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The Zuckerberg Tax
Hugh Pickens writes "David S. Miller writes that when Facebook goes public later this year, Mark Zuckerberg plans to exercise stock options worth $5 billion of the $28 billion that his ownership stake will be worth and since the $5 billion he will receive will be treated as salary, Zuckerberg will have a tax bill of more than $2 billion making him, quite possibly, the largest taxpayer in history. But how much income tax will Zuckerberg pay on the rest of his stock that he won't immediately sell? Nothing, nada, zilch. He can simply use his stock as collateral to borrow against his tremendous wealth and avoid all tax. That's what Lawrence J. Ellison, the chief executive of Oracle, did, reportedly borrowing more than a billion dollars against his Oracle shares to buy one of the most expensive yachts in the world. Or consider the case of Steven P. Jobs who never sold a single share of Apple after he rejoined the company in 1997, and therefore never paying a penny of tax on the over $2 billion of Apple stock he held at his death. Now Jobs' widow can sell those shares without paying any income tax on the appreciation before his death — only on the increase in value from the time of his death to the time of the sale — because our tax system is based on the concept of "realization." Individuals are not taxed until they actually sell property and realize their gains and the solution to the problem is called mark-to-market taxation. According to Miller, mark-to-market would only affect individuals who were undeniably, extraordinarily rich, only publicly traded stock would be marked to market, and a mark-to-market system of taxation on the top one-tenth of 1 percent would raise hundreds of billions of dollars of new revenue over the next 10 years."
...would raise hundreds of billions of dollars of new revenue over the next 10 years.
No, it would mean the excessively rich exploit a different loophole instead.
Yes. in fact you already *did* pay taxes on it.
If you are like the majority of us you paid income tax on the money before it went into the bank account.
Before you get excited about mark to market, mark to market accounting was one of the causes behind the banking melting down we just had and it has since been repealed. Mark to market can easily cause phantom gains. Phantom gains happen when the market crashes like it did in 2001. If you got marked to market in 2000 and then your stock crashed in early 2001 you could have ended up owing more in taxes that your stock is currently worth. That usually results in instant bankruptcy (or bank failure).
Alternatively, anything that allows the wealthiest to dodge their tax obligations should be looked at as a bug, not a feature.
The founding fathers had a lot to say about the accumulation of wealth and the corrosive effect it has on society.
And they would know, as they had seen the Aristocracies of Europe and their concentration of land ownership (wealth).
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For years and years we read news stories about the amazing and complicated hoops accountants jump through to keep their wealth clients from paying money. Now we find out that all their doing is borrowing money at below market rates against untaxable assets. Nothing too complex, and it relies on a good 'ole boy network to approve the ultra low interest loans that make it all possible (I, for example, can't borrow at a rate low enough to get away with this).
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The sleight of hand actually occurred when the wealth grew to a larger amount of wealth without its owner ever needing to describe this "increase in wealth" as "income".
Assume this year there is a stock market bubble, and I pay a huge tax this year. Next year there is a stock market crash, and I lose all my previous years gain. So what happens ? Government refunds me my tax ? What about interest on that tax ? Government pays it too ?
Next problem, how do I pay this tax ? If my money is tied up in investments, how do I generate the cash to pay my tax ? Should we start paying our taxes using equity shares ?
So when my house appreciated up to nearly double during the boom, you'd have me paying taxes on that? Where am I going to get the money? Would you pay me back after it dropped in value?
Actually, only the rich avoid a "wealth tax". For most people, their house represents the bulk of their wealth, and it is taxed annually at a percentage of its value. So effectively, ordinary people already pay a hefty "wealth tax". In some ways it is doubly unfair, because it also taxes the mortgaged part of that wealth that really belongs to the bank, not the person paying the tax.
Why do we accept this wealth tax but not one on other assets? It is just another unfair loophole that benefits mainly the rich. If people were taxed on their net worth rather than just real estate value, people stressed out by their mortgage would see their taxes go down while rich people who can afford it would pay more.
In Argentina, people are taxed a certain percentage of their net worth above a certain amount, so a "wealth tax" on all assets, not just real estate, is not unheard of.
See here's the problem: You start taxing wealth, then you start taxing all kinds of shit. Your house would now not only have a property tax, it'd have a wealth tax. It goes up in value, you have to pay tax on there. You don't realize any of that gain, of course, but it still increased in value, at least in theory, and thus you owe money. Now imagine that during the real estate boom. You suddenly owe income tax on an additional $100,000 because our "wealth" increased that much in theory because your house went up.
That's the thing is that having assets, having wealth, doesn't magically kick in at some number. Most of the middle class has some, just less than the rich. If you own any asset that appreciates in value, like a house, a retirement fund, etc, you have wealth. Maybe not much, but you have some. So anything that places a tax on having it is something that you'll be paying.
Have to be careful of unintended consequences.
This is a slippery slope the government would be well-advised to avoid. The only way to make this "fair" is for reduction in wealth to be given tax credits. Stock goes up, you pay taxes on the increase. Stock goes down, you get a refund on the reduction in value.
How do you think this would have played out when the market went into free fall a few years ago?
I don't begrudge Jobs or Zuckerberg their stock profits. Jobs took no salary and gambled that he could make the stock worth a bunch. He created a lot of employment and happy investors along the way.
But I do think billion-dollar estates should be taxed--a lot. The wife and kids (if any) did not create wealth. They deserve money, but so do we. Otherwise, we pay their taxes for them. The government has to get money from somewhere.
Half a billion is a nice inheritance. If it's not enough for the heirs, they could consider drastic measures, like getting a job.
Zuckerberg will still be a rich man when he dies, and the government will still need money. The place for the taxpayers to catch up with him is from his estate.
It's worth mentioning, too, that Zuckerberg has already made an eye-popping gift to New Jersey schools. Tax-deductible, no doubt, but still a praiseworthy act.
No, it isn't. "Income" is money that you earn. A bunch of pieces of paper saying you have an ownership in some company are not "wealth". Potential wealth, perhaps, but only when you actually sell those shares or exercise those options. Until then, they're nothing more than paper (or these days, bits on a computer somewhere).
I'd like to tax rich people more just like anyone else, but taxing people based on what their possessions might be worth at some point in the future is ridiculous. Those possessions might also become worthless before they ever cash out. Look at all the "millionaires" during the dot-com boom that suddenly became broke after the bubble collapsed. Are you saying those people should all have paid hefty taxes based on that so-called "wealth" they owned? What about when it all became worthless because those silly companies all dried up and blew away when people finally realized their business plans were idiotic? Is the government going to refund billions of dollar in taxes when that happens?
Yep, that's essentially the same thing. The problem with a wealth tax is that it requires you to make more income to pay the tax, or worse to sell off your property because you can't afford the taxes. For example, say some guy working as a barista inherits a nice $500k house from his parents when they die. He can afford to stay there as long as he keeps the heat and A/C set low, but in someplace with high property taxes like Texas, he can't afford to stay there at all because he can't afford the $20k/year taxes on the place. Why should he be forced to sell out (esp. if the market is bad, like right now), instead of being allowed to stay in the house his parents left him? So now he has to go sell the house, give a bunch of money to some no-good idiot realtor for doing nothing, and go buy some much cheaper place (again giving a big chunk to some no-good realtor, and paying a bunch in taxes), just so he can have a place to live (let's say he was living with his parents before, renting a room). That doesn't sound right to me.
Why not? Who are you to decide where he should live? If his parents want to set him up with a paid-off house so he can live rent-free, why is that a problem? You think it's better that he give most of his income to a big apartment complex corporation instead?
Yep. The real purpose of this is to destroy investing. It's not fair that you are planning ahead, or have a lot of money, or your business did extremely well (Zuckerburg, Jobs, Gates, etc.). You owe it to someone who is much better at managing and redistributing money: the United States government.
People seem to not realize that the few that get stock through options are far outweighed by those that buy stocks using their already taxed income. Then, when it comes time convert the stock back into cash, they get taxed again for it.
What Zuckerburg is supposedly doing should be infinitely encouraged. He started a business, which has certainly created a lot of wealth that was not there before, and he is about to pay a boatload of money based on his business doing incredibly well; his company has even created successful jobs outside of his own, such as Zynga. Yet that's a bad thing? Jobs was not taking a real salary because he did not need one, and the stocks are only of value if he continued to run a successful company. Seriously, what's wrong with that? Because he might take out a loan on his net worth to buy more property, which is itself taxed on top of the taxes on the product or property itself? Or is it because he paid so little (I have no idea how much he actually paid and frankly don't care as long as it followed the law) while running such a massively successful company that paid enormous amounts in taxes?
This is despicable. People need to get over themselves. You do not deserve money. You do not deserve success. And you do not deserve to deprive anyone else of it either, whether they got it through luck (including birth) or talent. The only justification is through cheating.
It's time that people started competing again rather than begging or complaining, but I think that I might be speaking to the wrong choir on this one.
Let's not ignore that, as the article points out, there's a loophole method of getting money from these investments in the form of loans using them as collateral. If a mechanism exists to get a monetary payment out of it, then the implications of that method need to be fully explored before you can say it is or isn't income.
Here's how it is a double-dip.
.37) = $150
You invest $100 in Company X.
Company X uses your money to make an 80% profit (good job investing!)
The government taxes the corporation at 37%.
This means that the earnings passed back to you as a shareholder are $100 + $80 - ($80 *
Woohoo! $150 means you made $50 in capital gains!
That $50 capital gains is again taxed at a capital gains rate. For long-term investments (one year + one day), this is currently (IIRC) %15.
This is where the notion of double-taxation comes in. The returns on your investment are taxed twice--once when it is counted as 'income' by the corporation, and again when it is counted as income by the individual. This is why some say that capital gains tax should be eliminated (a notion I do *not* agree with) or even that corporate tax should be eliminated (a notion I agree with even less). In any case, there is certainly double-taxation going on with investments. And that's why capital gains are taxed at a (generally) much lower rate than the higher income brackets are.
1. The rich always have it better.
2. If you try to change rule no. 1, you just make things worse.
This type of pessimism is frustrating. And you are wrong.
Rewind about 500-1000 years. Pretty much 100% of the wealth around the world was held be a sovereign of some kind and his mates, who between them shuffled some tribute money around but otherwise gained more wealth by taxing the pittance earned by everyone else. Killing a random animal in a random bit of wilderness was a crime because all animals belonged to the King, etc.
A couple of hundred years ago this had shifted such that the state, independent of the crown, was stepping in, intercepting some of the wealth and redistributing it via social spending. Serfdom and slavery were on the way out. Meanwhile property and other laws had evolved so that the poor could start becoming the middle class through hard work, with obviously much less of a boost at the start than the landed gentry.
Today, at least in principle, we agree that the rich and privileged deserve no special treatment, and that at least the opportunity to acquire and hold wealth is akin to a universal right. The fact that we haven't fully implemented a system which puts this into practice doesn't mean that "the rich always have it better", nor does the fact that we have recently experienced some short term backsliding on the move from "the king has everything" to "everyone has something".
In other words, you need to use a larger data set than just the last few years or decades. On a longer timeline there has been a very successful reduction in the extent to which the rich get their own way. The current thrashing around by companies and wealthy individuals post-financial crisis indicates to me that they appreciate that their only chance to maintain their privilege is to manipulate things outside of the rules of the game (political influence and tax evasion, for example).
Read Pynchon.
Funnily enough, my house has a market value, and I have to pay a property tax every year based on that market value. And when it goes up in value, my property tax increases.
I'm not entirely sure why stock is different.
Let's not ignore that, as the article points out, there's a loophole method of getting money from these investments in the form of loans using them as collateral.
Don't these loans need to be paid back at some point? They're going to have to either sell their shares, or earn money from somewhere else, to pay that loan. When that happens, they have to pay tax.
I was wondering that too. How do these loans get paid back?
Either way, the answer is simple. Rather than having a tax system based on how much money a person makes, why not have a tax system based on how much money people spend? Jobs borrowed billions using his stock as collateral. What happened to that money? I'm going to take a guess and say he spent it at some point.
With a tax on spending, no matter how much or how a person earns his income, it will get taxed when spent. Illegal alien? Money is taxed when it is spent. Drug dealer? Money is taxed when it is spent. Illegal gambler? Again, money is taxed when spent.
Of course, there are problems. Buy crack from dealer, it's not likely he's going to charge you sales tax. Hookers will have the same issue. That lady that cleans your house... Again, yes, not all taxation based on services will be enforcible, but it will still be taxed when they spend it.
A tax on spent money, aka a "Sales Tax" (doing the finger quotes here) will ensure that everyone pays taxes, no matter how good your accountant is, as there are no loopholes. The only way out is to save or invest, and well, you won't save forever. All money is spent at some point.
There is no "I disagree" mod for a reason. Flamebait, Troll, and Overrated are not substitutes.
mark-to-market system of taxation on the top one-tenth of 1 percent would raise hundreds of billions of dollars of new revenue over the next 10 years
Let's be pretend that it's 999 billion dollars over 10 years (the upper margin of hundreds). That's 100bn/year. Deficit is close to 100bn *a month*... I'm not sure that tax is going to do better than encourage the government to spend more. I humbly propose that a tad more attention be put on lowering spending rather than increasing taxes.
Mind the frickin' laser...
If the parents sunk all of their money into a $500k house and that was their only asset (thus leaving him no inheritance), then blame the parents for poor financial planning.
If someone leaves you a $500k house free and clear that's a pretty damn good inheritance and hardly poor financial planning on their part.
But aside from that, why should someone who only makes $20k/year (or whatever a barista might make...not much) be expected to be able to live in a $500k house?
Because it's bought and paid for, and his property. The question is, why should someone with low income but fully owned property NOT be allowed to live in it?
It's different because property taxes a) are levied by local governments (not federal, which would actually be illegal under the Constitution), and b) go to pay infrastructure used to make your property useful in the first place (roads and the like). It isn't really a tax on wealth, exactly, more a tax on the value that the local government gives the property. In order to tax wealth itself, you would have to argue that the federal government similarly makes stock valuable (a small stretch, but plausible, I guess: defense and whatnot) and would be legal (which it wouldn't).
"None can love freedom heartily, but good men; the rest love not freedom, but license." --John Milton
go to pay infrastructure used to make your property useful in the first place
This goes to the moral argument, and so that is the one I will address.
A huge portion of my property taxes actually go to public schools, which is not infrastructure benefit directly from. My understanding is that this is not unusual.
It isn't really a tax on wealth, exactly, more a tax on the value that the local government gives the property
It's not a tax on wealth, it's a tax on value?
I think that's splitting hairs, don't you?
federal government similarly makes stock valuable
The federal government, with all of the protections that it gives corporations, absolutely provides company ownership value. Similarly, companies clearly and directly benefit from infrastructure.
it its undeniably true that a lot of people and organizations currently make an *income* which is currently not taxed based purely because they benefit from this loophole
I still don't get where the loophole is. So I had a share that was worth $10 a week ago, now it's worth $20. Until I sell it, I don't make any actual income, no money I can spend on something.
TFS talks about borrowing money using that value of $20 as a collateral. Fine, I do that, now I have the cash. But I also have a debt which I will have to repay later - with more cash. So eventually I'll still have to sell my share, and I'll pay the tax then.
Where's the catch?
It doesn't matter how much the corporation is taxed.
YOU are not taxed twice for same money.
By your "logic", you would never have to pay taxes on anything because someone, somewhere, at sometime had already paid taxes on every dollar in circulation.
Exactly as I said. Every dollar in circulation has been taxed at least once. Therefore, no one should be taxed because it would all be "double taxation" by your "logic".
Except that it is not "double taxation" because YOU are being taxed on the money YOU receive.
The money does not owe taxes. YOU owe taxes.
It doesn't matter if someone else paid taxes on that dollar when they received it.
No. It's because poor people have bad lobbyists. And a lack of understanding of how the tax system works.
if FB goes to zero he still has to pay back the loan.
That's the beauty of it, if FB goes to zero he'll have nothing, so he'll declare bankruptcy and not pay back the loan.
If I have been able to see further than others, it is because I bought a pair of binoculars.
Great post. I'd like to respond to some of your thoughts:
a) The *truly* wealthy get hurt the most by far. The ruling class will not let anything like this to happen. Other posters moaned about this hurting the middle class is a load of baloney. A small wealth tax would allow for a significant reduction in income taxes, sales taxes, or deficits.
The truly wealthy are only a tiny tiny minority of the population. All property claims function only by mutual consent of the public. So the wealthy, by themselves, are not really in a position to prevent a wealth tax from being instituted and collected. They need at least some amount of public support. They don't need anything close to unanimous support, but they at least need the support of say 10-20% of the population. They at least need an agreeable pool of people to hire mercenaries from, mercenaries who will defend their property by force from the disagreeing population. If no one at all is willing to defend the property of the wealthy, then the "wealthy" person is just one frail and fallible human being and is effectively powerless.
So the public consent is a huge deal. If the public consent is widely withdrawn on moral grounds, then the amount of friction and struggle needed to maintain enormous wealth is going to skyrocket.
b) Unless all jurisdictions do it, liquid capital will just move elsewhere (which is probably why wealth taxes are only widely used for real estate).
This situation is similar to a thief fleeing the country. Yes, the thief may take a big hoard of gold with her, but she also takes all the thieving activities with her as well. It's a short-term loss and a long-term gain. As long as the country has sane, pragmatic and aware trade policies for dealing with other nations, there is no easy way for externally located super-wealthy to exploit people inside the nation who isn't consenting to exploitation.
As long as people believe in themselves (which is a big if), they don't need the nanny-type super-wealthy to hand out jobs. Jobs exists purely as function of demand. If there is demand, there are jobs. The super-wealthy do not create jobs. Instead demand creates jobs and the super-wealthy position themselves as intermediaries between demand for goods and services and job creation. In computer network security terms, the super-wealthy is a man-in-the-middle attack on job creation. They interpose themselves between demand and job creation. But they don't interpose themselves purely by their own power. They do so with our willing, grudging, brainwashed, or apathetic consent.
c) Some assets are hard to value. There are ways of doing this, but they are all ugly.
True. But this isn't a real impediment. For example, we all know that going 120 miles per hour is dangerous on highways not purposefully designed for such speed. At the same time we also know that going 20 miles per hour is too slow. But where would we draw the line? Well, in reality it's not a problem. We draw an arbitrary line somewhere in a reasonable spot. Not everyone is going to agree. Not everyone will think it's perfect. But in these matters perfection is not necessary. You draw the line anywhere within reason and people will work with it. So does everyone agree that 75 miles per hour is the right number for the speed limit? Of course not. But it's within reason so for most people it's not something worth arguing about.
Another example of this is age of consent for sexual intercourse. Obviously 5 year olds cannot give meaningful consent. And 25 year olds certainly can. But where would you draw the line? It seems like one of those "impossible" problems, but in reality it's very easy. In reality it actually doesn't matter that much. Be it 16 or 18 years of age, you just plop down some number which is somewhat arbitrary but also within reason, and people work with it.
The point is that a system doesn't have to be
The catch is that you can borrow to make other investments. The real problem with capitalism is that it is easy to make more money once you already have a lot of money, but much harder to make money when you start with nothing. If you have shares worth $1m in a low-risk low-return company, then you borrow $500k with them as collateral at a 4% interest rate. You then invest this in something with a 10% annual ROI, and after a year you've made $30K (more, by the way, than someone earning minimum wage in the USA makes from actually working).
This new investment is now worth $550k, and you owe $20k in interest. Now, you borrow $250k against this new investment and use $20K of that to pay the outstanding interest. Now you have $1,550,000 locked up in assets (assuming that your original $1m investment didn't gain any value) that you can't touch, $230k in liquid assets (i.e. cash), and $750K in liabilities. You have $230K more in liquid assets than when you started and $30k more in actual wealth. You've effectively cashed $200K out of the stock market, as well as making a profit of $30k. Since you have not sold any of these shares, however, you will still pay no tax. Even better, you can probably write off the $20k in interest as a loss, so this will reduce the amount of tax that you pay when you actually do realise some of your assets.
For extra fun, some financial institutions will offer special vehicles for doing exactly this. For example, they will sell you insurance against the shares decreasing in value, along with a loan backed by those shares with an offset facility. Effectively, you have now sold the shares to the bank. If the value of the shares goes down, then at the time of repayment the insurance will pay the difference. While the value goes up, the bank will just compound the interest against the total - you don't pay it, it just means that the loan total goes up and as long as the shares are of the same value as the loan it's fine. For example, if your $1m investment goes up by 10%, then the bank will add 10% to the paper value of the loan and give you 6% in cash, so you get $60k more to play with.
The idea of not taxing the increase in asset value until the assets are sold is that this value is not readily accessible. If someone buys a house for $250, and it goes up in value to $500k, then you can't expect them to pay 10-20% tax on this difference, because they are very likely not to have access to this kind of liquidity without selling the house. Worse, if you consider something like the property bubble of the last decade, someone may buy a house for $250k, see its value soar to to $500k, but then only be able to sell it for $200k when they need to move. Forcing them to pay the tax on the purely theoretical increase in value doesn't seem fair. In contrast, if the paper increase directly translates to an increase in their purchasing power, then it does. These loopholes mean that people can still get all of the benefits of selling their assets without actually selling them (and therefore without actually paying tax).
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