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How Entrepreneurs Overturned California's Retroactive Tax On Startup Founders
waderoush writes "Startup founders in California can breathe a little easier today — they won't be getting bills from the state for up to $120 million in back taxes. On Friday California Governor Jerry Brown signed a bill prohibiting the state from levying retroactive taxes on founders and other small-business investors who took advantage of a tax break invalidated last year by a state appeals court. California Business Defense, a coalition of entrepreneurs, spent most of 2013 trying to reverse the California Franchise Tax Board's interpretation of the court ruling, under which it planned to hit Californians with new tax bills on the sale of small-business stock going back to 2008 (a story that Slashdot picked up in January). Two bills on the matter reached Governor Brown's desk in September, one fully restoring the investment incentive through 2016, the other partially restoring it. Brown signed AB1412, the bill granting full relief. 'For a bunch of political greenhorns operating in an environment where political partisanship is at an all-time high, we did all right,' writes Brian Overstreet, one of the co-founders of California Business Defense. 'But it should never have been this hard.'"
Sometime soon they will remember that they failed to tax your hindquarters ten years ago and make a tax bill for that, which will require a new round of lobbying for repeal.
Time Bomber the Book coming soon.
Courts close loophole...... paid off politician gives amnesty to everyone who used loophole..... and rich people always win.
Government fails the 99% yet again.
What probably happened in both places is that businessfolks in IT, particularly entrepreneurs, don't have a lobbying presence in the state capitols like the old-line manufacturing and service business do. So when state government is hurting for cash, and they often are, they know they can't disappoint their friends who just wined and dined them in a skybox at the big game. By contrast, software and IT looks like a big cash cow, ripe for the plucking.
Yes, because taxing an income that has already been taxed is such a wonderful idea.
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Do you even understand what capital gains is?
Yes, it's a tax on inflation. Do *you* understand it?
Learn to love Alaska
I've heard this before, but I don't think I'm understanding it. Capital gains is on the profit from selling stock, right? How does that profit get taxed before you sell it?
A few rich guys who don't want to pay their taxes get together to do something about them. They have the resources to lobby a bill almost full time for nine months. In the end, they get their bill passed but whine that democracy is broken because they had to work really, really hard at it.
Must be nice. Some of us have day jobs.
I live ze unknown. I love ze unknown. I am ze unknown.
Sure. you buy a house for $50,000 in 1973, then 40 years later sell it for $250,000, an inflation calculator will indicate an almost imperceptible change in "value" (in 2013 dollars), but you'll be taxed on the inflation (on not, if you live there as a homestead, and meet other rules).
Capital gains is a tax on the inflation. They don't calculate the capital gains on the "real" gain, but the dollar gain.
You are obviously the person that doesn't understand it. If I don't understand it, explain how I'm wrong. Go ahead. I'll be waiting.
Learn to love Alaska
capital gains does NOT at all hinder the economy
Good to know. Perhaps we should eliminate the capital gains exemption for real estate sales of primary residences. I wonder if a $10,000 tax liability on $50k of profit would "hinder" John Q. Low Information voter when he sells his house.
He might be a little less willing to indulge "progressive" hate mongering about the "rich," at least. Anyhow, you let me know when we elect someone ready to repeal that little tax break because it doesn't "hinder" the economy.
I'll be right here, not holding my breath.
Maw! Fire up the karma burner!
What?!?! The tax RETROACTIVELY took money that people had earned years ago. You work 80 hours a week for several years, then sell the business, finally reaping the rewards of your hard work. With the money, you pay off the credit cards or other debts you incurred while getting the business going. Two years later, the state comes along and says they want that money.
How is ceasing that nastiness a "state subsidy to people who don't need it"? Are you high?
The idea behind cap gains taxes is to capture the gains above inflation that people make in buying and selling assets. But that's not the way they work when applied to dollar values. Inflation over 40 years may indeed raise the price of everything (including that house) by a factor of 5. But that isn't an increase in value. Long term dollar gains need to be discounted by an inflation factor to capture actual value gains above the rise due to inflation. Since Congress and the Administration are in control of inflation (in theory), cap gains taxes are a way of taking wealth which in reality was never created.
Have gnu, will travel.
In fact the only tax cut PROVEN to stimulate economy is the corporate tax rate.
[citation needed]
Have gnu, will travel.
Good point. What people don't realize is that capital gains taxes hit the individual harder than the corporation.
Individuals can't shuffle their asset ownership around like corporations can. Either by moving ownership structures offshore (most progressive countries have little or no cap gains taxes) or by resetting their tax basis by mergers and acquisitions.
The primary residence tax break was instated to keep the John Q Public voters largely unaffected and therefor unaware of the true impact of capital gains taxation. And since most voters' only other major wealth holding is a pension (managed by others), it remains largely hidden from them. If they ever sat down and figured out how much money the government has robbed from their retirement, there would be blood on the streets of Washington DC.
Have gnu, will travel.
are bullshit
Sure. you buy a house for $50,000 in 1973, then 40 years later sell it for $250,000, an inflation calculator will indicate an almost imperceptible change in "value" (in 2013 dollars), but you'll be taxed on the inflation (on not, if you live there as a homestead, and meet other rules).
Capital gains is a tax on the inflation. They don't calculate the capital gains on the "real" gain, but the dollar gain.
You are obviously the person that doesn't understand it. If I don't understand it, explain how I'm wrong. Go ahead. I'll be waiting.
That is actually a really good point.
Is indexing the cost basis against something like CPI something that has been proposed as law before?
I know I personally would absolutely support that change, although I would like to see CG rates be more in line with income rates as a compromise, as the goal was never meant to tax base value of long term assets, but specifically to tax value gained over the time.
a handful of selfish greedy people are no match for millions of selfish, greedy people -u4ya
I pay capital gains and I sure as fuck am not rich.
well lets put it out there since alot of you like to talk about how good or bad it is without talking about it.
I work, I save up a few hundred bucks. that money is taxed as income. I then decide I want to invest it, in say apple or MS or tesla or (insert whatever wont get your panties in a bunch since this is only for argument sake)
I then take that already taxed income and use it to prop up another business instead of spending it on xx or YY
why in the hell should my money thats already been taxed at income levels be taxed again???
have you seen my sig? there are many others like it but none that are the same
It can be, but that's over simplified. A capital gain is when a capital asset (stocks, bonds, property) is sold or traded for more value than it was initially purchased for.
As far as the "already taxed" thing goes, there are 2 primary arguments that support this.
The first is the easiest to understand. There is a "Corporate tax" on corporations. If you own stock in that corporation you are part owner, and, in effect, paying that corporate tax. The value of your stock is lower because of that tax. Then, when you pay capital gains, you're getting taxed again. You are quite literally paying taxes twice in this case.
The second is a little bit harder to grasp. Basically it goes like this: You earn money in some way, and you are taxed on it. Then you take that money and decide to save it. You start an investment account and invest in stocks. Then you have to pay capital gains tax on what to you is a retirement account. You were taxed when you earned the money and then you were taxed again when you try to withdraw it from your investment account simply because the stock increased in value.
Lastly there is an argument that's not really about "Double taxes" but is a good argument against our 'current' capital gains system. It's that much of capital gains is not, in fact, profit. If your capital assets are your retirement fund for example, and you hold an index for 30 years or more, when you sell that in retirement the increase in value is treated like profit, when in fact a lot of the increase in value is due to inflation. There are ways to tax that would take inflation into account but the United States has never taken action to change it.
If anything I think the most credible argument against capital gains is that it discourages investment. For example, I have an index fund that pays dividends. In most cases people choose to re-invest those dividends into the same stock. So the index pays out $20 a month in dividends and my account just uses that to buy more shares. But I have to pay capital gains on those dividends... the result? I invest less back into the index.
That's just silly. The money is not "taxed again". What is taxed is the *gains* you make from the investment. Now there are good arguments for taxing these gains at a lower percentage than income produced by your own labor, but claiming the "money is taxed twice" is a stupid thing to say.
It gets taxed via AMT (alternative minimum tax) in special cases. If your company gives you ISO stock options (as my wife's company did), you have a strike price and a vesting period. Once your stock option vests and you exercise it, you realize an on paper gain in wealth of current value of the stock less the strike price. You owe the AMT on this paper gain, which is treated as a pre-payment of any cap gains you'll owe when you sell it. So you hold it a year and then sell for cap gains long. If cap gains taxes are more than what you paid in AMT, you pay the difference. If it's less, you don't get a refund for a year. Since we're not rich, we did a straight sale when the option vested and paid income tax. :P
It would have been more money in the long run if we'd had the money to do it the right way. We could have swung the strike price, but the AMT would have killed us. Plus we just decided to go with easy as the headache for the difference was just not something we'd want to deal with anyways.
Post anonymously - For when your opinion embarrasses even you!
I really do not buy the second version at all:
You earn money in some way, and you are taxed on it. Then you take that money and decide to save it. You start an investment account and invest in stocks. Then you have to pay capital gains tax on what to you is a retirement account. You were taxed when you earned the money and then you were taxed again when you try to withdraw it from your investment account simply because the stock increased in value.
Sorry, I only see the increase in value being taxed. That is NOT the same money being taxed twice, it is NEW money.
I fully agree with your later statement that inflation should be taken into account (except no refunds if the resulting calculated tax is less than zero). But 99% of the complaints are about short-term investments which inflation does not effect. I do not think trading some money with somebody in one day should somehow make your income taxed less depending on whether it is classified as a "capital gain" or not. And inflation does not change prices in that short period of time as it is not a continuous slope.
It should all be taxed the same. Anything you sell you are allowed to subtract the inflated value of the original purchase price (except clamped so you cannot claim you lost money). This is part of your income. Taxing different forms of income differently is government market manipulation just like taxing larger sodas differently and should be hated by libertarians.
They also need to calculate capital gains on capital gains. I know more than one day-trader, and they spend all day long researching, trading, treating it like a salaried job, and if they make cash from a 2-hour holding of MSFT, it's a capital gain. Capital gains are discounted because the capital helps the economy grow. How does day-trading make a long-term investment in the economy?
It doesn't. Capital gains taxes do not tax what they are aiming for. Setting them as they are (lower than earned income) only helps the rich. What's needed is to abolish the difference between earned and unearned income. Perhaps a distinction between pre-tax and post-tax income (for some types of benefits or retirement accounts), but there's no need to tax capital gains lower, except for the campaign donations being from rich people who want no tax on their billions of dollars of income.
Treating capital gains under one month as earned income, setting the rate to the earned income rate, and "discounting" the gain against inflation to tax value, not numerical, and otherwise simplifying the tax would be a great improvement. The issue is that taxing as it is done now was well tweaked to leave in breaks and loopholes for those who helped write the rules, and they have more money and incentive to keep it going than we do.
Learn to love Alaska
Anybody who reads the actual story will realize that this is a fight with out-of-state companies, not with the state. They want to extract a bunch of money from California and will probably take this to the courts to try to get it.
Basically California offered a tax break to in-state entrepreneurs that it did not offer to people who lived out-of-state. For some reason this was declared unconstitutional. The outside groups are now claiming that unless California charges the in-state people retroactively then they must get refunded the same amount.
I assume the bill is some sort of legal thing to undermine this claim. Note that everybody is paying the same tax now.
It wouldn't hold back the economy to eliminate that exemption. In fact it would probably help housing affordability. CGT exemption on residence leads to people treating housing as a tax-free investment rather than a place to live. So they "improve" their house to the point where it's not even the kind of thing they'd want to live in any more with the sole intention of selling it without paying tax on the profit and moving on to the next one. Of course no politician will talk about eliminating the CGT exemption because their opposition would immediately use it to stir up negative feeling, because people only want others taxed, not themselves.
But in an ostensibly capitalist country it neesd to be ok to be a capitalist, otherwise the people with the capital flee the country. I think if taxes were simplfied rather than remain the incredibly complex morass of laws and regulations we have now, we might have a better chance at collecting them.
The rich will flee to where? To Somalia - the land with no taxes!
The whole argument 'if you tax the rich, they will flee' is nonsense perpetrated by the rich. They are in California, New York or Paris for a reason - these are good environments to be with your wealth.
Why do the rich Russian oligarchs buy property in London and other Western cities...its not because of their new found love for British monarchy, kidney pie or Shakespeare, its because of the quality of living and the 'rule of law' which may not be usurped by the Politicians in power if you fall out of favor. Only democracies can guarantee that to some extent - at least until you turn against the state in a serious way.
Tat Tvam Asi
Excellent! Since the money a corporation pays to employees was already taxed, we can eliminate the income tax and sales taxes entirely. Also, when you pay it to a business, they get to exempt that portion because it was already taxed once.
Somehow, that doesn't seem quite workable, I guess we have to let money be taxed more then once sometimes.
I'll bet you wouldn't prefer to pay income tax instead.
The problem is that the rich don't pay income tax at all. All of their money coming in is somehow not income and so is taxed at a lower rate.
I compare this to the cable company: "You ordered basic cable and have been paying for it; we mistakenly enabled the super-deluxe package, so you owe us back charges." No. If the service was set up wrong, that's the service's error, not the customer's fault. If the state had a tax rule, and taxpayers were complying with the rules as specified, and then the rules turned out to be invalid, that is not the taxpayers' fault.
My bigger problem with this kind of thing is that when government makes an error, they present it as if the people were cheating. Also when people set up legitimate plans based on the current rules, and the rules change, should the plans be grandfathered or not? Card or board games where the rules change in the middle can be amusing, but changing rules would be annoying in sports, and ruinous where money and law are concerned.
Heck, since every dollar (excepting whatever the Mint generates each year) has already been taxed, we shouldn't have to pay taxes on *anything* anymore, right?
FWIW, the one time I filed capital gains was from some stock that I had bought a few years ago, watched it keep almost all of its value while inflation went on, and then sold it. I lost a bit on the sale (inflation-adjusted) and significantly more on the taxes for illusory profit.
"When you have eliminated the unacceptable, whatever is left, however improbable, must be the truthiness" - Holmes
Yup. Inflation is the pink elephant. Everyone knows it's there, but nobody wants to talk about it. That's the reason why your taxes are "due" December 31, but you pre-pay them all year. So the government has a stable income to balance expenses on, and because $1 in January is worth more than $1 in December. If everyone paid their taxes in full the last day possible, the government would lose billions in inflation (usually called "interest" to hide the elephant).
Learn to love Alaska
ok i see how i may have misworded it a little bit however the point stands. I shouldnthave to pay taxes on something that I gain on money that has been taxed. In other words that money i have invested means i cant spend it anywhere else, its tied up and i should see the gains on that without the government getting involved. tax those gains i will find somewhere else to put my money. gold for example
have you seen my sig? there are many others like it but none that are the same
I still don't get it. That's like claiming I should not be taxed on the profits of my business because I had to purchase a machine to run the business and the money spent on that machine is "tied up" therefore the money produced by using that machine should not be taxed. (and don't try to bring up depreciation, since that is equivalent to your stock *losing* value, not gaining. If your stock gains it's like you got some income and the machine is still worth it's entire initial price).
The few serious attempts to explain this actually amount to arguments that the capital gains calculation should take inflation into account, which I agree with. But the convoluted reasoning to twist this into the "taxed twice" so that the tax is reduced for even short-term investments that are a millisecond long (and the reduced tax is still applied to inflation on long-term investments) is pretty bad.
Err well no. Money paid to employees isn't taxed - it's a business expense and it is deducted from what is otherwise taxable income.
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It is called income tax and millions of Americans will assure you it is real.
Yes, after it is paid to the employees, but not before.
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Taxed is taxed, it's a joke son.....a FUNNY!