What's striking to me is how he doesn't even have a grasp of the basic numbers that affect his returns. This speaks more to a "I am so rich and I made my money so easily that I don't care what I get taxed at" attitude.
>Nothing the government agreed to in the last few days actually affects the asset wealthy in this country.
The increased tax rate on dividends and capital gains definitely affects the "asset wealthy" in the country. In fact, both the top income tax rate and the dividend/capital gains tax rate for those making over $400k has increased by roughly the same amount [1].
However, complete inaction by government would have increased the dividend tax rate even more, so that it would have been considered ordinary income (43.4% top rate) [2]. The legislation passed on 12/31 and 1/1 by Congress definitely helped the asset wealthy. Oracle pays a 18c dividend per share, and Larry Ellison owns roughly a billion Oracle shares. The dividend tax savings he'll receive from this legislation is massive.
[1] The top income tax rate goes from 35% to 43.4% (39.6% + 3.8% health care tax) and the top dividend/capgains tax rate goes from 15% to 23.8% (20% + 3.8% health care tax). If person A makes $100MM in salary and person B makes $100MM in dividend/capgains in 2013, their relative tax rate increase compared to 2012 is about the same: 8.4% increase vs 8.8% increase.
If person A makes $100MM in salary and person B makes $100MM in dividend/capgains in 2013, their relative tax rate increase compared to 2012 is about the same: 8.4% increase vs 8.8% increase.
Michael's point was that person A (someone with a high ordinary income) will have approximately double the tax bill of person B (someone with capital gains income) on an absolute basis, and that he believes this disparity to be unfair.
I'm not sure how to define "fair" but haven't the investment money been already taxed as corporate profits before they are paid out to investors? I know some investment vehicles allow to avoid that but most regular investments do not, as far as I know.
You guys are all thinking in terms of forming a business and having income from it. Our tax system doesn't encourage that. Our system heavily incentivizes people to seek capital gains through (for example) stock market and real estate speculation.
Thanks for the info. Sounds like if one has a big sell off of assets in a year, better get as low an income as possible, preferable with delayed income into the following year.
It amazes me at how far to the political left is Silicon Valley. The startup ecosystem depends on the recycling of the profits from successful ventures into new angel investment, venture capital funds, and bootstrapped ventures. An extreme example is Elon Musk, who famously netted $180 million from the Paypal sale and put every last dollar into founding Space X, Tesla, and Solar City. I'm assuming that money was taxed at the long term capital gains rate. If the cap gains loophole were closed, either Space X or Tesla would have been stillborn.
Yet Silicon Valley regularly supports candidates and policies that would place large burdens on the entrepreneurial ecosystem. We have plenty of examples of high-tax, high-regulation economies around the world with no startup scene. You can't grow one by punishing success and preventing innovation.
The deal that happened today means the top California cap gains tax is going up ~11% this year (PPACA, cliff deal, prop 30). That's 11% of new capital for startups being diverted from Palo Alto to Washington.
(And yeah, I'm flagging this article because I don't like seeing pure politics on hacker news. But I'll participate while we're having the discussion)
I think of Silicon Valley as on the economic center-right, but socially liberal. Lots of techno-libertarian rhetoric (I find myself well to the left of the average techie on that), but cultural-conservative rhetoric doesn't play well. Candidates who are anti-gay, anti-abortion, or playing up the importance of religion in public life don't play well. The GOP has had a strong element of that cultural-conservatism for a while now, strongly damaging its brand among some demographics. The Democrats end up as the default option more than what people strongly support (I know many more people who were fired up against the GOP rather than for the Democrats in the last election).
Imo, the Democrats are a pretty miquetoast centrist party on economics, hardly "far left". They're broadly in favor of free trade with a modest safety net (quite modest, by first-world standards). Heck, I'm not sure more than a smallish minority of the party would even qualify as true social democrats, let alone actual leftists.
On policy terms, I would disagree that tax rates are strongly relevant to a startup scene (not irrelevant, but not one of the more sensitive environmental factors). I do think regulation is an important aspect. One reason I would support discontinuing the use of regulations to achieve quasi-safety-nets and replacing them with direct safety nets. But as for why SV is in SV? I think culture, networks, and education have a bigger role in it. Otherwise you'd expect a vibrant startup scene in lower-tax parts of the U.S. than California, Massachusetts, and New York, and we aren't really seeing that.
It's unfortunate the CA GOP is too inept to adapt to local circumstances. It benefits them to have social moderates in congress from blue states - e.g. more Scott Browns in congress than Elizabeth Warrens. But it is a state party that suffers from long periods in the minority.
Neither party really supports the issues that Silicon Valley cares about. The California Democratic caucus listens to Hollywood and unions more than SV.
I agree that culture, social networks, and education matter more than issues to explain voting behavior. College-educated people vote for Democrats and leftist propositions, so S.V. does too.
Well this is partially because the alternative to the right, the Republicans, have gone full retard over the last two decades. A lot of people in the valley might vote for a moderate Republican like there used to be but will not vote for a party that puts someone who doesn't believe in evolution in charge of the House Science committee, regardless of their fiscal policy.
>We have plenty of examples of high-tax, high-regulation economies around the world with no startup scene.
Sure, but California is already high-tax compared to most of the US. Why isn't Silicon Valley in a state with no state level income or cap gains tax? There's a number of European countries that have marginal taxation similar to California, why isn't there start-up scene worth talking about there?
There is one Silicon Valley in the whole world, sure there is plenty of innovation elsewhere, but for the software industry there is one stand-out and that is the valley. If there were a few of them then we could easily draw parallels between them and see what they have in common, as it is we can't do that because we have an n=1 situation where all we can do is speculate.
Progressive taxation is not leftist. Americans broadly agree on the concept. A 2011 WSJ/NBC poll found that 81% of Americans approved of increasing taxes on those who make more than $1 million.
I think natrius was saying your definition of 'left' is skewed right. Progressive taxation enjoys broad support and so is by definition centrist and not left.
This is a definition of left/right that depends on public opinion and not who controls the discourse. You could definitely argue that progressive taxation as defined by popular discourse in America is left. But that would be ceding too much power to the minority which controls political discourse in America, IMHO.
Or maybe because for every Elon Musk who uses his money to create more opportunities for the market there are more Mitt Romneys who abuse the loopholes and use the money for more horses and car elevators.
I love Silicon Valley due to the fact that people here actively CREATE wealth by producing ideas/products/companies with real, intrinsic values, which is a pretty big contrast to many of the folks on Wall Street.
Unfortunately, raising the taxes on the Wall St. guys is going to hit Silicon Valley too. The carried interest rate is probably less relevant for SV than the long-term cap gains rate. California cap gains going up by 12% this year (prop 30, PPACA, and the cliff deal) means that 12% of new capital for Silicon Valley startups is going to be diverted from Palo Alto to Washington.
All tax rates are going to go up until the US and CA stop living beyond their means. Its not a matter of left or right or whether that hurts incentives any more.
You're right on the flow of capital. I think the big venture firms will still survive (a lot of East Coast endowment money and foreign sovereign funds), but angel investments will go down significantly, or just rely on smaller rounds, as there's less money to throw around.
Yet Silicon Valley regularly supports candidates and policies that would place large burdens on the entrepreneurial ecosystem. We have plenty of examples of high-tax, high-regulation economies around the world with no startup scene. You can't grow one by punishing success and preventing innovation.
Taxing capital gains and ultra-high incomes is not placing a burden on the entrepreneurial ecosystem. Hell, it's not even really left-wing at all.
Further, in counterpoint: the Israeli economy supports a start-up scene larger than that of New York or Boston, second only to Silicon Valley, while paying marginal taxation rates that would have Americans squirming in their seats. We need high tax rates over here, because if we don't pay for the Army, we all die (or so the thinking goes). But also because a society without universal sick-fund membership or public higher education or scientific research grants or infrastructure projects would be uncivilized.
(Seriously, if you think "progressive Democrats" are left-wing, allow me to introduce you to my friend Karl Marx.)
The tax rate on his $180M at the time he cashed out was the 39.5% rate that thing would have reverted to if this bill failed. So your point is? The 5% increase just cost me personally an additional 100K minimum on my 2013 tax bill and I am okay with that.
The chart shows that you are both right. The marginal rate was 39.5%, then dropped as part of Clinton's deal with the House Republicans in his second term.
So what you're saying is Musk, had he been short 10-20 million of that $180, would have been completely unable to pull off Space X and Tesla?
I'm not sure how you figure. Were you perhaps under the impression that Space X and Tesla were funded solely by Musk? Considering Tesla's operating expenses last year cleared $400M and they are currently in debt, I am fairly certain Tesla is not funded solely by Musk's pocket book.
Anyway, so what if investments are taxed more heavily? So long as all types of investments are taxed equally, you will still have plenty of people investing in new business ventures.
I'm sure he would have found a way to make do with 1% less capital. But what if rates had been 9% higher, as they will be going forward? What if rates were 28% higher, as they would be if cap gains were treated as ordinary income? At some point, either Space X or Tesla would have never been made.
The tragedy is that we will never know the future Space Xs that are never built.
> It amazes me at how far to the political left is Silicon Valley.
Speaking as a foreign onlooker (I'm in Australia), I see more libertarians than any other stripe, tbqh.
> Yet Silicon Valley regularly supports candidates and policies that would place large burdens on the entrepreneurial ecosystem.
The Bay Area is home to San Francisco, a traditional hotbed of leftist activism. It's also home to UCB, a traditional hotbed of leftist activism. Some of the outlying suburbs are ... yes, traditional hotbeds of leftist activism.
Mix in:
1. The relatively lower presence of traditional / conservative / "silent majority" voters who are motivated voters
2. That leftists are motivated voters
3. That libertarians are often not motivated voters
4. That voting in the USA is voluntary and not compulsory
and the electoral calculus suggests that libertarians will be out-numbered by leftists at the ballot box.
>Speaking as a foreign onlooker (I'm in Australia), I see more libertarians than any other stripe, tbqh.
Paul Graham's informal poll of investors had two-thirds voting for Obama. That's a stronger lean than the US as a whole. They might be libertarians, but they're libertarians voting for the unionist/leftist/regulatory party.
If Obama is what leftist means in the USA (I still don't believe this), then what would you call a communist? I don't know if there is anywhere else where the political compass is so skewed. To most people I talked to when the US elections were going on, Obama is considered the left of the right.
Obama is not a communist by any measure, but he is certainly leftist by any definition - he is for big government, strong unions, strong government intervention in economy via both subsidies and taxation, pervasive regulation of businesses, highly progressive income taxation, abundant welfare services, nationalized healthcare, redistribution of wealth, identity politics. All are common characteristic of modern left.
Could you name one mainstream left concept that Obama opposes?
Obama wants to increase the share of the economy taken up by the federal government. I consider that to be dragging America further to the left, by any standard.
He also appoints people who are activist regulators and judges who view the Constitution as no limit to progressive doctrine.
They're capitalists voting for a managerial conservative capitalist party. America's "left-wing" Democrats would be right-wing Christian Democrats or right-wing Liberals in the entire rest of the First World and large portions of the developing world, too.
Libertarians are very active on the internet, but are practically non-existant as a political force on national scale. Fortunately, in some places (not in California) some Republican representatives hold views which are close to what libertarians can identify with. But this has very little to do with motivation and a lot to do with the fact that very small minority of people have libertarian views. Libertarian views are not natural. It is very hard to arrive at the idea that "there should be a law against that" is not the right answer for any problem and stay there. Most people think freedom is overrated.
Or maybe it's just that other people disagree with libertarians' notion of absolute freedom. Perhaps they define freedom differently. I'm sure most of us want the same things in life (like a decent standard of living), but we just can't seem to agree on the best ways to achieve them.
It's about self-restraint. Libertarians believe government has very specific purposes and boundaries within which it must stay, and that other matters are totally irrelevant to governance. Non-libertarians want the classic "2 wolves and a sheep voting on dinner", libertarians say that dinner isn't even on the ballot.
Of course, it's much easier to coerce people into doing the things you want them to do by making the desired behavior a matter of law than to convince each individual to cooperate and use his own free will to obtain the same result, so an undisciplined and unrestrained populace is going to disregard the "no voting on dinner" rule and use the force of the government to get what they want.
No, it's not about self-restraint. It's about basic definitional arguments.
Libertarians define freedom as the absolute, unbridled exercise of private property titles.
Non-libertarians take exception to both the extent (the "absolute, unbridled" part) and the core matter ("private property titles") for various reasons. Among these reasons:
* Any value legislated into absolute supremacy becomes steadily more and more totalitarian. People want some moderation.
* An archipelago of private dictatorships is called "feudalism", and is no better than a single public dictatorship.
* "Property is theft!", as Bakunin put it. Private property titles are themselves a form of government-enforced coercion. Taxes you only have to pay once a year, land-rent you pay once a month, exploitative wage-labor you perform every weekday.
* Even the most proprietarian society has some kind of public space, and it must be managed somehow. Example: you can't run naked through the streets.
* Some people genuinely believe that "freedom" in the sense libertarians define it is unimportant or unworthy. See: religious conservatives.
* Private capitalist markets are provably incapable of handling public goods (National Science Foundation, NASA) and commons goods (scarce fisheries, national forests, etc).
I consider myself libertarian and don't define freedom as "absolute, unbridled exercise of private property titles". I don't believe many libertarians hold that philosophy -- you're painting an extremist.
While I appreciate your contribution of more detailed points of disagreement with some semblances of libertarian philosophy, I will refrain from refuting them because a) I don't have the time to get into it and b) it deviates into too much of a tangent to remain apropos of the original post.
"Moderation" here usually means "if you agree with me, you're just being reasonable and exercise common sense, if you disagree with me, you're an extremist and your views don't even merit discussion". You call somebody "moderate" if he mostly agrees with you, except for some insignificant details.
How is is "totalitarian" to support personal freedom, is beyond me. Can you give an example of a totalitarian libertarian concept?
>>>> * An archipelago of private dictatorships is called "feudalism", and is no better than a single public dictatorship.
Please look it up in the dictionary, "feudalism" does not mean that. I can easily see one reason why small dictatorships are better - it's much easier to escape a bad small private dictator than a bad totalitarian state. Bad small dictator can be put out of business with relative ease, bad totalitarian state is very hard to change - see North Korea.
>>>> "Property is theft!", as Bakunin put it.
You mean Pierre-Joseph Proudhon. He also said "anarchy is order", I wonder if you agree with that too. Also he advocated absence of government. Do you agree with that too? Way to be "moderate", in this case.
>>>> exploitative wage-labor you perform every weekday.
I don't know where you are working, but I don't perform any "exploitative labor". I've heard there are some studios in South California that produce what is called "exploitation films", but I'm not nearly pretty enough to be in show business, even though rumors are there's some money to be made there.
>>>> * Some people genuinely believe that "freedom" in the sense libertarians define it is unimportant or unworthy. See: religious conservatives.
Yes. I know. Also see: modern left. That's why I say majority of US people do not value freedom, although for quite different ideological reasons, but for one underlying reason - freedom for you means freedom for everybody else, including freedom to do what pisses you off. For most people, it is just intolerable to realize other people can do what they don't like and there's no way to stop them.
>>>> Private capitalist markets are provably incapable of handling public goods.
By "incapable" you mean "they would not produce result I like". It's like saying "gravity is incapable of handling bricks" because bricks don't fly. Private markets are perfectly capable of handling anything, they just won't produce the results politicians would like, e.g. they won't probably spend half-trillion dollars on Solyndra. Since many people want Solyndra, you need coercion to make it happen.
I always thought it's silly for the Congress and WH to be focusing on raising the tax for the high income people (doctors, lawyers, senior engineers, people who are well off but still live off paychecks), whom are already paying a very high effective tax rate. Meanwhile the ultra-rich are mostly untouched by these new laws and people like Romney can still get away with a 13% effective tax rate.
The only significant portion of the new law that MAY make an impact on the uber-riches is raising long-term capital gain to 20% for people who make over $400k (so actually now even better reason for CEOs to take $1 salary and get the rest in stocks) and limit deductibles to $250k per family (So hopefully people like Romney can longer claim the expenses on their horses and everything else as deductibles).
Well, like MA said, the aspiring rich people took a bullet for the real rich people.
So when using Romney as an example, it is good to know that if he did not give this much to charity, the rate would be somewhere around 27%, maybe more if charity deductions avoided triggering some higher rates, etc. Average effective income tax rate (don't confuse with marginal!) for millionaires is 23%, for "middle class" is 20% and below (the figures is for tax year 2010, other years I imagine they may differ).
I find it weird that you can reduce charity contributions from taxation. Isn't it like grant for the rich to "choose where they pay their taxes"? And have nice dinners...
Correct me if I'm wrong, but I believe charity contributions can only reduce your taxable income. For simplicity, let's say you have an income of $1M and a tax rate of 35%. Normally you'd pay $350k in taxes. If you donate $100k to charity, then you pay 35% * $900k = $315k in taxes, for a total payout of $415k.
The real picture is a bit more complicated than that due to variable tax rates, but I don't think there's a case where donating to charity doesn't increase your total payout, since you give up 100% of what you donate instead of whatever tax rate you'd have paid.
Side question: are there really senior engineers who make >$400k in salary? I thought you had to go into upper management to break much above $200k in actual salary (paycheck, not equity), even in the Bay Area. But I could well be out of touch with recent developments in Valley pay.
What prostoalex said, while it's still rare, but for senior engineers who work for companies that give out a lot of valuable RSUs such as Google/Apple, etc, it's very possible for them to make more than that amount.
A lot of people at Google are north of $500k, I've heard. We're talking engineering and product, not management.
I mean, what would you pay someone like Ken Thompson? There are the outliers like him, of course, but I've also heard that even the less-known folks do well.
Though I've heard all of that from Xooglers, it remains anecdotal. I also remain slightly old-school when dealing with other peoples' salary and give them respect; I'll freely tell you what I make (if permitted legally), but I understand people are not as open as I am and I try to respect their privacy.
The problem here is the distinction between discrimination (there exists X) and calibration (X is close to true figure Y +/- Z, where Z is inflation from anecdotal inflation bias).
The "Welfare Queen" exists largely in the imagination of the right. Even in areas of the US with relatively generous public assistance, the difference in standard of living for someone who relies solely on welfare versus someone with even a moderate income (much less "rich") is so large, no rational person would choose to live on welfare just to avoid the taxation that resulted from having a high income.
I certainly don't agree with tax policies designed to punish or discourage high incomes, but this is pure hyperbole.
There certainly do exist people that face a negative return to marginal work, due to the phase out of public assistance with income.
I'm not really sure what "welfare queen" means, but there are plenty of people that face strong incentives to stay on public assistance and little help to get off of it. I wouldn't necessarily place all the blame on them, though.
If that is the case, I apologize and feel a bit sheepish.
In my defense, I live an incredibly conservative area in the US, and many of my neighbors honestly believe this exact thing, so it isn't obvious sarcasm to me.
The whole marginal thing must be really confusing. The problem is not that rich people would stop generating income - they won't. The problem is that marginal rates modify behavior, including changing how income is generated, where it is generated, etc. And the rich are exactly the people that have ample tools and opportunities to do that. If you earn nearly-minimal wage in some shop, you don't have many other options. If your taxes are raised, there's not much you can do other than spit and curse. If you're an investor, you have wide array of options where to invest, how to invest, etc. I know it sucks that it is always sunny in the rich man's world, but it's a reality. If whoever designs tax policy ignores it, he'd be unpleasantly surprised when projected tax income falls short of the target, and would have to slash the benefits programs or get deeper in debt.
Both statements are true. Taxing as a method of altering spending patterns is very well understood by economists. In the case of cigarettes, it seem sot have been quite effective since smoking rates in the Us have fallen to historic lows.
Surely, though it's worth noting that education campaigns and research are financed with both tax dollars and cigarette company settlement money (from a large lawsuit many years back).
There is. Living in California, marginal rates for a well-paid engineer can be 50% and more. Given that you give up half of the money, one's incentive to look for a side gigs and other supplemental income is significantly reduced. Of course, nobody turned down a raise saying "oh, taxes are high so I don't need it", but if additional income involves substantial marginal effort and risk, given high marginal tax it's just not worth it.
Yep. And if your investment portfolio generates reasonable before-tax return (it should, if you've been working for the past 5+ years and saving diligently), then you get to the marginal rate even quicker.
How do you figure? If I have the choice of increasing my labor by 20% (by some arbitrary metric, like labor hours per week) to increase my post-tax income by 20%, I might decide that is worth it and go for the higher income. If, on the other hand, I am currently at the top end of my current tax bracket, and the next highest bracket means that my 20% increase in labor will only increase my post-tax income by 10%, I might decide that isn't worth it and thus not go for the higher income.
But, with the higher tax rate, someone else might decide it's worth it to increase their labor by 40% so as to increase their post-tax income by 20%, whereas they only would have increased their labor by 20% without the tax effect. So, it really isn't clear that higher taxes lead to lower amounts of labor.
Except that someone will be hitting the external limitations (only 24 hours in a day, human body needs non-billable hours for sleep and food) pretty quickly. Also, this is true as long as there are no opportunity cost alternatives (spending time with family, pursuing hobby).
This assumes a linear correlation between labour spent and gross income earned.
The tax brackets are known to everyone, including those who pay the salaries - if you want to get someone to do that 20% extra work, and they'll want a 20% increase in net pay, then you can just do the math and pay the appropriate gross.
Paul, I have a tremendous amount of respect for you. In many ways you serve as a role model to me.
But I think you need to be careful calling what Arrington describes a "loophole." Yes, the people running the funds are the beneficiaries of this specific "hole" in the tax code. But have you considered that this could be a loophole by design? In other words, an incentive?
In many ways, capital is the eponymous character of capitalism. Capital drives our economy. It feeds our society. It's also a good indicator of our prosperity level.
No economist will argue with the fact that capital begets more capital, and therefore we should encourage any mechanism that creates it. Normally I avoid such generalities, but economists accept this as such a simple fact that it would be impossible for them to disagree with it.
This "loophole" in the tax code is a great example of an incentive for investing capital. It makes sense to place that incentive in the tax code because investing capital leads to more capital. Policy makers want people running funds to "exploit" this "loophole." The tax benefits are a reward for efficiently "putting the capital to work," so to speak.
If we can agree that this "loophole" in the tax code functions as an incentive, then I think we should also agree not to call it a loophole. When we call this a loophole rather than an incentive, we make it appear as though our profession (well, your profession... I'm still in college) is the business of exploiting loopholes. That is not what we value and I think we should respect ourselves enough to avoid this perception.
Of course it was created as an incentive, there's a nice justification for pretty much every line of the millions in the tax code, however it is considered a loophole because it turns out that it is really easy to manipulate the structure of investment deals so that all the income is gained as carried interest, and it even more surprisingly turns out people actually do this if there's sufficient incentive, so a lot of people now redefine what would have been 'income' into 'carried interest' in a way that appears not to have been intended when the rule was created.
If you really want people to respect your profession (I assume you intend to go into finance?) you should focus a little more on the ethics of what you actually do and less on how to spin it.
I have a lot of respect for your comment and do not mean for this to sound like an ad hominem attack, so please take it as an observation on the societal state of affairs: what you describe as "spinning" I describe as "offering my opinion."
I think the fact that you would describe my opinion as "spin" is indicative of the larger societal disassociation with members of the financial sector. Because of this, people do not like hearing the financial sector described in positive terms. So, often when people are confronted with a positive viewpoint of it, they have no recourse but to caste it as "spin."
Society has harbored a distaste for finance many times throughout history. The Catholic church even went so far as to forbid usury, preferring to delegate tasks as inferior as money lending to Jews. Not surprisingly, this distaste becomes most evident following an economic downturn. Before the current recession, society's view of "Wall Street" was generally very positive. Now, things are a bit different.
The fact of the matter is that we do not live in an ideal world. But we want to move toward one. The best way to do that is through a strong economy. A financial sector is a necessary part of a strong economy. But I worry that people discount its value to our country.
As long as people view the financial sector distastefully, we are going to need to incentivize working in it. Otherwise the only people working in the financial sector will be people who don't care if they are viewed as working in the dregs of society. That is not the type of person we want in charge of the economy.
Yallah yallah! Your ability to deny reality is amazing!
We do not need to further incentivize working in finance. Finance has already eaten most of the rest of the economy. This is shown by the fact that from roughly the 1980s onwards, FIRE sector has grown immensely, not only in total profits/revenues but as a share of all profits in the United States.
If finance is supposed to make its living by enabling other sectors to grow, then finance should not be outgrowing the other economic sectors. It should remain as a roughly steady proportion of total profits and grow with the economy.
Instead, finance, real-estate and insurance have grown at the expense of the rest of the economy and the rest of society. That's not doing their stated job, that's parasitizing everyone else.
That's nice for you, but as long as capital remains a legally separate category from all other income, the only thing accomplished by differential taxes on "capital gains" is to give a government favor to a narrow class of "capitalists".
As others in this thread have pointed out, there are plenty of highly productive, successful people like top Google engineers who aren't part of the financial sector, the executive class, or the investor-for-a-living class, and they get hit with higher taxes than the capitalist class because they dare, the sheer chutzpah, to take home most of their very-high incomes as salary rather than dividends, interest, or asset appreciation.
I'd like to see individuals making a high salary get their taxes slashed down to the levels that asset-based wealth currently enjoys. This can't take place unless the disproportionate influence of finance capitalists is likewise slashed. I wouldn't necessarily hold my breath for that; the governments of the world are as rotten as they've ever been.
So, wait - I understand how this might be an incentive so that Arrington's investors invest more capital - they pay low taxes on any gains the fund produces. But, why is also Arrington himself, as the fund manager, paying non-income tax, even though all the money he makes is his proper income, and not money produced by his capital investments (as he has no capital invested)?
Sorry, I meant to address this question in my original post. You make a valid point. This is not Arrington's money, so why is he being rewarded for investing it? Shouldn't the investors themselves be the ones rewarded?
The answer I see to this is that Arrington is rewarded because he is making the investments on behalf of the investors. I would hazard a guess that many of the people investing in Arrington's fund made their money outside of tech, and therefore do not possess the skill set to critically analyze tech investments. But they know the technology sector is a good place to invest, so they hand their money to someone with the proper skill set to invest in it. In this case, that person is Arrington.
He is rewarded because were it not for him, the people investing in his fund would be unable to intelligently invest in the tech sector.
But you could make the same statement for everybody - if it were not for the ordinary workers, capital would have no meaning. So why not give incentives to workers as well by giving them a low interest rate?
I must say this is a pretty weak argument. However honorable the activity is, he's still a hired gun.
Another question you have to ask - if his income was subject to income tax versus a LTCG tax that's currently in place, would he stop doing what he does? Reading his original post, most likely not. Maybe he'd raise a larger fund next time to justify the 2/20 fee structure, maybe the structure will be changed to 5/20, but investors will still chase the yield, and there will be someone on the receiving end happy to accept investors' money.
What you just described - - someone doing skilled work on behalf of others who might not know how to do it - - is called "hiring someone", and in every other sector is accompanied by the regular income tax.
Remember, carried interest is different than capital gains, which would suit your argument better.
It is good, but he most certainly isn't unique in this regard and he is late to the game.
For several years, Fred Wilson has written that "carried interest" should be taxed as ordinary income. For instance, see http://www.avc.com/a_vc/2010/05/why-taxing-carried-interest-... (and my guess is that Fred Wilson earns more carried-interest-income than Mike Arrington whose biggest payout was probably the sale of TechCrunch.)
I'm sure that many other investors (e.g Nick Hanauer, here in Seattle) have the same (or more progressive) positions
Btw on some of the other comments ...this fiscal deal wasn't about cutting loopholes. It covered a lot of other more-urgent stuff. There is no way they could have tackled less-urgent stuff in this bill.
However, in the past, Obama has called for cutting loopholes and he stressed that point in his speech tonight. Last year, in October, Romney had also stressed the need to cut loopholes. Cutting loopholes is very hard because each loophole has a strong lobby behind it, but I hope the two parties are able to agree on cutting some of these outrageous loopholes.
He does specification call this out - that something must be truly egregious when the beneficiaries of a law call for its repeal.
What's your position? Should we discount investment taxes to encourage reallocation of capital and tax earned income highly to discourage value add labour, or stop asking actual workers to suck it up because they can't flee like capital can?
Private property is just as coercive as taxation in the first place. You do not have a God-given right to make hundreds of thousands of dollars by investing millions of dollars and pay nothing towards the upkeep of society. Basic freaking social contract theory, and, in fact, basic law: financial instruments and corporations could not exist as they do except by government fiat.
Second, yes, he will make the sacrifice if everyone else does it. That's sensible. You don't solve large-scale systemic problems by individual action, not even mass individual action, but only by collective action. Again, this is just how the world works.
When did anyone ever get asked if they consented to the "social contract"? No one. We need, at the very least, to change the term. Something like "social compulsion", perhaps?
The person creating capital may not be someone who is liked, but they often produce jobs, and products/services that people want. Their capital comes about because of voluntary transactions within society. The so-called "social contract", meanwhile, is built on coercion.
But if I don't consent to the "social contract" called private property rights, then your exercise of the rights that you've claimed that I don't recognize seems equally coercive.
I happen to believe (in agreement with you, I think) that private property rights look more useful (in a benefit-to-humanity way) than the rights that most people who use the term "social contract" think of, but I don't believe there's a clear philosophical difference between the two.
Private property, financial instruments and corporations are also built on coercion. Literally, they all exist by government fiat.
You can tell yourself whatever Rothbardian fables you like, but the only real business you're building without any participation in a modern, "coercive" society is a subsistence farm.
You are correct that government currencies exist by government fiat. Who said that those had to be the only currencies? Of course government does mandate that its currencies are recognized as legal tender, but that's something that governments get away with across the board.
Corporations are indeed creatures of government. Are they required to conduct business? No, but they are awfully convenient, and allow for a lot of rotten things to occur.
Private property? If it requires government's nod, it isn't private. And, of course, we see this all the time, when government decides that it wants someone's property, and takes it. It might be your land, your automobile, or something else. It is all up for grabs.
Not sure why you're name-dropping Rothbard, but it doesn't help you here. No business is going to exist without participating in the existing society. Trade and commerce require cooperation. The alternative is what brings a society closer to subsistence farming (and it tends to leave people starving).
That's a bit of a strawman, since I said nothing about the securing of property. As you are undoubtedly aware, government does not allow a choice in this, but you're likely taking a position that it must be this way. You're also taking the rather weak stance that existing precedent doesn't allow for any other way. That kind of thinking serves governments well (they don't think well outside of the box), but not private individuals and groups.
No, I'm taking the stance that bourgeois governments are the result of a long historical process whereby the mighty displaced the weak and stole their property until there was eventually only one ruler, who enforced the property regime of their liking.
Something to that effect has undoubtedly occurred. I think that things can work differently. Do you?
We've had a chance to see a number of government experiments run their course (some continue to), ranging from absolute monarchies, to Marxist-Leninists, to Maoists, to various kinds of republics. All of them have ended up going in similar directions, over time, consolidating power, though at different speeds.
It's not as selfish as you try to spin it. There are any number of political and economic policies that you might favor, but that only make sense in aggregate.
I might favor more NASA funding, but I'm not going to write a check and donate to NASA. That doesn't make my desire for more NASA funding any less earnest than someone who wants less funding for NASA.
Not sure if selfish quite captures it. It's more practical consideration. I'll give you X, if everyone else is also giving you X. Otherwise, my X won't make any difference.
Looking at again: it's a variant of the prisoner's dilemma. If everyone moves, nobody is worse off. If you move on your own, you are worse off. If everyone else moves and you don't, you're best off.
Unsurprisingly, the dominant strategy is to write blog posts saying "we really ought to amend the taxation laws" :D
Carried interest is just one of the loopholes that hedge funds exploit that should be closed. When I worked for a quant fund, we were making at least one trade a day, but because we were trading futures contracts we were mostly paying long-term instead of short-term capital gains.
Looks like high income (250k-1.2million)/small investment portfolio people (doctors and lawyers) are going to be even more screwed since they already pay high taxes and probably have enormous student loans.
I'm confused how someone who makes 250k-1.2million in income, could be crushed by student loans. Are you telling me there are an appreciable number of people with student loans of several million?
Well if you consider 4 years undergrad, 4 years medschool (medschools offer no aid and routinely cost 70-95k a year), 4 years residency, 3 years fellowship it can add up (you're not making too much in residency/fellowship). Additionally this would be basically your entire twenties so if you made an effort to have friends or get married (possibly have a kid) you'd be in even more trouble. Assuming a generous starting salary of 320k for some higher end specialty if you're getting taxed at nearly 50% of total income, leaving 160k take home, it would be a pretty poor ROI and you could be nearly a half million in debt.
I assume the low capital gains tax is because the money is 'at risk' in the market, but for professions with long expensive educations - the risk is in the time and money investment up front. Additionally doctors/lawyers are more likely to actually spend their money locally to buy and fund local business since they're not moving around millions of dollars or just leaving their wealth in the market - taxing them harder just means they won't pay local contractors to have an addition on their house and they'll pay taxes instead.
Non-American here. Was there/is there a rationale for allowing people to deduct interest from their incomes? It has always seemed odd to these English eyes. Is it considered a way to encourage people to buy property/invest in their education or is there more to it than that? As a home owner, I would love this deduction ;-)
Was there/is there a rationale for allowing people to deduct interest from their incomes?
Yes. The situation is analogous to borrowing money to invest in the stock market: Your profit is the profit you make from the stocks minus the interest you pay on the loan, and that difference is what you pay tax on.
In Canada, a mortgage on a principle residence is not tax deductible, since Canadian tax law doesn't consider where you live to be an "investment"; this is balanced by a principle residence being exempt from capital gains tax.
If you have a 'home office' then the interest you pay on your mortgage is an expense, and is thus a business deduction, as are hydro, gas, communications, etc.
If you have a business that borrows to buy and then rent houses, the same principle pertains; the interest on the mortgage is an expense.
AIUI in some areas if the business claims for part of the main residence as a home office over a prolonged period then Capital Gains Tax can be due on that same fraction if there's a profit when the house is sold. IOW, it's not a free lunch.
I'm not very familiar with these rules, but you're definitely right that there are some complications. I have a friend who works for CRA and commented that he would never claim costs of a home office in a residence he owned, simply because the tax savings wouldn't be enough to make up for the headaches and tax audits which would result. (Claiming a home office in an apartment you're renting is much easier, since there's no capital gains to worry about and there's an easy paper trail for how much the space costs.)
If you have a 'home office' then the interest you pay on your mortgage is an expense, and is thus a business deduction, as are hydro, gas, communications, etc.
Only in proportion to the fraction of the house which constitutes your home office.
If you have a business that borrows to buy and then rent houses, the same principle pertains; the interest on the mortgage is an expense.
Right -- mortgage interest is a business expense when it's paid for a business reason. A principle residence is not considered to be an investment; it's considered to be a home.
The student loan interest deduction gets phased out pretty early. It's gone once your AGI is over $75k.
ITEMIZED deductions get reduced by 3% of every dollar you make over a specified threshold. That's 300k in 2013 with this bill. It's called the Pease phaseout and its back after being partially or completely repealed in previous years.
If you are married, filing jointly, the student loan interest deduction is fully gone at $150,000 of adjusted gross income. Yet another in a long line of reasons why DOMA sucks.
But I think my main point was that a lot of deductions disappear once your AGI reaches a point where people feel that you don't need the benefit of that deduction.
With Pease Itemized Deduction phaseouts, the effective tax rate for high wage earners goes up independent of their marginal tax rate because more of their income is taxed at those rates.
There's also the qualified dividend tax rate of 15%.
This is justified by the fact that the corporation will be taxed on any income that is paid out as a dividend. Therefore the effective tax rate on the income is the corporation tax plus the dividend tax rate.
Is the effective tax rate on the carried interest loophole just the 15% Arrington mentions, or is it also more?
I ask because we can talk about capital gains tax rates and how low they are, but we should always talk about effective tax rates, in my opinion. That was why Subchapter S Corporations were created, I believe.
If his tax rate (and those of people similar and better off) did in fact jump from 15% to 20%, then that sounds like this particular policy change (tax the rich a little more) was successful and does not, in fact, apply only to the "income rich". "Tax capital gains much less than ordinary income, even on other people's money" is a seperate policy decision, which was the situation before and is the situation now. In fact, the gap closed very slightly - tax rates on the top income bracket went up 4.6%, whereas tax rates on capital gains for high earners went up 5%.
One thing that is bugging the hell out of me is the news coverage. They continually throw numbers around without being at all precise about what the numbers mean. I saw an op-ed, in the last run, arguing that $250k didn't amount to aaaalll that much once you take taxes out of it so let's not raise taxes on those making around $250k - except the $250k figure everyone was throwing around was post taxes; in pre-tax income $250k was simply not a any sort of interesting point. Now, we're hearing that capital gains is going up for people "making more than X", and the like - is that pre-tax? post-tax? is capital gains counted toward that? These things hugely change the character of the situation, and I flat out can't get it from the press, and that is absurd. Similarly, "Extend the Bush tax cuts for people making more than X" - that's not what anyone was talking about; they were talking about extending for everyone the Bush tax cuts on the first X dollars of income.
I would assume $250K and other figures relate to AGI (adjusted gross income). That's how taxes are usually based. As to how to calculate AGI from nominal salary, there's a reason there are 1.7 million accountants in the US :) US tax code is one messed up piece of spaghetti code.
For the $250K figure, you would be wrong. When that number was being cited, the top tax bracket started at something north of $350K ($366something, IIRC, but I may not) which wound up being $250k after taxes. This is, of course, precisely what is bugging me.
The number of companies started in any number of countries around the world with substantially higher tax rates demonstrate that people clearly do still have incentive to invest in their own business even if they pay more.
You did not make any claims about the amount of money invested. You made a blanket claim that closing this loophole would remove the incentive to invest in your own business.
This would translate to investing "someone else's" money too, as that investor or lender would presumably be looking for a return.
More personally: I've co-founded several companies. Never once was tax loopholes or tax levels at all any part of my consideration or the discussions I've had with co-founders or various VC's about whether or not the business was worthwhile. At most taxes would be some line item buried somewhere in a spreadsheet amongst other costs of doing business.
Maybe it affects amount of capital available in the market, but it certainly does not take away the incentive.
Is there somewhere the detailed effects of the deal are spelled out? I see conflicting reports over such things as whether the 20% capital gains rate applies to everyone and which income the 3.8% surcharge applies too.
The first thing I thought of when this bill cleared was the recent news regarding how much Apple pays Tim Cook[1], said to be the highest-paid executive in the country (in total, not just salary). His big RSU grant isn't going to begin vesting until 2016, but he now makes $1.36mm and more in incentives annually (in salary, which is Arrington's point) so presumably this deal will affect his taxes quite a bit. I'd be curious to know just how much to put things into a little bit of perspective.
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>Nothing the government agreed to in the last few days actually affects the asset wealthy in this country.
The increased tax rate on dividends and capital gains definitely affects the "asset wealthy" in the country. In fact, both the top income tax rate and the dividend/capital gains tax rate for those making over $400k has increased by roughly the same amount [1].
However, complete inaction by government would have increased the dividend tax rate even more, so that it would have been considered ordinary income (43.4% top rate) [2]. The legislation passed on 12/31 and 1/1 by Congress definitely helped the asset wealthy. Oracle pays a 18c dividend per share, and Larry Ellison owns roughly a billion Oracle shares. The dividend tax savings he'll receive from this legislation is massive.
[1] The top income tax rate goes from 35% to 43.4% (39.6% + 3.8% health care tax) and the top dividend/capgains tax rate goes from 15% to 23.8% (20% + 3.8% health care tax). If person A makes $100MM in salary and person B makes $100MM in dividend/capgains in 2013, their relative tax rate increase compared to 2012 is about the same: 8.4% increase vs 8.8% increase.
[2] http://www.atr.org/trillion-obamacare-tax-hike-hitting-jan-a...
[3]http://www.bloomberg.com/news/2013-01-02/bipartisan-house-ba...