The Income Rich Take One For The Team. Thanks!
techcrunch.com
techcrunch.com
>Nothing the government agreed to in the last few days actually affects the asset wealthy in this country.
The increased tax rate on dividends and capital gains definitely affects the "asset wealthy" in the country. In fact, both the top income tax rate and the dividend/capital gains tax rate for those making over $400k has increased by roughly the same amount [1].
However, complete inaction by government would have increased the dividend tax rate even more, so that it would have been considered ordinary income (43.4% top rate) [2]. The legislation passed on 12/31 and 1/1 by Congress definitely helped the asset wealthy. Oracle pays a 18c dividend per share, and Larry Ellison owns roughly a billion Oracle shares. The dividend tax savings he'll receive from this legislation is massive.
[1] The top income tax rate goes from 35% to 43.4% (39.6% + 3.8% health care tax) and the top dividend/capgains tax rate goes from 15% to 23.8% (20% + 3.8% health care tax). If person A makes $100MM in salary and person B makes $100MM in dividend/capgains in 2013, their relative tax rate increase compared to 2012 is about the same: 8.4% increase vs 8.8% increase.
[2] http://www.atr.org/trillion-obamacare-tax-hike-hitting-jan-a...
[3]http://www.bloomberg.com/news/2013-01-02/bipartisan-house-ba...
Is the dividend/capital-gain increase across the board? Or is it bucketed progressively like the income tax rates?
Below $35k income: the 0% capital-gains/dividend rate is retained
Between $35k-$200k incomes: the 15% rate is retained
Between $200k-$400k incomes: PPACA adds a 3.8% capital-gains surtax, but the 15% base rate is retained, effectively raising the marginal rate to 18.8%
Above $400k incomes: the base marginal rate rises from 15% to 20%, plus the 3.8%, for a total of 23.8%
Michael's point was that person A (someone with a high ordinary income) will have approximately double the tax bill of person B (someone with capital gains income) on an absolute basis, and that he believes this disparity to be unfair.
If you choose to create/invest in a corporation, you accept double-taxation as the cost of the benefits afforded by the corporate form.
Yet Silicon Valley regularly supports candidates and policies that would place large burdens on the entrepreneurial ecosystem. We have plenty of examples of high-tax, high-regulation economies around the world with no startup scene. You can't grow one by punishing success and preventing innovation.
The deal that happened today means the top California cap gains tax is going up ~11% this year (PPACA, cliff deal, prop 30). That's 11% of new capital for startups being diverted from Palo Alto to Washington.
(And yeah, I'm flagging this article because I don't like seeing pure politics on hacker news. But I'll participate while we're having the discussion)
http://online.wsj.com/article/SB1000142405274870472800457617...
It's one of the classic problems of democracy - two wolves and a sheep voting on what to have for dinner.
This is a definition of left/right that depends on public opinion and not who controls the discourse. You could definitely argue that progressive taxation as defined by popular discourse in America is left. But that would be ceding too much power to the minority which controls political discourse in America, IMHO.
I'm not sure how you figure. Were you perhaps under the impression that Space X and Tesla were funded solely by Musk? Considering Tesla's operating expenses last year cleared $400M and they are currently in debt, I am fairly certain Tesla is not funded solely by Musk's pocket book.
Anyway, so what if investments are taxed more heavily? So long as all types of investments are taxed equally, you will still have plenty of people investing in new business ventures.
http://pandodaily.com/2012/07/12/space-age-risks-and-profoun...
I'm sure he would have found a way to make do with 1% less capital. But what if rates had been 9% higher, as they will be going forward? What if rates were 28% higher, as they would be if cap gains were treated as ordinary income? At some point, either Space X or Tesla would have never been made.
The tragedy is that we will never know the future Space Xs that are never built.
Speaking as a foreign onlooker (I'm in Australia), I see more libertarians than any other stripe, tbqh.
> Yet Silicon Valley regularly supports candidates and policies that would place large burdens on the entrepreneurial ecosystem.
The Bay Area is home to San Francisco, a traditional hotbed of leftist activism. It's also home to UCB, a traditional hotbed of leftist activism. Some of the outlying suburbs are ... yes, traditional hotbeds of leftist activism.
Mix in:
1. The relatively lower presence of traditional / conservative / "silent majority" voters who are motivated voters
2. That leftists are motivated voters
3. That libertarians are often not motivated voters
4. That voting in the USA is voluntary and not compulsory
and the electoral calculus suggests that libertarians will be out-numbered by leftists at the ballot box.
Or maybe it's just that other people disagree with libertarians' notion of absolute freedom. Perhaps they define freedom differently. I'm sure most of us want the same things in life (like a decent standard of living), but we just can't seem to agree on the best ways to achieve them.
Of course, it's much easier to coerce people into doing the things you want them to do by making the desired behavior a matter of law than to convince each individual to cooperate and use his own free will to obtain the same result, so an undisciplined and unrestrained populace is going to disregard the "no voting on dinner" rule and use the force of the government to get what they want.
Libertarians define freedom as the absolute, unbridled exercise of private property titles.
Non-libertarians take exception to both the extent (the "absolute, unbridled" part) and the core matter ("private property titles") for various reasons. Among these reasons:
* Any value legislated into absolute supremacy becomes steadily more and more totalitarian. People want some moderation.
* An archipelago of private dictatorships is called "feudalism", and is no better than a single public dictatorship.
* "Property is theft!", as Bakunin put it. Private property titles are themselves a form of government-enforced coercion. Taxes you only have to pay once a year, land-rent you pay once a month, exploitative wage-labor you perform every weekday.
* Even the most proprietarian society has some kind of public space, and it must be managed somehow. Example: you can't run naked through the streets.
* Some people genuinely believe that "freedom" in the sense libertarians define it is unimportant or unworthy. See: religious conservatives.
* Private capitalist markets are provably incapable of handling public goods (National Science Foundation, NASA) and commons goods (scarce fisheries, national forests, etc).
While I appreciate your contribution of more detailed points of disagreement with some semblances of libertarian philosophy, I will refrain from refuting them because a) I don't have the time to get into it and b) it deviates into too much of a tangent to remain apropos of the original post.
"Moderation" here usually means "if you agree with me, you're just being reasonable and exercise common sense, if you disagree with me, you're an extremist and your views don't even merit discussion". You call somebody "moderate" if he mostly agrees with you, except for some insignificant details. How is is "totalitarian" to support personal freedom, is beyond me. Can you give an example of a totalitarian libertarian concept?
>>>> * An archipelago of private dictatorships is called "feudalism", and is no better than a single public dictatorship.
Please look it up in the dictionary, "feudalism" does not mean that. I can easily see one reason why small dictatorships are better - it's much easier to escape a bad small private dictator than a bad totalitarian state. Bad small dictator can be put out of business with relative ease, bad totalitarian state is very hard to change - see North Korea.
>>>> "Property is theft!", as Bakunin put it.
You mean Pierre-Joseph Proudhon. He also said "anarchy is order", I wonder if you agree with that too. Also he advocated absence of government. Do you agree with that too? Way to be "moderate", in this case.
>>>> exploitative wage-labor you perform every weekday.
I don't know where you are working, but I don't perform any "exploitative labor". I've heard there are some studios in South California that produce what is called "exploitation films", but I'm not nearly pretty enough to be in show business, even though rumors are there's some money to be made there.
>>>> * Some people genuinely believe that "freedom" in the sense libertarians define it is unimportant or unworthy. See: religious conservatives.
Yes. I know. Also see: modern left. That's why I say majority of US people do not value freedom, although for quite different ideological reasons, but for one underlying reason - freedom for you means freedom for everybody else, including freedom to do what pisses you off. For most people, it is just intolerable to realize other people can do what they don't like and there's no way to stop them.
>>>> Private capitalist markets are provably incapable of handling public goods.
By "incapable" you mean "they would not produce result I like". It's like saying "gravity is incapable of handling bricks" because bricks don't fly. Private markets are perfectly capable of handling anything, they just won't produce the results politicians would like, e.g. they won't probably spend half-trillion dollars on Solyndra. Since many people want Solyndra, you need coercion to make it happen.
Paul Graham's informal poll of investors had two-thirds voting for Obama. That's a stronger lean than the US as a whole. They might be libertarians, but they're libertarians voting for the unionist/leftist/regulatory party.
Plurality voting systems lead to "least worst" strategies dominating.
In the sense that I expect a larger sample size to give more accurate results, yes.
He also appoints people who are activist regulators and judges who view the Constitution as no limit to progressive doctrine.
Could you name one mainstream left concept that Obama opposes?
Imo, the Democrats are a pretty miquetoast centrist party on economics, hardly "far left". They're broadly in favor of free trade with a modest safety net (quite modest, by first-world standards). Heck, I'm not sure more than a smallish minority of the party would even qualify as true social democrats, let alone actual leftists.
On policy terms, I would disagree that tax rates are strongly relevant to a startup scene (not irrelevant, but not one of the more sensitive environmental factors). I do think regulation is an important aspect. One reason I would support discontinuing the use of regulations to achieve quasi-safety-nets and replacing them with direct safety nets. But as for why SV is in SV? I think culture, networks, and education have a bigger role in it. Otherwise you'd expect a vibrant startup scene in lower-tax parts of the U.S. than California, Massachusetts, and New York, and we aren't really seeing that.
Neither party really supports the issues that Silicon Valley cares about. The California Democratic caucus listens to Hollywood and unions more than SV.
I agree that culture, social networks, and education matter more than issues to explain voting behavior. College-educated people vote for Democrats and leftist propositions, so S.V. does too.
>We have plenty of examples of high-tax, high-regulation economies around the world with no startup scene.
Sure, but California is already high-tax compared to most of the US. Why isn't Silicon Valley in a state with no state level income or cap gains tax? There's a number of European countries that have marginal taxation similar to California, why isn't there start-up scene worth talking about there?
There is one Silicon Valley in the whole world, sure there is plenty of innovation elsewhere, but for the software industry there is one stand-out and that is the valley. If there were a few of them then we could easily draw parallels between them and see what they have in common, as it is we can't do that because we have an n=1 situation where all we can do is speculate.
Taxing capital gains and ultra-high incomes is not placing a burden on the entrepreneurial ecosystem. Hell, it's not even really left-wing at all.
Further, in counterpoint: the Israeli economy supports a start-up scene larger than that of New York or Boston, second only to Silicon Valley, while paying marginal taxation rates that would have Americans squirming in their seats. We need high tax rates over here, because if we don't pay for the Army, we all die (or so the thinking goes). But also because a society without universal sick-fund membership or public higher education or scientific research grants or infrastructure projects would be uncivilized.
(Seriously, if you think "progressive Democrats" are left-wing, allow me to introduce you to my friend Karl Marx.)
The only significant portion of the new law that MAY make an impact on the uber-riches is raising long-term capital gain to 20% for people who make over $400k (so actually now even better reason for CEOs to take $1 salary and get the rest in stocks) and limit deductibles to $250k per family (So hopefully people like Romney can longer claim the expenses on their horses and everything else as deductibles).
Well, like MA said, the aspiring rich people took a bullet for the real rich people.
I mean, what would you pay someone like Ken Thompson? There are the outliers like him, of course, but I've also heard that even the less-known folks do well.
Though I've heard all of that from Xooglers, it remains anecdotal. I also remain slightly old-school when dealing with other peoples' salary and give them respect; I'll freely tell you what I make (if permitted legally), but I understand people are not as open as I am and I try to respect their privacy.
Tragic, really.
I certainly don't agree with tax policies designed to punish or discourage high incomes, but this is pure hyperbole.
In my defense, I live an incredibly conservative area in the US, and many of my neighbors honestly believe this exact thing, so it isn't obvious sarcasm to me.
I'm pretty sure it was satirical.
I'm not really sure what "welfare queen" means, but there are plenty of people that face strong incentives to stay on public assistance and little help to get off of it. I wouldn't necessarily place all the blame on them, though.
This is largely because either their state-government is incredibly stingy (see: Texas) or because their potential wages are incredibly low.
In a nutshell, "High top marginal personal income tax rates are found to impede long-run productivity". Source on this is OECD, but original PDF link no longer works http://www.cato.org/blog/oecd-admits-high-personal-corporate...
The tax brackets are known to everyone, including those who pay the salaries - if you want to get someone to do that 20% extra work, and they'll want a 20% increase in net pay, then you can just do the math and pay the appropriate gross.
So when using Romney as an example, it is good to know that if he did not give this much to charity, the rate would be somewhere around 27%, maybe more if charity deductions avoided triggering some higher rates, etc. Average effective income tax rate (don't confuse with marginal!) for millionaires is 23%, for "middle class" is 20% and below (the figures is for tax year 2010, other years I imagine they may differ).
The real picture is a bit more complicated than that due to variable tax rates, but I don't think there's a case where donating to charity doesn't increase your total payout, since you give up 100% of what you donate instead of whatever tax rate you'd have paid.
What's your position? Should we discount investment taxes to encourage reallocation of capital and tax earned income highly to discourage value add labour, or stop asking actual workers to suck it up because they can't flee like capital can?
Maybe, just maybe, I misjudged Arrington a bit.
So if he wants to pay more tax, he can.
He may also rearrange his tax affairs to increase his tax liability. Same thing, but with the exciting frisson of potential coercion (gosh!).
He doesn't seem to be doing either of these, however. Possibly because that might lower his social status vis-a-vis others of his kind.
So actually, he's prepared to make a great personal sacrifice ... if everyone in his class does too.
It seems less impressive when you put it that way, but that's human nature.
I might favor more NASA funding, but I'm not going to write a check and donate to NASA. That doesn't make my desire for more NASA funding any less earnest than someone who wants less funding for NASA.
I'm not judging, I'm exactly the same. I'm much happier if everyone else is beggared at the same time in the same way.
Unsurprisingly, the dominant strategy is to write blog posts saying "we really ought to amend the taxation laws" :D
Private property is just as coercive as taxation in the first place. You do not have a God-given right to make hundreds of thousands of dollars by investing millions of dollars and pay nothing towards the upkeep of society. Basic freaking social contract theory, and, in fact, basic law: financial instruments and corporations could not exist as they do except by government fiat.
Second, yes, he will make the sacrifice if everyone else does it. That's sensible. You don't solve large-scale systemic problems by individual action, not even mass individual action, but only by collective action. Again, this is just how the world works.
The person creating capital may not be someone who is liked, but they often produce jobs, and products/services that people want. Their capital comes about because of voluntary transactions within society. The so-called "social contract", meanwhile, is built on coercion.
I happen to believe (in agreement with you, I think) that private property rights look more useful (in a benefit-to-humanity way) than the rights that most people who use the term "social contract" think of, but I don't believe there's a clear philosophical difference between the two.
You can tell yourself whatever Rothbardian fables you like, but the only real business you're building without any participation in a modern, "coercive" society is a subsistence farm.
Corporations are indeed creatures of government. Are they required to conduct business? No, but they are awfully convenient, and allow for a lot of rotten things to occur.
Private property? If it requires government's nod, it isn't private. And, of course, we see this all the time, when government decides that it wants someone's property, and takes it. It might be your land, your automobile, or something else. It is all up for grabs.
Not sure why you're name-dropping Rothbard, but it doesn't help you here. No business is going to exist without participating in the existing society. Trade and commerce require cooperation. The alternative is what brings a society closer to subsistence farming (and it tends to leave people starving).
You can't escape your problems by pretending to define them away. No property regime has ever been secured without the use of government.
We've had a chance to see a number of government experiments run their course (some continue to), ranging from absolute monarchies, to Marxist-Leninists, to Maoists, to various kinds of republics. All of them have ended up going in similar directions, over time, consolidating power, though at different speeds.
But I think you need to be careful calling what Arrington describes a "loophole." Yes, the people running the funds are the beneficiaries of this specific "hole" in the tax code. But have you considered that this could be a loophole by design? In other words, an incentive?
In many ways, capital is the eponymous character of capitalism. Capital drives our economy. It feeds our society. It's also a good indicator of our prosperity level.
No economist will argue with the fact that capital begets more capital, and therefore we should encourage any mechanism that creates it. Normally I avoid such generalities, but economists accept this as such a simple fact that it would be impossible for them to disagree with it.
This "loophole" in the tax code is a great example of an incentive for investing capital. It makes sense to place that incentive in the tax code because investing capital leads to more capital. Policy makers want people running funds to "exploit" this "loophole." The tax benefits are a reward for efficiently "putting the capital to work," so to speak.
If we can agree that this "loophole" in the tax code functions as an incentive, then I think we should also agree not to call it a loophole. When we call this a loophole rather than an incentive, we make it appear as though our profession (well, your profession... I'm still in college) is the business of exploiting loopholes. That is not what we value and I think we should respect ourselves enough to avoid this perception.
Thanks Paul -- I hope you find time to read this.
If you really want people to respect your profession (I assume you intend to go into finance?) you should focus a little more on the ethics of what you actually do and less on how to spin it.
I think the fact that you would describe my opinion as "spin" is indicative of the larger societal disassociation with members of the financial sector. Because of this, people do not like hearing the financial sector described in positive terms. So, often when people are confronted with a positive viewpoint of it, they have no recourse but to caste it as "spin."
Society has harbored a distaste for finance many times throughout history. The Catholic church even went so far as to forbid usury, preferring to delegate tasks as inferior as money lending to Jews. Not surprisingly, this distaste becomes most evident following an economic downturn. Before the current recession, society's view of "Wall Street" was generally very positive. Now, things are a bit different.
The fact of the matter is that we do not live in an ideal world. But we want to move toward one. The best way to do that is through a strong economy. A financial sector is a necessary part of a strong economy. But I worry that people discount its value to our country.
As long as people view the financial sector distastefully, we are going to need to incentivize working in it. Otherwise the only people working in the financial sector will be people who don't care if they are viewed as working in the dregs of society. That is not the type of person we want in charge of the economy.
(FYI - No, I am not going into finance.)
We do not need to further incentivize working in finance. Finance has already eaten most of the rest of the economy. This is shown by the fact that from roughly the 1980s onwards, FIRE sector has grown immensely, not only in total profits/revenues but as a share of all profits in the United States.
If finance is supposed to make its living by enabling other sectors to grow, then finance should not be outgrowing the other economic sectors. It should remain as a roughly steady proportion of total profits and grow with the economy.
Instead, finance, real-estate and insurance have grown at the expense of the rest of the economy and the rest of society. That's not doing their stated job, that's parasitizing everyone else.
It takes someone with more than a passing knowledge in finance to explain the kind of scummy the financial sector has come up with.
Making money with money is enough of a lure people will still do it.
The answer I see to this is that Arrington is rewarded because he is making the investments on behalf of the investors. I would hazard a guess that many of the people investing in Arrington's fund made their money outside of tech, and therefore do not possess the skill set to critically analyze tech investments. But they know the technology sector is a good place to invest, so they hand their money to someone with the proper skill set to invest in it. In this case, that person is Arrington.
He is rewarded because were it not for him, the people investing in his fund would be unable to intelligently invest in the tech sector.
Another question you have to ask - if his income was subject to income tax versus a LTCG tax that's currently in place, would he stop doing what he does? Reading his original post, most likely not. Maybe he'd raise a larger fund next time to justify the 2/20 fee structure, maybe the structure will be changed to 5/20, but investors will still chase the yield, and there will be someone on the receiving end happy to accept investors' money.
Remember, carried interest is different than capital gains, which would suit your argument better.
As others in this thread have pointed out, there are plenty of highly productive, successful people like top Google engineers who aren't part of the financial sector, the executive class, or the investor-for-a-living class, and they get hit with higher taxes than the capitalist class because they dare, the sheer chutzpah, to take home most of their very-high incomes as salary rather than dividends, interest, or asset appreciation.
For several years, Fred Wilson has written that "carried interest" should be taxed as ordinary income. For instance, see http://www.avc.com/a_vc/2010/05/why-taxing-carried-interest-... (and my guess is that Fred Wilson earns more carried-interest-income than Mike Arrington whose biggest payout was probably the sale of TechCrunch.)
I'm sure that many other investors (e.g Nick Hanauer, here in Seattle) have the same (or more progressive) positions
Btw on some of the other comments ...this fiscal deal wasn't about cutting loopholes. It covered a lot of other more-urgent stuff. There is no way they could have tackled less-urgent stuff in this bill.
However, in the past, Obama has called for cutting loopholes and he stressed that point in his speech tonight. Last year, in October, Romney had also stressed the need to cut loopholes. Cutting loopholes is very hard because each loophole has a strong lobby behind it, but I hope the two parties are able to agree on cutting some of these outrageous loopholes.
The student loan interest deduction gets phased out pretty early. It's gone once your AGI is over $75k.
ITEMIZED deductions get reduced by 3% of every dollar you make over a specified threshold. That's 300k in 2013 with this bill. It's called the Pease phaseout and its back after being partially or completely repealed in previous years.
But I think my main point was that a lot of deductions disappear once your AGI reaches a point where people feel that you don't need the benefit of that deduction.
With Pease Itemized Deduction phaseouts, the effective tax rate for high wage earners goes up independent of their marginal tax rate because more of their income is taxed at those rates.
Seems to be another one of those perks that got removed just as I reached the point in life where I'd benefit from it.
Yes. The situation is analogous to borrowing money to invest in the stock market: Your profit is the profit you make from the stocks minus the interest you pay on the loan, and that difference is what you pay tax on.
In Canada, a mortgage on a principle residence is not tax deductible, since Canadian tax law doesn't consider where you live to be an "investment"; this is balanced by a principle residence being exempt from capital gains tax.
If you have a business that borrows to buy and then rent houses, the same principle pertains; the interest on the mortgage is an expense.
Only in proportion to the fraction of the house which constitutes your home office.
If you have a business that borrows to buy and then rent houses, the same principle pertains; the interest on the mortgage is an expense.
Right -- mortgage interest is a business expense when it's paid for a business reason. A principle residence is not considered to be an investment; it's considered to be a home.
I assume the low capital gains tax is because the money is 'at risk' in the market, but for professions with long expensive educations - the risk is in the time and money investment up front. Additionally doctors/lawyers are more likely to actually spend their money locally to buy and fund local business since they're not moving around millions of dollars or just leaving their wealth in the market - taxing them harder just means they won't pay local contractors to have an addition on their house and they'll pay taxes instead.
This is justified by the fact that the corporation will be taxed on any income that is paid out as a dividend. Therefore the effective tax rate on the income is the corporation tax plus the dividend tax rate.
I ask because we can talk about capital gains tax rates and how low they are, but we should always talk about effective tax rates, in my opinion. That was why Subchapter S Corporations were created, I believe.
One thing that is bugging the hell out of me is the news coverage. They continually throw numbers around without being at all precise about what the numbers mean. I saw an op-ed, in the last run, arguing that $250k didn't amount to aaaalll that much once you take taxes out of it so let's not raise taxes on those making around $250k - except the $250k figure everyone was throwing around was post taxes; in pre-tax income $250k was simply not a any sort of interesting point. Now, we're hearing that capital gains is going up for people "making more than X", and the like - is that pre-tax? post-tax? is capital gains counted toward that? These things hugely change the character of the situation, and I flat out can't get it from the press, and that is absurd. Similarly, "Extend the Bush tax cuts for people making more than X" - that's not what anyone was talking about; they were talking about extending for everyone the Bush tax cuts on the first X dollars of income.
CrunchFund could start being denominated in Pesetas, Roubles, Euro or Sterling.
The interest deduction makes the effective rate of circa 15% internationally competitive.
There is still plenty of room to budge 5% say, but beyond that would get limited returns and capital rehoming.
http://accf.org/news/publication/an-international-comparison...
This would translate to investing "someone else's" money too, as that investor or lender would presumably be looking for a return.
More personally: I've co-founded several companies. Never once was tax loopholes or tax levels at all any part of my consideration or the discussions I've had with co-founders or various VC's about whether or not the business was worthwhile. At most taxes would be some line item buried somewhere in a spreadsheet amongst other costs of doing business.
Maybe it affects amount of capital available in the market, but it certainly does not take away the incentive.
[1]: http://www.macworld.com/article/2023491/apple-gives-tim-cook...