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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."
If he has to pay taxes, how is he going to create jobs?
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.
Dog is my co-pilot.
...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).
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.
Dog is my co-pilot.
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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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 ?
Of course she didn't, because she was his wife and as such, the co-owner of his property.
...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.
Second class citizen of the New Gilded Age
Capital gains is a tax on the INCREASE in value. The BASE is not taxed a second time.
If you invest $100 and you realize a gain of $50 on that, then the $50 is taxed as capital gains but the $100 is not taxed a second time.
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.
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.
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.
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.
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...
Borrowing money does not avoid the tax - it delays the tax.
Or, to put it another way, taxes are triggered by a taxable event - such as selling the stock. Borrowing the money just shifts this discussion to a buy now, pay latter. Z probably wants to delay the sale of stock because 1. He thinks FB stock will go up in value faster than the interest rate on the loan (see compounded interest, and leverage) and 2. He wants to keep voting control of the company so he is willing to take the risk. i.e., if FB goes to zero he still has to pay back the loan.
By the way, a wealth tax has the opposite affect of a sales tax. Sales taxes are meant to discourage consumer purchases and encourage investment. Wealth taxes discourages investing in long term capital goods.
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.
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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