How Entrepreneurs Overturned California's Retroactive Tax On Startup Founders 105
waderoush writes "Startup founders in California can breathe a little easier today — they won't be getting bills from the state for up to $120 million in back taxes. On Friday California Governor Jerry Brown signed a bill prohibiting the state from levying retroactive taxes on founders and other small-business investors who took advantage of a tax break invalidated last year by a state appeals court. California Business Defense, a coalition of entrepreneurs, spent most of 2013 trying to reverse the California Franchise Tax Board's interpretation of the court ruling, under which it planned to hit Californians with new tax bills on the sale of small-business stock going back to 2008 (a story that Slashdot picked up in January). Two bills on the matter reached Governor Brown's desk in September, one fully restoring the investment incentive through 2016, the other partially restoring it. Brown signed AB1412, the bill granting full relief. 'For a bunch of political greenhorns operating in an environment where political partisanship is at an all-time high, we did all right,' writes Brian Overstreet, one of the co-founders of California Business Defense. 'But it should never have been this hard.'"
Don't Worry (Score:2)
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Alternatively, keep drilling into their testicles with your new power drill, and see if they keep staying.
People vote with their feet, too, and there are 49, well, about 42 other states and Puerto Rico to go to.
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BTW, Governor Brown knows this, and understands the difference between rhetoric fed to you for your vote, and the poitical calamity of losing billions in taxes as industries flee the state.
Heh heh heh I said brown knows.
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snot funny
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I'm impressed by Brown. He paddles a little on the left, then a little on the right, and he keeps a steady path.
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Between allowing illegals to get both drivers licenses and practice law, banning lead ammo for hunting, reclassifying any semi-auto rifle with a clip as a assault rifle (including simple .22's) and therefore making it illegal to transfer ownership (even upon death); I would say that Brown paddled to the far left.
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In politics, left and right are very relative terms. What is left in the USA is right in Europe, for example.
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Congratulations on your ability to selectively quote left-leaning policies.
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That's the United States of Heinz. That's somewhere in Europe. Near Andorra.
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No, they didn't forget -- they still tax your ass off in CA. For instance, you'll still have to pay an $800/year fee to have an LLC, even if it grosses $0 that year. CA would be at or near the top of my list for places to move, despite it generally being overpriced, if not for those sorts of dickish taxes and fees. I'm trying to get my one-man business off the ground, and losing a month's rent each year to fees I don't have to pay in other states that are as nice or nicer than CA just doesn't appeal to me.
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I pay less than that for a 10-year mortgage on a 5-bedroom house.
The free banjo playing kid in town must really seal the deal for you.
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$800 == a months rent?!?!
In Sacramento it would.
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Rich sociopaths don't have to worry about taxes. Only the 99% who can't afford to buy politicians will ever have to pay more than a token percentage of their assets.
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Yes, because taxing an income that has already been taxed is such a wonderful idea.
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It's a bullshit line to make the feeble minded weep for the rich, and take pity on them. There's nothing else to understand about it.
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I pay capital gains and I sure as fuck am not rich.
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I'll bet you wouldn't prefer to pay income tax instead.
The problem is that the rich don't pay income tax at all. All of their money coming in is somehow not income and so is taxed at a lower rate.
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It can be, but that's over simplified. A capital gain is when a capital asset (stocks, bonds, property) is sold or traded for more value than it was initially purchased for.
As far as the "already taxed" thing goes, there are 2 primary arguments that support this.
The first is the easiest to understand. There is a "Corporate tax" on corporations. If you own stock in that corporation you are part owner, and, in effect, paying that corporate tax. The value of your stock is lower because of that tax. Then, when
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I really do not buy the second version at all:
You earn money in some way, and you are taxed on it. Then you take that money and decide to save it. You start an investment account and invest in stocks. Then you have to pay capital gains tax on what to you is a retirement account. You were taxed when you earned the money and then you were taxed again when you try to withdraw it from your investment account simply because the stock increased in value.
Sorry, I only see the increase in value being taxed. That is
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It gets taxed via AMT (alternative minimum tax) in special cases. If your company gives you ISO stock options (as my wife's company did), you have a strike price and a vesting period. Once your stock option vests and you exercise it, you realize an on paper gain in wealth of current value of the stock less the strike price. You owe the AMT on this paper gain, which is treated as a pre-payment of any cap gains you'll owe when you sell it. So you hold it a year and then sell for cap gains long. If cap gains t
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Excellent! Since the money a corporation pays to employees was already taxed, we can eliminate the income tax and sales taxes entirely. Also, when you pay it to a business, they get to exempt that portion because it was already taxed once.
Somehow, that doesn't seem quite workable, I guess we have to let money be taxed more then once sometimes.
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Heck, since every dollar (excepting whatever the Mint generates each year) has already been taxed, we shouldn't have to pay taxes on *anything* anymore, right?
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Err well no. Money paid to employees isn't taxed - it's a business expense and it is deducted from what is otherwise taxable income.
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It is called income tax and millions of Americans will assure you it is real.
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Yes, after it is paid to the employees, but not before.
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Taxed is taxed, it's a joke son.....a FUNNY!
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I work, I save up a few hundred bucks. that money is taxed as income. I then decide I want to invest it, in say apple or MS or tesla or (insert whatever wont get your panties in a bunch since this is only for argument sake)
I then take that already taxed income and use it to prop up another business instead of spending it on xx or YY
why in the hell should my money thats already been taxed at
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That's just silly. The money is not "taxed again". What is taxed is the *gains* you make from the investment. Now there are good arguments for taxing these gains at a lower percentage than income produced by your own labor, but claiming the "money is taxed twice" is a stupid thing to say.
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I still don't get it. That's like claiming I should not be taxed on the profits of my business because I had to purchase a machine to run the business and the money spent on that machine is "tied up" therefore the money produced by using that machine should not be taxed. (and don't try to bring up depreciation, since that is equivalent to your stock *losing* value, not gaining. If your stock gains it's like you got some income and the machine is still worth it's entire initial price).
The few serious attempt
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Do you even understand what capital gains is?
Yes, it's a tax on inflation. Do *you* understand it?
Re:uh, yeah... (Score:4, Informative)
Capital gains is a tax on the inflation. They don't calculate the capital gains on the "real" gain, but the dollar gain.
You are obviously the person that doesn't understand it. If I don't understand it, explain how I'm wrong. Go ahead. I'll be waiting.
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The idea behind cap gains taxes is to capture the gains above inflation that people make in buying and selling assets. But that's not the way they work when applied to dollar values. Inflation over 40 years may indeed raise the price of everything (including that house) by a factor of 5. But that isn't an increase in value. Long term dollar gains need to be discounted by an inflation factor to capture actual value gains above the rise due to inflation. Since Congress and the Administration are in control of
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It doesn't. Capital gains taxes do not tax what they are aiming for. Setting them as they are (lower than earned income
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Sure. you buy a house for $50,000 in 1973, then 40 years later sell it for $250,000, an inflation calculator will indicate an almost imperceptible change in "value" (in 2013 dollars), but you'll be taxed on the inflation (on not, if you live there as a homestead, and meet other rules).
Capital gains is a tax on the inflation. They don't calculate the capital gains on the "real" gain, but the dollar gain.
You are obviously the person that doesn't understand it. If I don't understand it, explain how I'm wrong. Go ahead. I'll be waiting.
That is actually a really good point.
Is indexing the cost basis against something like CPI something that has been proposed as law before?
I know I personally would absolutely support that change, although I would like to see CG rates be more in line with income rates as a compromise, as the goal was never meant to tax base value of long term assets, but specifically to tax value gained over the time.
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FWIW, the one time I filed capital gains was from some stock that I had bought a few years ago, watched it keep almost all of its value while inflation went on, and then sold it. I lost a bit on the sale (inflation-adjusted) and significantly more on the taxes for illusory profit.
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Capital gains tax in the US is functionally the same as income tax, at a lower rate.
And no, increases in the tax rate of capital gains does NOT at all hinder the economy.
In fact the only tax cut PROVEN to stimulate economy is the corporate tax rate.
All other data points to most other tax cuts having no effect or a negative effect on the economy with the exception of taxes near or below the poverty level.
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capital gains does NOT at all hinder the economy
Good to know. Perhaps we should eliminate the capital gains exemption [bankrate.com] for real estate sales of primary residences. I wonder if a $10,000 tax liability on $50k of profit would "hinder" John Q. Low Information voter when he sells his house.
He might be a little less willing to indulge "progressive" hate mongering about the "rich," at least. Anyhow, you let me know when we elect someone ready to repeal that little tax break because it doesn't "hinder" the economy.
I'll be right here, not holding my breath.
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Good point. What people don't realize is that capital gains taxes hit the individual harder than the corporation.
Individuals can't shuffle their asset ownership around like corporations can. Either by moving ownership structures offshore (most progressive countries have little or no cap gains taxes) or by resetting their tax basis by mergers and acquisitions.
The primary residence tax break was instated to keep the John Q Public voters largely unaffected and therefor unaware of the true impact of capital g
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It wouldn't hold back the economy to eliminate that exemption. In fact it would probably help housing affordability. CGT exemption on residence leads to people treating housing as a tax-free investment rather than a place to live. So they "improve" their house to the point where it's not even the kind of thing they'd want to live in any more with the sole intention of selling it without paying tax on the profit and moving on to the next one. Of course no politician will talk about eliminating the CGT ex
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In fact the only tax cut PROVEN to stimulate economy is the corporate tax rate.
[citation needed]
Rich People Find Loophole.... (Score:2, Insightful)
Government fails the 99% yet again.
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How are state subsidies to people who don't need them 'capitalist'?
Don't need them? You ever start a company, with the potential to employ people? I thought not. Protip: It takes a lot of money.
not retroactively taking away a paycheck is subsid (Score:2, Insightful)
What?!?! The tax RETROACTIVELY took money that people had earned years ago. You work 80 hours a week for several years, then sell the business, finally reaping the rewards of your hard work. With the money, you pay off the credit cards or other debts you incurred while getting the business going. Two years later, the state comes along and says they want that money.
How is ceasing that nastiness a "state subsidy to people who don't need it"? Are you high?
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But in an ostensibly capitalist country it needs to be ok to be a capitalist, otherwise the people with the capital flee the country.
Don't forget to pay the exit tax [wikipedia.org] on the way out!
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Funny I didn't notice germany, which has more new millionaires than any other country, hemorrhaging population recently. Or the scandinavias. Or pretty much anywhere that isn't a blatant kleptocracy.
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That seems unlikely.
According to this [msn.com] the US created more new millionaires last year than Germany has TOTAL.
Nonsense... (Score:2)
But in an ostensibly capitalist country it neesd to be ok to be a capitalist, otherwise the people with the capital flee the country. I think if taxes were simplfied rather than remain the incredibly complex morass of laws and regulations we have now, we might have a better chance at collecting them.
The rich will flee to where? To Somalia - the land with no taxes!
The whole argument 'if you tax the rich, they will flee' is nonsense perpetrated by the rich. They are in California, New York or Paris for a reason - these are good environments to be with your wealth.
Why do the rich Russian oligarchs buy property in London and other Western cities...its not because of their new found love for British monarchy, kidney pie or Shakespeare, its because of the quality of living and the 'rule of law' which
Re:Rich People Find Loophole.... (Score:5, Insightful)
The concept of "Ex Post Facto" is not a loophole, it's a foundational principle of justice. This same "loophole" prevents the government from declaring whatever you did yesterday a crime and throwing you in the slammer for it.
Re:Rich People Find Loophole.... (Score:4, Insightful)
No - courts close loophole, loophole can't be used anymore.
Laws that take away freedoms (e.g. making something a crime) or property (e.g. taxes) must not be retroactive. This includes loopholes - if use of the loophole was determined to be legal under the law as it was at the time anything gained from it cannot be taken away.
I dislike people using loopholes to advance themselves as much as anyone, but not setting precedents of making retroactive legislation is more important.
Re:Rich People Find Loophole.... (Score:5, Insightful)
As we always clamor: streamline the tax code and get rid of this myriad of deductions and loopholes
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I've used two legal forms of tax "management" in the UK; child care vouchers (vouchers taken before tax to pay for child care costs) and the "salary sacrifice scheme" (where your employer pays your national insurance for you, causing your taxable income to become lower).
The difference is that these were both understood (and in the case of child care vouchers an actively encouraged benefit) to be legal by all parties; employers, employees and the government.
If you actively seek out loop holes for yourself in
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Please mod down my post above; I had misunderstood the situation. The "loop hole" in question seems to have been a government encouraged benefit, more or less the same as the child care vouchers. If child care vouchers later turned out to be illegal under some EU regulation which the UK government had misinterpreted, then going after all the users for tax evasion would have been terrible.
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A synonym for "loophole" is "legal". The law said "if this, then that", and someone decided to meet the predicate so that they could use the result. Blame the politicians for not clearly specifying their intent, not the people who obeyed the law as it was written.
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Hang on. Courts don't have law making ability (*). That is up to the elected government. If a court closed a loop hole, it just means it was already illegal and the court has simply decided how the law should be interpreted. When assholes use shady loopholes to benefit themselves, they may have believed it to legal, but they run the risk of that loophole turning out to be illegal after all (and ignorance is not a defence). If a court later concludes that the practise was indeed illegal, going after them is
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To clarify. My post is about the principle of retroactive legislation and tax loop holes; not about this current case, which seems rather special in that the businesses followed state accepted (and encouraged rules) for tax management created to stimulate startups. That these rules later turned out to be unconstitutional is not the fault of the businesses, but the fault of the state government creating a poor state law.
The businesses have thus broken the law, but in this specific case the right thing to do
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Almost correct.
Rich people lobby for loophole and get legislation creating it. After some time, court invalidates it. Rich people ask for and get amnesty for period between creation of loophole and its final invalidation.
In theory, they could play this game forever. Simply pass the 'same' legislation again with some minor differences making previous court decision not applicable. Case goes back to court, invalidating new loophole. But amnesty is granted for the period between law enactment and court findi
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What's going to be even funnier: The court overruled the original tax loophole. The legislature passes and Gov Brown signs a bill prohibiting levying of retroactive taxes. But the court has not yet spoken on this second piece of legislation. What if the court overturns it as well?
Two things come to mind. IANAL, so bear (bare?) with me. The Constitutional prohibition against ex post facto laws is a restriction on the powers of Congress. Its not certain that the courts can't say that the law was one way, you
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Can you please define "rich people"?
Sounds like the Massachusetts software tax (Score:1)
What probably happened in both places is that businessfolks in IT, particularly entrepreneurs, don't have a lobbying presence in the state capitols like the old-line manufacturing and service business do. So when state government is hurting for cash, and they often are, they know they can't disappoint their friends who just wined and dined them in a skybox at the big game. By contrast, software and IT looks like a big cash cow, ripe for the plucking.
Looked At Another Way... (Score:1, Insightful)
A few rich guys who don't want to pay their taxes get together to do something about them. They have the resources to lobby a bill almost full time for nine months. In the end, they get their bill passed but whine that democracy is broken because they had to work really, really hard at it.
Must be nice. Some of us have day jobs.
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I don't think that's fair. If the federal government retroactively increased your taxes, I'm pretty sure you'd be pissed too, and probably join / start a class action lawsuit to reverse it.
retroactive laws (Score:1)
are bullshit
I doubt this is over (Score:2)
Anybody who reads the actual story will realize that this is a fight with out-of-state companies, not with the state. They want to extract a bunch of money from California and will probably take this to the courts to try to get it.
Basically California offered a tax break to in-state entrepreneurs that it did not offer to people who lived out-of-state. For some reason this was declared unconstitutional. The outside groups are now claiming that unless California charges the in-state people retroactively then
Not retroactive, but it was the state's mistake (Score:2)
My bigger problem with this kind of thing is that when government makes an error