Ok, there are a lot of bean counters on Wall Street that like to keep operating costs at a bare minimum.
That being said, whenever you upgrade the main trading desks all members need to update theirs. And I know a lot of them are running under legacy systems. i.e. very hold, highly customize platforms, using lots of different systems, patched over the years, sketchy documentation, and some are still on big iron. So guaranteeing thousands of firms will shift over cleanly is kind of a big hurdle.
The exchanges do not like to update there systems.
The issue is that a lot of people hang out at one of the two landings at the top of the escalators – a rather small area – but it heated and you can see the trains.
It’s better in the summer when more people actually hang out on the platform. The Late Street Station is open to the elements (There are 3 sided semi heated enclosures, but) and elevated over a busy street, so not the best place to play when it’s below freezing.
I posted the formulas for wealth and capital gains tax in this thread. You might find it interesting. All tax jurisdictions that I know tax the whole amount, not the unrealized amount. But even if you are assuming the unrealized amount, I think the wealth tax would still have a higher tax drag.
And I was not considering the reinvestment of dividends or stuff like that. Assume you hold a non-dividend paying stock, such as Apple or Google. Their stock price grows 10% a year - compounding. A wealth tax would have a higher tax drag.
Or, here is an easy way to look at it. You have a tree farm and it takes 20 years to grow the trees. With a wealth tax you have to pay taxes 20 times as the trees grow. With a capital gains tax you only pay once. Even if the wealth tax is 20 times smaller then the capital gains tax the overall tax is higher.
So, when Z dies and his children inherit his fortune they will pay a estate tax on the total value they receive - not just the gain. At which point the cost basis "steps up" to the value of the death / transfer.
So you don't avoid taxes that way. Unless the inheritance tax is set at zero - which it is. sigh.
r = return on investment n = number of years held t = tax rate.
Assumes constant returns and constant taxes. You can break that assumption, but then the formula becomes more complex.
Return without tax= (1+r)^n Return with a Capital Gains Tax: ((1+r)^n)*(1-t) Return with a Wealth Tax: (1+(r*(1-t)))^n Tax Drag = 1 – (Return with Tax / Return without tax)
Even if the wealth tax is lower than the capital gains tax, as t gets higher the tax drag gets larger.
Wealth Tax actually would collect more funds – which is why it is better as discouraging investment.
With Capital Gains you compound your return tax free. With a wealth tax a return is taxed, so the compounded rate or return is lower. More tax, less growth.
I will post the formula tonight, but as you increase the time period that you hold a asset, a wealth tax will generate a higher tax drag then capital gains.
Let's say you hold an asset (bond, factory, whatever) for 3 years.
For Capital Gains you pay the tax once on the gain at the end. All return is compounded tax free.
For a Wealth Tax, you pay the tax every year, on the initial investment, on the gain and the compounded return is reduced by the amount of the wealth tax.
Then push it out to 5 years. Then 10. Since you are paying tax on everything each year, the total tax bill over the time period is much higher, the return is much lower, and the incentive is invest in productive assets is greatly reduced.
The tax code says that compensation given to employees must be taxed. If it’s non-cash it’s taxed at market value.
I would guess that the example you gave is somebody pushing a loophole. If you work from home or are on call after hours, you need “cable/phone/internet service” so the $100 becomes a work expense and not compensation.
I have heard about some questionable items. Mainly CEO who take the corporate jet to travel to their "office" that's located in a ski resort. But you have to operate under some type of fig leaf.
I had the job. That is, I was on the broker side and had to sell out clients who were doing what Z is doing now. Mind you, I was dealing only with millions of dollars, not billions, but still - I know the rules and what happens.
Has it every happened to me? No, but I have never had that much money to be that silly wtih margin loans.
I have held the job that actually sells the stock, so I know this forwards and backwards.
If I bought a stock for $10 and it was sold for $100, I have to pay capital gains on the $90. It does not matter how much I borrowed against it - that does not affect the cost basis or the capital gains. I have seen some people land in serious hot water because I did sell their stock, leaving them with no stock and a large tax bill.
But it's not tax free. Just because the broker sold the underlying does not mean you don't owe the tax. The sale triggers the capital gain - it does not matter if you or the bank pulled the trigger.
And the only way to default on the loan is when you are at 75% loan to value and you fail to top up the loan. They sell the stock and you get the remaining 25% left in cash.
Re:Such systems have been proposed before
on
The Zuckerberg Tax
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It kind of works like that - but not like the way you think - and I was a margin analyst during the dot com bust.
First, you don't avoid the taxes per say. You delay them.
Second things don't work as smoothly as you say. For example, you can't deduct margin interest on capital gains.
Third - stop worrying about the bank bailouts. This is a different issue. Margin loans have provisions in them that the brokers can sell the stock against the client wishes if the stock falls. During the dot com bust, of the thousands of people that I worked with (and wiped out their accounts to pay their margin loans) only a handful were left with defaulted loans (i.e.e the free money you are talking about).
Short answer yes - it does create a tax liability.
Here is the order of events.
1. Deposit stock at a brokerage company.
2. Borrow 50% of the value of the stock (margin loan)
3. Stock price falls and your loan to stock value is under 25%
4. Get a margin call - i.e. broker asks you to pay up to get to the 25% in 3 days.
5. You don't.
6. Broker sells your stock to you back to 25%
6a. In fast moving markets the broker may not sell you stock fast enough to cover the loan. So you end up with no stock plus a loan - which you are still on the hook for. If you can't pay it in full the broker might write off a part of the loan. If it does, it treated as taxable income.
7. Broker reports sale to IRS. Depending on your tax basis you may or may not owe taxes.
8. Tax time - pay the taxes you owe. Don't have the money? Good news, debtors prison is now closed. Bad news, the IRS still has a lot of tools in it's tool kit.
I know a lot of people who run LLC corporations to protect them from liability and have full control over their company. Most tend to be small, some are partnerships (who partner's are large private equity companies) etc.
The owner's of these LLC have a choice - they can either pay themselves a income (with payroll tax) or pay themselves a dividend (No taxes if it's QDI).
They chose the dividend because of the lower rate and that drive me nuts. I am for low, simple, fair taxes. But dodges like this drive me nuts.
Should we use Book Value instead? You know that caused Japan's banking crisis?
Both have strengths and weaknesses.
Mark to Market let's you recognize phantom gains, Book Value allows you to ignore expected losses. Japan's banks were able to ignore failed companies because they could always make the next loan payment - even if they had to borrow it from the bank itself. Lots of zombie companies back then.
And if your boss pays you in space trips, or cars, or reduced company stock - they still have to be taxed at the value it's worth.
I remember one boss who paid his employees in American Gold Eagles (1 oz gold, face value of $50.00) and tried to claim he was only paying his employees $50 per coin instead of market value.
However bond payments are a expense, so a lot of companies load up on debt as a "debt shield" - which leads to more bankruptcies - but that's a different story.
It's called a margin loan. Anybody would has more than $2,000 in a taxable account can do it.
There's no credit check, the rates tend to be low, no monthly payments, and the interest may be tax deductible. The only downside is if your stock falls you will get a margin call. And going on margin will leverage up your portfolio - so you are playing with fire.
Point is, you can do the same thing as Z. Maybe not at his scale - but you can do the exact same thing.
When she sells the Apple stock it will have the same costs basis as when Steve bought them because there is no transfer.
On the other hand, when the shares pass on to the kids they will 1. pay an inheritance tax (currently at 0%, sign) and 2. the stock's basis will step up. (Because inheritance tax, at 0%, had been paid).
This argument would be a little stronger if the inheritance tax was something greater then zero.
Let's consider a state that has a wealth tax of 2% and you have 10 million dollars to invest.
You could invest the 10 million dollars into a factory. It will be 5 years before you know if it's a success. (buy land, build buildings, trains people - then see if you can actually market the stuff.). You will pay 1 million in taxes even if you are a failure.
Or you could invest in some type of short term investment. Say government bonds. So much more predicable.
Studies show that countries that tax wealth people invest less in long term capital goods. The returns are much lower because of the wealth tax.
I am not saying the rich should not pay their share. I am saying that we want to structure the tax code to encourage investment - not discourage it.
I have actually seen something that said George Washington was the richest man ever in America. i.e. If rich = (wealth / nations GNP). He was a land speculator and thus had a lot of land.
Slashdot Mirror
Ok, there are a lot of bean counters on Wall Street that like to keep operating costs at a bare minimum.
That being said, whenever you upgrade the main trading desks all members need to update theirs. And I know a lot of them are running under legacy systems. i.e. very hold, highly customize platforms, using lots of different systems, patched over the years, sketchy documentation, and some are still on big iron. So guaranteeing thousands of firms will shift over cleanly is kind of a big hurdle.
The exchanges do not like to update there systems.
The number of trees and the amount of forest has increased.
The suburbs has been fairly effective in turning farmland into urban forests.
Mind you, it does not answer the question about old growth forests, etc. but still....
The issue is that a lot of people hang out at one of the two landings at the top of the escalators – a rather small area – but it heated and you can see the trains.
It’s better in the summer when more people actually hang out on the platform. The Late Street Station is open to the elements (There are 3 sided semi heated enclosures, but) and elevated over a busy street, so not the best place to play when it’s below freezing.
I posted the formulas for wealth and capital gains tax in this thread. You might find it interesting. All tax jurisdictions that I know tax the whole amount, not the unrealized amount. But even if you are assuming the unrealized amount, I think the wealth tax would still have a higher tax drag.
And I was not considering the reinvestment of dividends or stuff like that. Assume you hold a non-dividend paying stock, such as Apple or Google. Their stock price grows 10% a year - compounding. A wealth tax would have a higher tax drag.
Or, here is an easy way to look at it. You have a tree farm and it takes 20 years to grow the trees. With a wealth tax you have to pay taxes 20 times as the trees grow. With a capital gains tax you only pay once. Even if the wealth tax is 20 times smaller then the capital gains tax the overall tax is higher.
So, when Z dies and his children inherit his fortune they will pay a estate tax on the total value they receive - not just the gain. At which point the cost basis "steps up" to the value of the death / transfer.
So you don't avoid taxes that way. Unless the inheritance tax is set at zero - which it is. sigh.
I posted the return with a dividend tax, not wealth tax.
Return with a Dividend Tax: (1+(r*(1-t)))^n
Return with a Wealth Tax: ((1 + r)*(1 – t))^n
r = return on investment
n = number of years held
t = tax rate.
Assumes constant returns and constant taxes. You can break that assumption, but then the formula becomes more complex.
Return without tax= (1+r)^n
Return with a Capital Gains Tax: ((1+r)^n)*(1-t)
Return with a Wealth Tax: (1+(r*(1-t)))^n
Tax Drag = 1 – (Return with Tax / Return without tax)
Even if the wealth tax is lower than the capital gains tax, as t gets higher the tax drag gets larger.
Wealth Tax actually would collect more funds – which is why it is better as discouraging investment.
With Capital Gains you compound your return tax free. With a wealth tax a return is taxed, so the compounded rate or return is lower. More tax, less growth.
I will post the formula tonight, but as you increase the time period that you hold a asset, a wealth tax will generate a higher tax drag then capital gains.
Let's say you hold an asset (bond, factory, whatever) for 3 years.
For Capital Gains you pay the tax once on the gain at the end. All return is compounded tax free.
For a Wealth Tax, you pay the tax every year, on the initial investment, on the gain and the compounded return is reduced by the amount of the wealth tax.
Then push it out to 5 years. Then 10.
Since you are paying tax on everything each year, the total tax bill over the time period is much higher, the return is much lower, and the incentive is invest in productive assets is greatly reduced.
The tax code says that compensation given to employees must be taxed. If it’s non-cash it’s taxed at market value.
I would guess that the example you gave is somebody pushing a loophole. If you work from home or are on call after hours, you need “cable/phone/internet service” so the $100 becomes a work expense and not compensation.
I have heard about some questionable items. Mainly CEO who take the corporate jet to travel to their "office" that's located in a ski resort. But you have to operate under some type of fig leaf.
I had the job. That is, I was on the broker side and had to sell out clients who were doing what Z is doing now. Mind you, I was dealing only with millions of dollars, not billions, but still - I know the rules and what happens.
Has it every happened to me? No, but I have never had that much money to be that silly wtih margin loans.
I have held the job that actually sells the stock, so I know this forwards and backwards.
If I bought a stock for $10 and it was sold for $100, I have to pay capital gains on the $90. It does not matter how much I borrowed against it - that does not affect the cost basis or the capital gains. I have seen some people land in serious hot water because I did sell their stock, leaving them with no stock and a large tax bill.
But it's not tax free. Just because the broker sold the underlying does not mean you don't owe the tax. The sale triggers the capital gain - it does not matter if you or the bank pulled the trigger.
And the only way to default on the loan is when you are at 75% loan to value and you fail to top up the loan. They sell the stock and you get the remaining 25% left in cash.
It kind of works like that - but not like the way you think - and I was a margin analyst during the dot com bust.
First, you don't avoid the taxes per say. You delay them.
Second things don't work as smoothly as you say. For example, you can't deduct margin interest on capital gains.
Third - stop worrying about the bank bailouts. This is a different issue. Margin loans have provisions in them that the brokers can sell the stock against the client wishes if the stock falls. During the dot com bust, of the thousands of people that I worked with (and wiped out their accounts to pay their margin loans) only a handful were left with defaulted loans (i.e.e the free money you are talking about).
Short answer yes - it does create a tax liability.
Here is the order of events.
1. Deposit stock at a brokerage company.
2. Borrow 50% of the value of the stock (margin loan)
3. Stock price falls and your loan to stock value is under 25%
4. Get a margin call - i.e. broker asks you to pay up to get to the 25% in 3 days.
5. You don't.
6. Broker sells your stock to you back to 25%
6a. In fast moving markets the broker may not sell you stock fast enough to cover the loan. So you end up with no stock plus a loan - which you are still on the hook for. If you can't pay it in full the broker might write off a part of the loan. If it does, it treated as taxable income.
7. Broker reports sale to IRS. Depending on your tax basis you may or may not owe taxes.
8. Tax time - pay the taxes you owe. Don't have the money? Good news, debtors prison is now closed. Bad news, the IRS still has a lot of tools in it's tool kit.
You are assuming that you have limited control.
I know a lot of people who run LLC corporations to protect them from liability and have full control over their company. Most tend to be small, some are partnerships (who partner's are large private equity companies) etc.
The owner's of these LLC have a choice - they can either pay themselves a income (with payroll tax) or pay themselves a dividend (No taxes if it's QDI).
They chose the dividend because of the lower rate and that drive me nuts. I am for low, simple, fair taxes. But dodges like this drive me nuts.
Should we use Book Value instead? You know that caused Japan's banking crisis?
Both have strengths and weaknesses.
Mark to Market let's you recognize phantom gains, Book Value allows you to ignore expected losses. Japan's banks were able to ignore failed companies because they could always make the next loan payment - even if they had to borrow it from the bank itself. Lots of zombie companies back then.
And if your boss pays you in space trips, or cars, or reduced company stock - they still have to be taxed at the value it's worth.
I remember one boss who paid his employees in American Gold Eagles (1 oz gold, face value of $50.00) and tried to claim he was only paying his employees $50 per coin instead of market value.
However bond payments are a expense, so a lot of companies load up on debt as a "debt shield" - which leads to more bankruptcies - but that's a different story.
No, you understand just fine.
This is a tax deferment strategy. Get cash now (via the loan) and pay the taxes latter (when he sells the FB stock).
And since this is a margin loan there is no term and no payments - so he does not even have to roll over the loan.
The one point a lot of people are missing is that you can use margin interest to reduce your dividend income but not on capital gains.
It's called a margin loan. Anybody would has more than $2,000 in a taxable account can do it.
There's no credit check, the rates tend to be low, no monthly payments, and the interest may be tax deductible. The only downside is if your stock falls you will get a margin call. And going on margin will leverage up your portfolio - so you are playing with fire.
Point is, you can do the same thing as Z. Maybe not at his scale - but you can do the exact same thing.
When she sells the Apple stock it will have the same costs basis as when Steve bought them because there is no transfer.
On the other hand, when the shares pass on to the kids they will 1. pay an inheritance tax (currently at 0%, sign) and 2. the stock's basis will step up. (Because inheritance tax, at 0%, had been paid).
This argument would be a little stronger if the inheritance tax was something greater then zero.
Let's consider a state that has a wealth tax of 2% and you have 10 million dollars to invest.
You could invest the 10 million dollars into a factory. It will be 5 years before you know if it's a success. (buy land, build buildings, trains people - then see if you can actually market the stuff.). You will pay 1 million in taxes even if you are a failure.
Or you could invest in some type of short term investment. Say government bonds. So much more predicable.
Studies show that countries that tax wealth people invest less in long term capital goods. The returns are much lower because of the wealth tax.
I am not saying the rich should not pay their share. I am saying that we want to structure the tax code to encourage investment - not discourage it.
I have actually seen something that said George Washington was the richest man ever in America. i.e. If rich = (wealth / nations GNP). He was a land speculator and thus had a lot of land.
Shareholders get limited liability by investing in a corporation. It would seem like they should pay a little extra for that benefit.
A little.