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."

Comments

Such systems have been proposed before

[Scareduck]

and are uniformly shot down as a tax on wealth rather than income. And that is correct: it is, after all, an income tax, not a wealth tax. The author of this piece wishes us to ignore his sleight of hand. That is, this is not a bug, but a feature.

Re:Such systems have been proposed before

[Surt]

There's nothing wrong with a wealth tax. In fact, every so often one becomes vitally necessary because the few have accumulated so much wealth that the many can no longer live reasonable lives. This tax is sometimes known as 'violent revolution'.

The wealthy, were they wise, would get behind a wealth tax now, rather than deal with the alternative that is not far off.

Re:Such systems have been proposed before

[Grishnakh]

And yet, they implemented neither income nor wealth taxes, at least at the federal level. Odd how you imply they didn't want the accumulation of wealth and yet they did nothing to stop it. I think they actually knew that wealth was the incentive to success and didn't want to cripple a new country by trying to redistribute the wealth.

Nope, instead, the Founders wrote a Postal Service into the Constitution because they knew that inexpensive communications were essential to a democracy, and they made education free for everyone (at the state level, however, not federal), because they knew that education and literacy were essential to democracy.

Nowadays, everything's screwed up. The "conservatives" (teabaggers) want to eliminate the Post Office and replace it with private services so that people in rural areas get to pay $50 to mail a letter, and they want to eliminate public schools altogether (and until then, they want to teach fundamentalist Christianity in public schools). On the other hand, the liberals want to prevent public schools from eliminating bad teachers, and they want to change the curriculum so that instead of teaching English, math, science, and other important subjects, they teach Spanish and "multicultural studies" and other such vacuous BS, and eliminate the hard subjects because they'll hurt kids' self-esteem.

I think the Founders would be really pissed if they saw how things had gotten after only 230 years.

Re:Such systems have been proposed before

[A nonymous Coward]

Where did the money come from that he used to pay back the loan? Unless he got that from another loan, it was .... income!

Clever, ain't it?

Re:Such systems have been proposed before

[tragedy]

Yes, they have to be paid back, but one question involved there is when they have to be paid back. Grishnakh specifically stated: "My dear tender little fools...", no, wait, wrong Grishnakh. This one said: "Stock certificates are worthless pieces of paper that only become worth something when you convince some other sucker to buy them from you for more than you paid for them." The fact that you can use them as collateral for a loan like that means that you can get money out of them way before you need to sell them. And the loan could be set up so that you don't even need to start paying it back for years. Not to mention that you don't have to pay tax on money you spend to pay certain types of interest. So, if the loan is structured so you never have to pay any of the capital and just have to pay interest, you could conceivably take out the loan against stock, then each financial term (I don't know if it would be yearly or quarterly or monthly or whatever) sell some stock to pay the interest on the loan. Then, when it's time to pay your capital gains tax, you take a deduction on the money you spent servicing the interest on the debt. As long as the interest you pay on the loan is less than what you would pay for taxes, you could save money and avoid paying taxes.

I don't know if that's what actually happens. Maybe it's impossible to get away with a tax dodge like the one I describe above. Seems like that, or a variation on it would be possible though, especially when such a massive chunk of the law is the tax code and most of that chunk consists of special exceptions and exemptions. Anyway, as I said about stocks, 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. I've just veered into the realm of speculation because I don't fully understand all the implications of these loans. In that, I'm no different than you. We're all stumbling around in the dark expounding on the shallow parts of this we do understand and ignoring the inconvenient details we don't.

In addition to that, after the recent bank bailouts, I think the question of who eventually pays if the stock value doesn't grow forever and the loan comes due with worthless collateral has already been answered. The person who has been living like a billionaire with no technical income and no taxes ends up no worse off than most of us, or maybe even simply defaults on the loan holding a bunch of cash and the bank left with worthless collateral gets bailed out with public money from the taxes the billionaire never paid because the system let them float their taxes.

Re:Such systems have been proposed before

[hsthompson69]

When billionaires can get away without paying most taxes (surely they pay sales tax on things that they purchase?) yet working stiffs have to pay 20% of their incomes in income+medicare+ss alone, something is clearly out of whack.

The really ironic thing is that the first income tax was essentially a "billionaire tax", that was never meant to affect normal working stiffs :) While adjusted for 2012 dollars, the 1913 income tax did technically affect non-bill/millionaires, they were only those in the top 5% of income (and I couldn't find any real statistics on the accumulated wealth of the top 5%, just yearly income).

I'd go for the flat sales tax as the "easy" fix (http://www.cato.org/speeches/sp5-11-5.html) - the problem with it is that such even-handed treatment would send all the special interests who already have all kinds of deductions/subsidies/loopholes into a tizzy. Not to mention that when *everyone* is paying the same rate for taxes, all of a sudden large government programs that cost lots of money become *real* to people because they experience the tax rate every time they buy something - be it wars, social welfare programs, or industry bailouts. When people aren't personally confronted with the costs of something (say, healthcare), they spend more, and get less benefit from it - waste is just too easy to do.

One more issue

[Scareduck]

Calling this "mark to market" is horribly misleading, not only for the reason I cited above (it's actually a wealth tax, not an income tax) but also because a wealth tax would demand a substantial fraction of assets would have to be shed each year, thus diluting the market for that asset class. It becomes an Heisenbergian problem.

A wealth tax assumes liquidity: for instruments such as REITs where the underlying asset is not itself terribly liquid (imagine, for instance, owning a shopping mall outright), how does one go about liquidating such a thing in part? Finding another partner? And then the next year, when the same thing has to happen again?

Finally, the issue remains of incentives. France has a wealth tax, and the net result of this is that while it has collected $2.6 billion (equivalent), it has resulted in $125 billion in capital flight since 1998.

Re:One more issue

[rlk]

I consider myself to favor progressive tax policies, but even I think this goes too far.

"Mark to market" has a lot of problems. As you say, the market price at any given moment in time simply reflects the price at which the most recent sale of any size was executed. There's no guarantee that any other sale would be executed at that price, and if a large volume of the item (or security) were to be sold all at once, it's unlikely that anything close to that price would be realized. So even leaving aside that this is a wealth tax rather than an income tax, it's not taxing actual wealth; it's taxing wealth assuming an arbitrary valuation.

This kind of thing could easily be gamed. Suppose at the end of the year someone arranged to sell a small block of securities at an artificially low price right at the closing bell? Presumably regulations could be passed to inhibit this, but I'm sure there would still be plenty of possibilities.

Furthermore, what happens when the security's price goes down? Does everyone holding it get a rebate? Or it is really nothing more than an annual wealth tax?

I'm not opposed on principle to a wealth tax, and I understand the issue of using an appreciated security as collateral to float a loan that could be more or less constantly renewed. And while a security's price is "stepped up" when passing through probate, I believe the estate still pays tax on the security's value at the time of death (but IANAL).

Re:One more issue

[rachit]

Theoretically, wealth taxes are one of the most progressive taxes out there which also give the best economic incentives for growth. Income taxes discourage earning money, sales taxes discourage consumption, capital gains taxes distort / discourage investment. Wealth taxes encourage people to make the best return from their assets, and if they can't do it, sell it to someone who can.

It doesn't work for three reasons:

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.
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).
c) Some assets are hard to value. There are ways of doing this, but they are all ugly.

Re:Not a problem...

[crunchygranola]

...Bump capital gains to equal payroll, including taking cuts for social security and Medicare.

After all, that was good enough for Ronald Reagan. His big tax reform achievement, the 1986 Tax Reform Act, equalized treatment between capital gains and wage income.

Re:You know what I like?

[steelfood]

It seems a bit ridiculous to complain about this. If you had six hundred dollars worth of collateral that you could use to borrow the hundred dollars you paid in capital gains tax, I'm sure you could do it too. It may not be for the same interest rate, but it's still doable.

The only thing is, when you're borrowing that little, it's fairly pointless and not really worth anybody's time, be it yours, your accountant's, or the bank's. It takes time and money to process a loan application, irrespective of who the borrower is. That time adds up to costing about as much as or more than the amount you're borrowing.

What the wealthy have over the middle class is economies of scale. They can borrow several million or billion to cover their millions in paid taxes all in one go, which would actually be worthwhile for all parties. They pay the same flat amount as the middle class person would to apply for the loan, but their ROI is millions. The low interest rate is just icing on the cake. The bank can afford this not necessarily because of connections, but because when the loan is a billion dollars, the bank is still making a million dollars even the your interest rate is 0.1%.