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The Almighty Buck News

The Zuckerberg Tax 1065

Posted by samzenpus
from the biggest-bill dept.
Hugh Pickens writes "David S. Miller writes that when Facebook goes public later this year, Mark Zuckerberg plans to exercise stock options worth $5 billion of the $28 billion that his ownership stake will be worth and since the $5 billion he will receive will be treated as salary, Zuckerberg will have a tax bill of more than $2 billion making him, quite possibly, the largest taxpayer in history. But how much income tax will Zuckerberg pay on the rest of his stock that he won't immediately sell? Nothing, nada, zilch. He can simply use his stock as collateral to borrow against his tremendous wealth and avoid all tax. That's what Lawrence J. Ellison, the chief executive of Oracle, did, reportedly borrowing more than a billion dollars against his Oracle shares to buy one of the most expensive yachts in the world. Or consider the case of Steven P. Jobs who never sold a single share of Apple after he rejoined the company in 1997, and therefore never paying a penny of tax on the over $2 billion of Apple stock he held at his death. Now Jobs' widow can sell those shares without paying any income tax on the appreciation before his death — only on the increase in value from the time of his death to the time of the sale — because our tax system is based on the concept of "realization." Individuals are not taxed until they actually sell property and realize their gains and the solution to the problem is called mark-to-market taxation. According to Miller, mark-to-market would only affect individuals who were undeniably, extraordinarily rich, only publicly traded stock would be marked to market, and a mark-to-market system of taxation on the top one-tenth of 1 percent would raise hundreds of billions of dollars of new revenue over the next 10 years."
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The Zuckerberg Tax

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  • by khasim (1285) <brandioch.conner@gmail.com> on Wednesday February 08, 2012 @08:21PM (#38975175)

    And it is one of the reasons that our tax laws are such a mess.

    But I also don't think that we can have a discussion about it without various political agendas derailing it.

  • Wrong. (Score:5, Insightful)

    by viperidaenz (2515578) on Wednesday February 08, 2012 @08:21PM (#38975183)

    ...would raise hundreds of billions of dollars of new revenue over the next 10 years.

    No, it would mean the excessively rich exploit a different loophole instead.

  • by CrimsonAvenger (580665) on Wednesday February 08, 2012 @08:24PM (#38975217)

    This has nothing to do with a flat tax. Or most other kinds.

    So he doesn't pay income tax on things that aren't income. Big deal.

    I don't pay income on my bank balance either. Just on my income.

  • AMT (Score:4, Insightful)

    by bhcompy (1877290) on Wednesday February 08, 2012 @08:26PM (#38975235)
    The AMT was only supposed to affect the rich as well... Look how that turned out(and continues to turn out every year). Look, I'm cool with taxing these people, but all these cute little plans ultimately only bite one group of people in the ass, and it's those that are neither rich nor poor.
  • by Anonymous Coward on Wednesday February 08, 2012 @08:26PM (#38975249)

    This is a tax on an increase in wealth. An increase in wealth is otherwise known as an income.

  • by Anonymous Coward on Wednesday February 08, 2012 @08:27PM (#38975261)

    Yes. in fact you already *did* pay taxes on it.
    If you are like the majority of us you paid income tax on the money before it went into the bank account.

  • Mark to market (Score:5, Insightful)

    by jonsmirl (114798) on Wednesday February 08, 2012 @08:29PM (#38975287) Homepage

    Before you get excited about mark to market, mark to market accounting was one of the causes behind the banking melting down we just had and it has since been repealed. Mark to market can easily cause phantom gains. Phantom gains happen when the market crashes like it did in 2001. If you got marked to market in 2000 and then your stock crashed in early 2001 you could have ended up owing more in taxes that your stock is currently worth. That usually results in instant bankruptcy (or bank failure).

  • by TubeSteak (669689) on Wednesday February 08, 2012 @08:31PM (#38975301) Journal

    Alternatively, anything that allows the wealthiest to dodge their tax obligations should be looked at as a bug, not a feature.
    The founding fathers had a lot to say about the accumulation of wealth and the corrosive effect it has on society.
    And they would know, as they had seen the Aristocracies of Europe and their concentration of land ownership (wealth).

  • by crunchygranola (1954152) on Wednesday February 08, 2012 @08:32PM (#38975317)

    This has nothing to do with a flat tax. Or most other kinds.

    So he doesn't pay income tax on things that aren't income. Big deal.

    I don't pay income on my bank balance either. Just on my income.

    But notice - your bank balance appreciates due to interest, and you don't take it out - you just leave it there. It is nonetheless taxed as income. It your wealth was in financial instruments like stock, and it appreciates, no tax on the increase.

    The proposal is not to tax the value of the stock (which is the parallel to "taxing your bank balance") - just the increase.

  • by rsilvergun (571051) on Wednesday February 08, 2012 @08:33PM (#38975337)
    For years and years we read news stories about the amazing and complicated hoops accountants jump through to keep their wealth clients from paying money. Now we find out that all their doing is borrowing money at below market rates against untaxable assets. Nothing too complex, and it relies on a good 'ole boy network to approve the ultra low interest loans that make it all possible (I, for example, can't borrow at a rate low enough to get away with this).
  • by vux984 (928602) on Wednesday February 08, 2012 @08:33PM (#38975339)

    The sleight of hand actually occurred when the wealth grew to a larger amount of wealth without its owner ever needing to describe this "increase in wealth" as "income".

  • Re:Wrong. (Score:3, Insightful)

    by Obfuscant (592200) on Wednesday February 08, 2012 @08:33PM (#38975341)

    No, it would mean the excessively rich exploit a different loophole instead.

    You mean they'd use a different legal means of avoiding paying tax that they aren't required to pay. Why do people seem happy to take every deduction they are allowed, and then rant about the deductions other people get?

    But yes, taxes aren't a zero sum game. Raise the tax rates, the revenue goes down as people use more of the options to avoid paying it, or simply have less to invest in making more money to start with. Even JFK figured that one out. You can't simply say "double the tax rates means double the revenue".

  • Doesn't work (Score:5, Insightful)

    by alphabetsoup (953829) on Wednesday February 08, 2012 @08:36PM (#38975389)

    Assume this year there is a stock market bubble, and I pay a huge tax this year. Next year there is a stock market crash, and I lose all my previous years gain. So what happens ? Government refunds me my tax ? What about interest on that tax ? Government pays it too ?

    Next problem, how do I pay this tax ? If my money is tied up in investments, how do I generate the cash to pay my tax ? Should we start paying our taxes using equity shares ?

  • Re:Wrong. (Score:5, Insightful)

    by Jah-Wren Ryel (80510) on Wednesday February 08, 2012 @08:41PM (#38975453)

    ...would raise hundreds of billions of dollars of new revenue over the next 10 years.

    No, it would mean the excessively rich exploit a different loophole instead.

    That isn't a reason to give up trying to fix the system.

    No system will ever be perfect but that doesn't mean we shouldn't always be working to improve it, applying lessons learned along the way. For one thing, if we don't constantly evolve it, it will rot as more and more people apply the lessons they've learned and create new ways to game the system. It isn't like all loopholes are immediately apparent and exploitable. Even the ones that are 'obvious' may still carry the risk of a court ruling making them invalid so only the people with the highest risk tolerance will try to make use of them until the whole thing has worked its way through the court system.

  • by swalve (1980968) on Wednesday February 08, 2012 @08:41PM (#38975459)
    So when my house appreciated up to nearly double during the boom, you'd have me paying taxes on that? Where am I going to get the money? Would you pay me back after it dropped in value?
  • Quite a stretch (Score:2, Insightful)

    by Anonymous Coward on Wednesday February 08, 2012 @08:43PM (#38975495)

    This is unlikely to go anywhere. Tax law has around a century's worth of precedent on only taxing assets at the time of disposal, or deemed disposal. Any transfer of ownership for instance.

    If you try and change this there are a couple of problems over and above mere precedent.

    1). Many people, even the very rich, can be considered asset rich but cash poor. If you mark to market, the tax code can sometimes create a liability far beyond what the owner can pay out of pocket;
    2). Assets do not only increase in value, they can decrease as well. When you mark these to market, does the owner get a refund? A tax credit?

    There are answers to these issues of course and I don't want to create the impression that nothing can be done. The biggest barrier I would suggest, would be the precedent. Most citizens have a general idea of how the tax system works. This would be a major departure. Some people have positioned their asset structure around these rules and have created systems literally designed to last for a lifetime. Mark to market would be viewed as an assault by such people, I'm sure.

  • by Asic Eng (193332) on Wednesday February 08, 2012 @08:46PM (#38975537)

    Should have inheritance tax then - the inheritance is income.

    As for the borrowing stuff - how is that supposed to work? So Ellison borrows against his shares (fair enough) and buys something with it. So now he has to pay back the loan. That payment needs to come from income, and for that he pays tax. Seems fair.

  • by perpenso (1613749) on Wednesday February 08, 2012 @08:47PM (#38975541)

    Alternatively, anything that allows the wealthiest to dodge their tax obligations should be looked at as a bug, not a feature.

    The middle class does this exact sort of thing too. When a retired blue collar worker leaves his house to his kids, the kids only pay taxes on the appreciation from the date of death.

  • by ortholattice (175065) on Wednesday February 08, 2012 @08:48PM (#38975555)
    So what is fundamentally wrong with a wealth tax?

    Actually, only the rich avoid a "wealth tax". For most people, their house represents the bulk of their wealth, and it is taxed annually at a percentage of its value. So effectively, ordinary people already pay a hefty "wealth tax". In some ways it is doubly unfair, because it also taxes the mortgaged part of that wealth that really belongs to the bank, not the person paying the tax.

    Why do we accept this wealth tax but not one on other assets? It is just another unfair loophole that benefits mainly the rich. If people were taxed on their net worth rather than just real estate value, people stressed out by their mortgage would see their taxes go down while rich people who can afford it would pay more.

    In Argentina, people are taxed a certain percentage of their net worth [taxrates.cc] above a certain amount, so a "wealth tax" on all assets, not just real estate, is not unheard of.

  • by Sycraft-fu (314770) on Wednesday February 08, 2012 @08:48PM (#38975563)

    See here's the problem: You start taxing wealth, then you start taxing all kinds of shit. Your house would now not only have a property tax, it'd have a wealth tax. It goes up in value, you have to pay tax on there. You don't realize any of that gain, of course, but it still increased in value, at least in theory, and thus you owe money. Now imagine that during the real estate boom. You suddenly owe income tax on an additional $100,000 because our "wealth" increased that much in theory because your house went up.

    That's the thing is that having assets, having wealth, doesn't magically kick in at some number. Most of the middle class has some, just less than the rich. If you own any asset that appreciates in value, like a house, a retirement fund, etc, you have wealth. Maybe not much, but you have some. So anything that places a tax on having it is something that you'll be paying.

    Have to be careful of unintended consequences.

  • Re:Wrong. (Score:4, Insightful)

    by DragonWriter (970822) on Wednesday February 08, 2012 @08:49PM (#38975565)

    Capital gains tax is effectively a double-dip, hence the lower rate.

    Actually, no. Its in no way a "double-dip", because income earned via appreciation of capital isn't, as a rule, earned and taxed as income by some other means; further capital gains in general aren't taxed at a lower rate, long-term capital gains are. Long-term (where the asset is held for longer than one year) capital gains are taxed at a lower rate than normal income (which includes labor income, short-term capital gains, and lots of other things) is because the U.S. progressive income tax system is based on the presumption that the income taxed is earned during a single year, and that those with more taxable income in a year have a higher annual rate of income generation. The inclusion of long-term capital gains as normal income would (if done naively) violate this premise, particularly in the case of most people with long-term capital gains, who have them as occasional events as liquidating long-term stock holdings, selling long-held homes or other real estate, etc.

    Now, the very rich (who have by far the biggest share of long-term capital gains and the biggest benefit from the reduced tax, though they are a small percentage of the number of people affected by the preferential tax) may have the kind of assets where they can regularly roll-out assets held for more than a year, such that they have effectively a regular annual income that is being taxed favorably under a tax which really isn't designed for that kind of income.

    There are fairly simple ways to address this while not breaking the system for people who have occasional long-term capital gains rather than regular long-term gains -- one of which is taxing capital gains as regular income but permitting advance recognition of gains, prior to realization, for tax purposes or permitting gains to be distributed over several years after realization (or both).

  • by Obfuscant (592200) on Wednesday February 08, 2012 @08:50PM (#38975579)

    Alternatively, anything that allows the wealthiest to dodge their tax obligations should be looked at as a bug, not a feature.

    The "tax obligation" is what the law requires them to pay. Are you claiming that they are violating the law and paying less than required? If so, the IRS would probably like to have copies of your evidence.

    If all you are whining about is that they have deductions that they use, just like the rest of us have deductions we can use, then I assume you use none of your deductions and pay more than the law requires.

    The founding fathers had a lot to say about the accumulation of wealth and the corrosive effect it has on society.

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

  • by patchmaster (463431) on Wednesday February 08, 2012 @08:54PM (#38975627) Journal

    This is a slippery slope the government would be well-advised to avoid. The only way to make this "fair" is for reduction in wealth to be given tax credits. Stock goes up, you pay taxes on the increase. Stock goes down, you get a refund on the reduction in value.

    How do you think this would have played out when the market went into free fall a few years ago?

  • Worst idea ever. (Score:3, Insightful)

    by pavera (320634) on Wednesday February 08, 2012 @08:55PM (#38975641) Homepage Journal

    Ok, I'm a middle class person, I have 50k invested in a 401k, said 401k goes up 20% this year... creating a gain of 10k and I get taxed at say 25%.. so I now need to sell $2500 in my retirement account to pay the tax... It gets even crazier if say I'm close to retirement and I have 500-600k or something in said account... now I have a $25000 tax bill on income I didn't make... and I have to sell investments just to pay the tax man... And next year the market could drop 20% and I'll just be out the 25k in taxes plus the 100k in investment losses...

    I thought everyone was agreed we needed to simplify the tax code not make it insanely more complicated.

  • Estate tax (Score:5, Insightful)

    by QuincyDurant (943157) on Wednesday February 08, 2012 @08:55PM (#38975645)

    I don't begrudge Jobs or Zuckerberg their stock profits. Jobs took no salary and gambled that he could make the stock worth a bunch. He created a lot of employment and happy investors along the way.

    But I do think billion-dollar estates should be taxed--a lot. The wife and kids (if any) did not create wealth. They deserve money, but so do we. Otherwise, we pay their taxes for them. The government has to get money from somewhere.

    Half a billion is a nice inheritance. If it's not enough for the heirs, they could consider drastic measures, like getting a job.

    Zuckerberg will still be a rich man when he dies, and the government will still need money. The place for the taxpayers to catch up with him is from his estate.

    It's worth mentioning, too, that Zuckerberg has already made an eye-popping gift to New Jersey schools. Tax-deductible, no doubt, but still a praiseworthy act.

  • by Grishnakh (216268) on Wednesday February 08, 2012 @09:08PM (#38975789)

    No, it isn't. "Income" is money that you earn. A bunch of pieces of paper saying you have an ownership in some company are not "wealth". Potential wealth, perhaps, but only when you actually sell those shares or exercise those options. Until then, they're nothing more than paper (or these days, bits on a computer somewhere).

    I'd like to tax rich people more just like anyone else, but taxing people based on what their possessions might be worth at some point in the future is ridiculous. Those possessions might also become worthless before they ever cash out. Look at all the "millionaires" during the dot-com boom that suddenly became broke after the bubble collapsed. Are you saying those people should all have paid hefty taxes based on that so-called "wealth" they owned? What about when it all became worthless because those silly companies all dried up and blew away when people finally realized their business plans were idiotic? Is the government going to refund billions of dollar in taxes when that happens?

  • Re:One more issue (Score:5, Insightful)

    by Grishnakh (216268) on Wednesday February 08, 2012 @09:13PM (#38975845)

    Yep, that's essentially the same thing. The problem with a wealth tax is that it requires you to make more income to pay the tax, or worse to sell off your property because you can't afford the taxes. For example, say some guy working as a barista inherits a nice $500k house from his parents when they die. He can afford to stay there as long as he keeps the heat and A/C set low, but in someplace with high property taxes like Texas, he can't afford to stay there at all because he can't afford the $20k/year taxes on the place. Why should he be forced to sell out (esp. if the market is bad, like right now), instead of being allowed to stay in the house his parents left him? So now he has to go sell the house, give a bunch of money to some no-good idiot realtor for doing nothing, and go buy some much cheaper place (again giving a big chunk to some no-good realtor, and paying a bunch in taxes), just so he can have a place to live (let's say he was living with his parents before, renting a room). That doesn't sound right to me.

  • by dnaumov (453672) on Wednesday February 08, 2012 @09:19PM (#38975893)

    Are you retarded, braindead or both?

    Are you seriously proposing we tax people based on how/when their stock holdings increase in value without the person actually making a sale? How do you propose we deal with decrease of value then? Or alternatively.... you made a nice home purchase in that nice neighborhood of yours, too bad it went up in market value, now you have to sell it off and move elsewhere just to pay your tax bill.

  • by Barlo_Mung_42 (411228) on Wednesday February 08, 2012 @09:21PM (#38975917) Homepage

    I don't understand how that works. So Ellison took out a huge loan to pay for a boat using his stock as collateral. He still had to pay the loan back somehow. If he paid it back by selling his stock it would have been taxed. If he paid it back with income he got some other way, it was also taxed.

    Where’s the loophole?

  • by Grishnakh (216268) on Wednesday February 08, 2012 @09:26PM (#38975955)

    You also are not taxed on your house increasing in value

    Unfortunately, in most places you are; it's called "property tax", and it's based on some BS called "assessed value". So if you buy a house that's the most you can afford, and then there's a mini-bubble in real estate (like we just had), your property tax bill goes up and you have to sell your house and move into a much smaller house even though if you wait a few years, the bubble will collapse and your house will be worth less than you bought it for.

  • by Grishnakh (216268) on Wednesday February 08, 2012 @09:33PM (#38976007)

    You just confirmed what I wrote before: "the monetary payment received...from...investments".

    Hint: stock certificates are not "monetary". Only money qualifies as a monetary payment. Stock certificates are worthless pieces of paper that only become worth something when you convince some other sucker to buy them from you for more than you paid for them.

  • Re:One more issue (Score:5, Insightful)

    by Grishnakh (216268) on Wednesday February 08, 2012 @09:35PM (#38976023)

    Why not? Who are you to decide where he should live? If his parents want to set him up with a paid-off house so he can live rent-free, why is that a problem? You think it's better that he give most of his income to a big apartment complex corporation instead?

  • by PickyH3D (680158) on Wednesday February 08, 2012 @09:35PM (#38976025)

    Yep. The real purpose of this is to destroy investing. It's not fair that you are planning ahead, or have a lot of money, or your business did extremely well (Zuckerburg, Jobs, Gates, etc.). You owe it to someone who is much better at managing and redistributing money: the United States government.

    People seem to not realize that the few that get stock through options are far outweighed by those that buy stocks using their already taxed income. Then, when it comes time convert the stock back into cash, they get taxed again for it.

    What Zuckerburg is supposedly doing should be infinitely encouraged. He started a business, which has certainly created a lot of wealth that was not there before, and he is about to pay a boatload of money based on his business doing incredibly well; his company has even created successful jobs outside of his own, such as Zynga. Yet that's a bad thing? Jobs was not taking a real salary because he did not need one, and the stocks are only of value if he continued to run a successful company. Seriously, what's wrong with that? Because he might take out a loan on his net worth to buy more property, which is itself taxed on top of the taxes on the product or property itself? Or is it because he paid so little (I have no idea how much he actually paid and frankly don't care as long as it followed the law) while running such a massively successful company that paid enormous amounts in taxes?

    This is despicable. People need to get over themselves. You do not deserve money. You do not deserve success. And you do not deserve to deprive anyone else of it either, whether they got it through luck (including birth) or talent. The only justification is through cheating.

    It's time that people started competing again rather than begging or complaining, but I think that I might be speaking to the wrong choir on this one.

  • by tragedy (27079) on Wednesday February 08, 2012 @09:42PM (#38976091)

    Let's not ignore that, as the article points out, there's a loophole method of getting money from these investments in the form of loans using them as collateral. If a mechanism exists to get a monetary payment out of it, then the implications of that method need to be fully explored before you can say it is or isn't income.

  • by A nonymous Coward (7548) on Wednesday February 08, 2012 @09:47PM (#38976121)

    Dividends are paid from corporate post-tax income, ie, already taxed. How many more times do you want to tax it?

  • Re:No it is not. (Score:5, Insightful)

    by TheRedSeven (1234758) on Wednesday February 08, 2012 @09:48PM (#38976149) Homepage
    Here's how it is a double-dip.

    You invest $100 in Company X.
    Company X uses your money to make an 80% profit (good job investing!)
    The government taxes the corporation at 37%.
    This means that the earnings passed back to you as a shareholder are $100 + $80 - ($80 * .37) = $150
    Woohoo! $150 means you made $50 in capital gains!
    That $50 capital gains is again taxed at a capital gains rate. For long-term investments (one year + one day), this is currently (IIRC) %15.

    This is where the notion of double-taxation comes in. The returns on your investment are taxed twice--once when it is counted as 'income' by the corporation, and again when it is counted as income by the individual. This is why some say that capital gains tax should be eliminated (a notion I do *not* agree with) or even that corporate tax should be eliminated (a notion I agree with even less). In any case, there is certainly double-taxation going on with investments. And that's why capital gains are taxed at a (generally) much lower rate than the higher income brackets are.
  • Re:One more issue (Score:4, Insightful)

    by chebucto (992517) on Wednesday February 08, 2012 @09:49PM (#38976151) Homepage

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

    And what effect has this massive capital flight had?

    Money is stored in banks outside of France instead of inside of France?

    Ceteris paribus, that seems about as important as the location of lost pirate gold - interesting, sure, but without any effect on the present-day economy.

  • Re:Two rules (Score:5, Insightful)

    by caitsith01 (606117) on Wednesday February 08, 2012 @09:50PM (#38976165) Journal

    1. The rich always have it better.

    2. If you try to change rule no. 1, you just make things worse.

    This type of pessimism is frustrating. And you are wrong.

    Rewind about 500-1000 years. Pretty much 100% of the wealth around the world was held be a sovereign of some kind and his mates, who between them shuffled some tribute money around but otherwise gained more wealth by taxing the pittance earned by everyone else. Killing a random animal in a random bit of wilderness was a crime because all animals belonged to the King, etc.

    A couple of hundred years ago this had shifted such that the state, independent of the crown, was stepping in, intercepting some of the wealth and redistributing it via social spending. Serfdom and slavery were on the way out. Meanwhile property and other laws had evolved so that the poor could start becoming the middle class through hard work, with obviously much less of a boost at the start than the landed gentry.

    Today, at least in principle, we agree that the rich and privileged deserve no special treatment, and that at least the opportunity to acquire and hold wealth is akin to a universal right. The fact that we haven't fully implemented a system which puts this into practice doesn't mean that "the rich always have it better", nor does the fact that we have recently experienced some short term backsliding on the move from "the king has everything" to "everyone has something".

    In other words, you need to use a larger data set than just the last few years or decades. On a longer timeline there has been a very successful reduction in the extent to which the rich get their own way. The current thrashing around by companies and wealthy individuals post-financial crisis indicates to me that they appreciate that their only chance to maintain their privilege is to manipulate things outside of the rules of the game (political influence and tax evasion, for example).

  • by Sancho (17056) * on Wednesday February 08, 2012 @09:57PM (#38976213) Homepage

    Funnily enough, my house has a market value, and I have to pay a property tax every year based on that market value. And when it goes up in value, my property tax increases.

    I'm not entirely sure why stock is different.

  • by gwolf (26339) <gwolf&gwolf,org> on Wednesday February 08, 2012 @10:01PM (#38976257) Homepage

    My house has increased in value over the last 10 years. In Mexico, we pay taxes for all of our real estate - And the tax for my house increased quite a bit (way more than the percentage of appreciation - Yes, it has some brackets on which it jumps). Of course I didn't like it, but of course I believe it is fair.

  • by Charliemopps (1157495) on Wednesday February 08, 2012 @10:01PM (#38976261)
    Once again, an article written by someone that simply assumes that someone else, not paying enough in taxes, is a bad thing. It's not. PAYING TAXES IS A BAD THING. Yes, in our present system, with our present technology, we need a tax system... but that's unfortunate. It's not wrong, evil or unpatriotic to pay less in taxes. We should all pay less. There is no entity on earth less adept at managing money than a government. Much like an aquarium, a government operates at its most efficient and is healthiest when it's starved of food/money. Given more and more food/money, it eventually pollutes the water and makes the entire system unhealthy. Unfortunately for us, politicians generally just move to a new tank once they've ruined ours.
  • by ArcherB (796902) on Wednesday February 08, 2012 @10:14PM (#38976373) Journal

    Let's not ignore that, as the article points out, there's a loophole method of getting money from these investments in the form of loans using them as collateral.

    Don't these loans need to be paid back at some point? They're going to have to either sell their shares, or earn money from somewhere else, to pay that loan. When that happens, they have to pay tax.

    I was wondering that too. How do these loans get paid back?

    Either way, the answer is simple. Rather than having a tax system based on how much money a person makes, why not have a tax system based on how much money people spend? Jobs borrowed billions using his stock as collateral. What happened to that money? I'm going to take a guess and say he spent it at some point.

    With a tax on spending, no matter how much or how a person earns his income, it will get taxed when spent. Illegal alien? Money is taxed when it is spent. Drug dealer? Money is taxed when it is spent. Illegal gambler? Again, money is taxed when spent.

    Of course, there are problems. Buy crack from dealer, it's not likely he's going to charge you sales tax. Hookers will have the same issue. That lady that cleans your house... Again, yes, not all taxation based on services will be enforcible, but it will still be taxed when they spend it.

    A tax on spent money, aka a "Sales Tax" (doing the finger quotes here) will ensure that everyone pays taxes, no matter how good your accountant is, as there are no loopholes. The only way out is to save or invest, and well, you won't save forever. All money is spent at some point.

  • Not to mention... (Score:5, Insightful)

    by Shark (78448) on Wednesday February 08, 2012 @10:16PM (#38976393)

    mark-to-market system of taxation on the top one-tenth of 1 percent would raise hundreds of billions of dollars of new revenue over the next 10 years

    Let's be pretend that it's 999 billion dollars over 10 years (the upper margin of hundreds). That's 100bn/year. Deficit is close to 100bn *a month*... I'm not sure that tax is going to do better than encourage the government to spend more. I humbly propose that a tad more attention be put on lowering spending rather than increasing taxes.

  • Re:One more issue (Score:5, Insightful)

    by Dahamma (304068) on Wednesday February 08, 2012 @10:16PM (#38976395)

    If the parents sunk all of their money into a $500k house and that was their only asset (thus leaving him no inheritance), then blame the parents for poor financial planning.

    If someone leaves you a $500k house free and clear that's a pretty damn good inheritance and hardly poor financial planning on their part.

    But aside from that, why should someone who only makes $20k/year (or whatever a barista might make...not much) be expected to be able to live in a $500k house?

    Because it's bought and paid for, and his property. The question is, why should someone with low income but fully owned property NOT be allowed to live in it?

  • by Baloroth (2370816) on Wednesday February 08, 2012 @10:18PM (#38976407)

    It's different because property taxes a) are levied by local governments (not federal, which would actually be illegal under the Constitution), and b) go to pay infrastructure used to make your property useful in the first place (roads and the like). It isn't really a tax on wealth, exactly, more a tax on the value that the local government gives the property. In order to tax wealth itself, you would have to argue that the federal government similarly makes stock valuable (a small stretch, but plausible, I guess: defense and whatnot) and would be legal (which it wouldn't).

  • by khasim (1285) <brandioch.conner@gmail.com> on Wednesday February 08, 2012 @10:19PM (#38976423)

    i don't like the idea of a death tax, but it seems the entire solution would be to tax the assets upon death of the original owner, when they are transferred to the beneficiary, as if the original owner had sold them.

    I believe that such is why certain groups use the term "death tax" instead of "inheritance tax".

    Taxes are a VERY complex subject. And always will be. And every tax is SOME form of social engineering. Unless you agree with it. Then it's not. Only the taxes that you don't agree with are social engineering. And badly done at that. (sarcasm, but not aimed at you)

    And the moment you commit a new tax law to paper you create an opportunity for some tax lawyer to find a way around it.

    And if it is a tax on the wealthy, that can be tens of millions of dollars in incentives for that tax lawyer. Or more.

    And I'm not even addressing globalization. Can assets be moved to a different country where they can be cashed in under a different tax model?

    Or can I make tax-free contributions to a charity that pays for things I want that is run by my family?

    Not to mention that when you get rich enough, you can hire lobbyists to help Congress Critters write the tax laws that are more favourable to specific situation.

    And so on and so forth.

  • by Sancho (17056) * on Wednesday February 08, 2012 @10:32PM (#38976535) Homepage

    It seems that if you were to decide to tax stocks in the same way you might tax property, you'd have fewer people willing to buy stock, and subsequently less investment in the economy.

    This is the general argument used to keep capital gains taxes low, and as far as I can see, there's no real evidence to support it. Of course, most of the ways that stocks are broken can be linked back to the fact that companies rarely issue dividends anymore, and the main way that people make money from stocks is through selling them for a gain. But that's a complaint for a different time.

    I guess the reducto ad absurdum is why not tax savings? If you've got $100.00 in the bank, why not tax you 15% every year on it? In ten years, you'll end up with less that $20 bucks. Or why not tax the perceived value of your antique record collection?

    Well, my property taxes are much much lower than that. Less than 1%, actually (something like $0.50 for every $100 valuation.) But I do get your point.

    I think that taxing savings might encourage people to spend money which is otherwise sitting there doing nothing and not helping the economy. Of course, savings is at an all-time low in this country, so really it might not do anything at all.

    At least for property tax there's some sort of implied quid pro quo (you're getting roads, fire, police for your taxes). What exactly does a government give you for savings or stock that is equivalent?

    Well, stock is ownership of a company. It's not like companies don't benefit from infrastructure. In fact, they probably benefit more from infrastructure than any individual person does (though they get to deduct their property rather than paying tax on it.) It seems reasonable that a company would need to pay for infrastructure.

    If you believe articles like http://www.huffingtonpost.com/2011/11/03/major-corporations-tax-subsidies_n_1073548.html [huffingtonpost.com] then it turns out that many of the most profitable companies don't end up paying income tax (though they may pay into medicare and social security). I'm not sure why that's fair.

    The bottom line is that the tax code is screwed up, which is sort of what this /. article is about in the first place. When billionaires can get away without paying most taxes (surely they pay sales tax on things that they purchase?) yet working stiffs have to pay 20% of their incomes in income+medicare+ss alone, something is clearly out of whack. I don't think there's an easy fix.

  • by Sancho (17056) * on Wednesday February 08, 2012 @10:37PM (#38976569) Homepage

    go to pay infrastructure used to make your property useful in the first place

    This goes to the moral argument, and so that is the one I will address.

    A huge portion of my property taxes actually go to public schools, which is not infrastructure benefit directly from. My understanding is that this is not unusual.

    It isn't really a tax on wealth, exactly, more a tax on the value that the local government gives the property

    It's not a tax on wealth, it's a tax on value?

    I think that's splitting hairs, don't you?

    federal government similarly makes stock valuable

    The federal government, with all of the protections that it gives corporations, absolutely provides company ownership value. Similarly, companies clearly and directly benefit from infrastructure.

  • by Sir_Sri (199544) on Wednesday February 08, 2012 @10:41PM (#38976615)

    In canada we have a system of taxing stock options based on when the option was granted. There are also capital gains separately, but the option is considered to have real value. It's like giving someone a car as compensation, the car is taxed at the value of the car when given, and if it goes up or down later that's a separate issue. If it has value now, it is a taxable benefit, whether that's a personal driver, personal use of a company car etc. So it can be taxed.

    Usually this isn't a problem. Unless the stock nose dives before the end of the year, then you have to pay tax on something worth nothing, but that you have nothing to back it up with. It makes lots of people unhappy when these things do happen.

    There's nothing particularly wrong with taxing wealth rather than income theoretically. That's certainly something governments could do. But in the west we don't, we tax income. It is managerially easier, because you don't have to deal with house prices rising or falling every year, assessing house prices, car prices etc. Judging the value of someone's assets is actually quite hard, especially if they don't have much, because then you have to really precisely measure stuff or you end up with a very uneven system that could unfairly screw people differently.

  • by shutdown -p now (807394) on Wednesday February 08, 2012 @11:11PM (#38976867) Journal

    it its undeniably true that a lot of people and organizations currently make an *income* which is currently not taxed based purely because they benefit from this loophole

    I still don't get where the loophole is. So I had a share that was worth $10 a week ago, now it's worth $20. Until I sell it, I don't make any actual income, no money I can spend on something.

    TFS talks about borrowing money using that value of $20 as a collateral. Fine, I do that, now I have the cash. But I also have a debt which I will have to repay later - with more cash. So eventually I'll still have to sell my share, and I'll pay the tax then.

    Where's the catch?

  • Again, no. (Score:5, Insightful)

    by khasim (1285) <brandioch.conner@gmail.com> on Wednesday February 08, 2012 @11:13PM (#38976877)

    It doesn't matter how much the corporation is taxed.

    YOU are not taxed twice for same money.

    By your "logic", you would never have to pay taxes on anything because someone, somewhere, at sometime had already paid taxes on every dollar in circulation.

    The returns on your investment are taxed twice--once when it is counted as 'income' by the corporation, and again when it is counted as income by the individual.

    Exactly as I said. Every dollar in circulation has been taxed at least once. Therefore, no one should be taxed because it would all be "double taxation" by your "logic".

    Except that it is not "double taxation" because YOU are being taxed on the money YOU receive.

    The money does not owe taxes. YOU owe taxes.

    It doesn't matter if someone else paid taxes on that dollar when they received it.

    And that's why capital gains are taxed at a (generally) much lower rate than the higher income brackets are.

    No. It's because poor people have bad lobbyists. And a lack of understanding of how the tax system works.

  • Re:One more issue (Score:1, Insightful)

    by ArcherB (796902) on Wednesday February 08, 2012 @11:13PM (#38976885) Journal

    Except that rich people don't spend much money inside the country. Where do you think they get those megayachts from?

    You mean those mega yachts that the owner has to pay a duty on like everything else people buy overseas and bring to the US? Um... I guess they would pay a duty on them. They will also get taxed wherever they are docked [latimes.com].

    And what do you think keeps the poor people from simply killing these rich people and taking all their stuff? It's called military and police. The rich benefit more than everyone else.

    Actually, it's called Blackwater Security Firm.
    Everyone benefits from the military equally. It's not like the Reds are coming over here and robbing the poor and middle class while the military is protecting the rich neighborhoods. Seriously man, think about what you are saying here. I'm not rich and I get 100%, absolute protection from foreign armies in my home. The EXACT same protection Michael Dell gets.

    As for the police, like I said, the top 5% pays over half the taxes. Are over half the police in the rich neighborhoods? Here's a hint; NO! For that matter, most of the uber-rich are protected by private security companies. And yet, they still pay for police. Go ahead ask a cop or even listen to a police scanner. How many calls come from the good part of town? Is it over 50? Are over half the fire departments in the rich neighborhoods? Nope. Let's look at the school system? Well, rich neighborhoods do tend to have better schools, but much of that comes from the locals sending their kids to private schools, but still having to pay the taxes for the local public schools. This means there are fewer kids in the school for each person paying taxes. So, yeah. Just like everything else, the rich pay for the public services, and then pay for the services they use privately.

    Any other examples you need me to explain? So far you are batting a perfect zero.

  • by toadlife (301863) on Wednesday February 08, 2012 @11:22PM (#38976973) Journal

    why not have a tax system based on how much money people spend?

    1) Inherently regressive. They may seem somewhat fair for households that earn up into 200,000's, but when you get into the very high income earners, the effective tax rate drops to near zero because the percentage of income spent on consumables starts to drop and ends up being...near zero. There is only so much money one can spend on consumables. Mitt Romney, who recently revealed that his effective tax rate was 13.9%, would probably have an effective tax rate of 1% or less under a system of consumption-only taxation. The difference or course would have to be made up by middle income households.

    2) It would be an enforcement nightmare. Sales tax is already more difficult to enforce than income tax. jacking the effective sales tax rate from ~6% to 35% would encourage more tax evasion. Widespread evasion would either force a feedback loop of ever higher rates, or draconian enforcement mechanisms that result in even more of our rights being taken away....or BOTH.

    3) It would be catastrophically disruptive to our economy. 70% of the U.S. economy is based on consumption. The paradigm shift would cause a massive drop in consumption and result in a massive recession, which of course would cause tax revenue to plummet.

    If you want to tax consumption, a small VAT is the logical way to do it.

    Since you like Ray-Gun quotes, here is one for you:

    "Taxes should hurt. I just mailed my own tax return last night and I am prepared to say 'ouch!' as loud as anyone."

    --Reagan, 1970, after approving California's largest tax increase in history. Reporters soon pointed out that Reagan didn't pay a cent on state taxes that year. For all his talk about shrinking government, California's state budget more than doubled under his governorship, from $4.6 billion to $10.2 billion.

  • Re:Tax Shelter (Score:5, Insightful)

    by Qzukk (229616) on Thursday February 09, 2012 @12:10AM (#38977289) Journal

    if FB goes to zero he still has to pay back the loan.

    That's the beauty of it, if FB goes to zero he'll have nothing, so he'll declare bankruptcy and not pay back the loan.

  • by JBMcB (73720) on Thursday February 09, 2012 @12:11AM (#38977291)

    It's like giving someone a car as compensation, the car is taxed at the value of the car when given, and if it goes up or down later that's a separate issue.

    Seriously? A car has immediate inherent and utility value - you can drive it around. An option has NO value at it's time of issue - it's the potential ability, after a period of time, to buy stock at a particular price. At issuance it's nearly worthless. Taxing it at full value at the time of issuance is like selling someone a package of carrot seeds, and taxing them the value of a bushel of carrots.

    There's nothing particularly wrong with taxing wealth rather than income theoretically.

    Heck yes there is. It punishes people for saving and investing. It's only marginally less lousy than punishing people for making money in the first place. The correct avenue is to tax consumption.

  • Re:One more issue (Score:5, Insightful)

    by aeoo (568706) on Thursday February 09, 2012 @12:53AM (#38977623) Journal

    Great post. I'd like to respond to some of your thoughts:

    a) The *truly* wealthy get hurt the most by far. The ruling class will not let anything like this to happen. Other posters moaned about this hurting the middle class is a load of baloney. A small wealth tax would allow for a significant reduction in income taxes, sales taxes, or deficits.

    The truly wealthy are only a tiny tiny minority of the population. All property claims function only by mutual consent of the public. So the wealthy, by themselves, are not really in a position to prevent a wealth tax from being instituted and collected. They need at least some amount of public support. They don't need anything close to unanimous support, but they at least need the support of say 10-20% of the population. They at least need an agreeable pool of people to hire mercenaries from, mercenaries who will defend their property by force from the disagreeing population. If no one at all is willing to defend the property of the wealthy, then the "wealthy" person is just one frail and fallible human being and is effectively powerless.

    So the public consent is a huge deal. If the public consent is widely withdrawn on moral grounds, then the amount of friction and struggle needed to maintain enormous wealth is going to skyrocket.

    b) Unless all jurisdictions do it, liquid capital will just move elsewhere (which is probably why wealth taxes are only widely used for real estate).

    This situation is similar to a thief fleeing the country. Yes, the thief may take a big hoard of gold with her, but she also takes all the thieving activities with her as well. It's a short-term loss and a long-term gain. As long as the country has sane, pragmatic and aware trade policies for dealing with other nations, there is no easy way for externally located super-wealthy to exploit people inside the nation who isn't consenting to exploitation.

    As long as people believe in themselves (which is a big if), they don't need the nanny-type super-wealthy to hand out jobs. Jobs exists purely as function of demand. If there is demand, there are jobs. The super-wealthy do not create jobs. Instead demand creates jobs and the super-wealthy position themselves as intermediaries between demand for goods and services and job creation. In computer network security terms, the super-wealthy is a man-in-the-middle attack on job creation. They interpose themselves between demand and job creation. But they don't interpose themselves purely by their own power. They do so with our willing, grudging, brainwashed, or apathetic consent.

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

    True. But this isn't a real impediment. For example, we all know that going 120 miles per hour is dangerous on highways not purposefully designed for such speed. At the same time we also know that going 20 miles per hour is too slow. But where would we draw the line? Well, in reality it's not a problem. We draw an arbitrary line somewhere in a reasonable spot. Not everyone is going to agree. Not everyone will think it's perfect. But in these matters perfection is not necessary. You draw the line anywhere within reason and people will work with it. So does everyone agree that 75 miles per hour is the right number for the speed limit? Of course not. But it's within reason so for most people it's not something worth arguing about.

    Another example of this is age of consent for sexual intercourse. Obviously 5 year olds cannot give meaningful consent. And 25 year olds certainly can. But where would you draw the line? It seems like one of those "impossible" problems, but in reality it's very easy. In reality it actually doesn't matter that much. Be it 16 or 18 years of age, you just plop down some number which is somewhat arbitrary but also within reason, and people work with it.

    The point is that a system doesn't have to be

  • by Sir_Sri (199544) on Thursday February 09, 2012 @03:20AM (#38978615)

    There's nothing particularly wrong with taxing wealth rather than income theoretically.

    Heck yes there is. It punishes people for saving and investing. It's only marginally less lousy than punishing people for making money in the first place. The correct avenue is to tax consumption.

    Factually incorrect. You have no idea what rate you such taxes on wealth would be at, and neither do I, because we don't do it. It can neither reward nor punish unless you put numbers on it. And I'm making a purely theoretical argument, I haven't the time or inclination to try and figure out how to put numbers on it, because it would be a fairly difficult stats problem with a lot of assumptions we'd have to agree one (like what you want to the total income to be or the like), and I'm not sure Canada or the US keep track of all of the relevant statistics publicly, the UK probably does, but I don't know about anyone else. Consumption taxes (sales taxes for example) take higher percentages from people who can't save, and have to spend all of their money for their lifestyle. That's why income taxes are preferable. Rich people like consumption taxes because as a percentage of their income they spend less than poor people, who spend all of it, the net effect being that they are taxed at a lower rate. This is why consumption taxes are on average the least 'economically damaging' (to use the right wing babble), rich people keep more money and have more to spend, so on average it looks like people have more money at the end of the taxation. You've just reduced the consumption possible by the poor but whatever your tax rate is, and not appreciably changed the lifestyle of the rich.

    In effect our current graduated income tax systems are taxes based on what wealth bracket you are in. How many tiers and how sliding you want the scale to be is a fairly technical discussion. It's basically a half step towards taxing wealth, based on the idea that if you're in the top quartile of income earners you're probably in the top something of wealth holders (and I don't know what the something is, I'd have to look it up, the top quartile of wage earners are not the top quartile of wealth holders though).

    As with everything, what tax rates should be is a matter of degree. If the wealthiest 10% control 50% of the wealth you could tax their income at 50%, and the bottom 90% at 10% for example. Or you could tax the wealthiest 10% at 90%, and the bottom 90% at 10%. Those would have two very different outcomes, and one is a decidedly bad idea. The conservative talking point of 'everyone should pay something' does not actually get you a whole lot, since a lot of people don't have much to pay, so even if you tax them, you get very little money on the scale of things, and you just reduce their lifestyle.

  • Re:One more issue (Score:4, Insightful)

    by Grishnakh (216268) on Thursday February 09, 2012 @03:54AM (#38978765)

    That's an ideal world. In the real world, or at least in the USA, the money will be given to government contractors for $600 toilet seats and various military hardware like $15 billion aircraft carriers, not to mention expensive overseas wars to secure oil supplies, while the retarded orphans will be thrown out into the streets along with all the mentally disturbed people because the taxpayers would rather fund military adventurism than social services and institutions for the mentally ill.

  • by TheRaven64 (641858) on Thursday February 09, 2012 @09:08AM (#38980207) Journal

    The catch is that you can borrow to make other investments. The real problem with capitalism is that it is easy to make more money once you already have a lot of money, but much harder to make money when you start with nothing. If you have shares worth $1m in a low-risk low-return company, then you borrow $500k with them as collateral at a 4% interest rate. You then invest this in something with a 10% annual ROI, and after a year you've made $30K (more, by the way, than someone earning minimum wage in the USA makes from actually working).

    This new investment is now worth $550k, and you owe $20k in interest. Now, you borrow $250k against this new investment and use $20K of that to pay the outstanding interest. Now you have $1,550,000 locked up in assets (assuming that your original $1m investment didn't gain any value) that you can't touch, $230k in liquid assets (i.e. cash), and $750K in liabilities. You have $230K more in liquid assets than when you started and $30k more in actual wealth. You've effectively cashed $200K out of the stock market, as well as making a profit of $30k. Since you have not sold any of these shares, however, you will still pay no tax. Even better, you can probably write off the $20k in interest as a loss, so this will reduce the amount of tax that you pay when you actually do realise some of your assets.

    For extra fun, some financial institutions will offer special vehicles for doing exactly this. For example, they will sell you insurance against the shares decreasing in value, along with a loan backed by those shares with an offset facility. Effectively, you have now sold the shares to the bank. If the value of the shares goes down, then at the time of repayment the insurance will pay the difference. While the value goes up, the bank will just compound the interest against the total - you don't pay it, it just means that the loan total goes up and as long as the shares are of the same value as the loan it's fine. For example, if your $1m investment goes up by 10%, then the bank will add 10% to the paper value of the loan and give you 6% in cash, so you get $60k more to play with.

    The idea of not taxing the increase in asset value until the assets are sold is that this value is not readily accessible. If someone buys a house for $250, and it goes up in value to $500k, then you can't expect them to pay 10-20% tax on this difference, because they are very likely not to have access to this kind of liquidity without selling the house. Worse, if you consider something like the property bubble of the last decade, someone may buy a house for $250k, see its value soar to to $500k, but then only be able to sell it for $200k when they need to move. Forcing them to pay the tax on the purely theoretical increase in value doesn't seem fair. In contrast, if the paper increase directly translates to an increase in their purchasing power, then it does. These loopholes mean that people can still get all of the benefits of selling their assets without actually selling them (and therefore without actually paying tax).

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