And "working folk". Being a billionaire is a measure of wealth; your tax bracket is based on income in a single year. Are we talking about marginal rates or average rates? Federal income taxes? All federal taxes? All taxes? How do we impute the corporate income tax (knowing, as we do, that it is paid by both employees and investors)? How do we impute the corporate half of the payroll tax (ditto)? How should we handle cases where someone is in the "1%" for a single year due to the sale of a single large asset they've been working on for decades (family farm, small business, IPO, or the like)? Does it truly make sense that someone who makes $50k/year for 10 years, then sells his start-up for $100m should be in the same tax bracket in that 11th year as an investment banker who makes $100m/year every single year?
This is not an area with easy answers, and the tax code looks the way it does due to a long series of hard-fought struggles and difficult compromises. It's easy to look at Romney at say "he paid 14%", but it's less clear what rate is "right". Capital gains is fundamentally not normal income, and there's no reason it should be taxed at any given rate, much less whatever rate normal income would be taxed at. Some very socialist and egalitarian places have no capital gains tax at all. :)
Edit: My initial post had some silly errors of fact. Mike Ash was quite polite in pointing them out. :) Thanks.
Mitt Romney paid about 14% last year. I paid more than that, as did a whole lot of other common folk. That seems fairly conclusive that it's not impossible.
We can just look at income in a single year for the comparisons. Total wealth isn't really relevant to the question, aside from the fact that it's strongly correlated with yearly income.
Your other points are astute, but I'm just pointing out that this phenomenon does in fact happen, and isn't even disputed. Only whether and how to change things is in question.