So what happens with AMZN if down for a year and Bezos liquidates his stocks? Would ProPublica run a story about Bezos' negative tax rate for the year?
In the privacy angle, you comment on the third quote with: "This is an … insane statement? — both rationally and morally. Truth can't ever be a sole criteria for publishing. It's necessary, but not sufficient. To suggest otherwise ought to flunk someone out of first year journalism school."
But they're not saying that they would publish any information that comes into their hands with no criteria besides reliability. They are just saying that they won't take into account the *provider's* motivation.
I said in that same segment "if your only criteria for publishing are some measure of verification and some measure of newsworthiness". In re-reading their piece, that's all they checked for. So what I said seems substantially accurate to me.
But as a matter of phrasing, it's true that I used "sole criteria" above, which was sloppy. So I'll award a bounty on that. Someone else emailed me about it at roughly the same time, so I'll send you $15 each for flagging it. If you can DM your email to @jdotarnold on Twitter please, along with whether you want PayPal $ or an Amazon card.
Stocks represent ownership and founders shouldn’t have that control taken away from them forcibly without making their own choices. Most founders would lose control of their company after several years as their stake dilutes.
Yeah this can be somewhat avoided by having multiple share classes. But even losing common shares dilutes their power somewhat (along with their economic interest), and it’s hard to see how either are good outcomes!
Since you called this "bullshit", I'm going to be similarly harsh: your criticisms are bullshit. Point-by-point comments below; your text is prefixed by “>>” and my replies below.
>> “Delaying a tax is not avoiding a tax. Tax avoidance is a term of art..."
This is at best a nitpick and at worst a disingenuous attempt to imply ProPublica are ignorant (something you do throughout this piece). "Tax avoidance" is commonly understood—as in this Investopedia definition (https://www.investopedia.com/terms/t/tax_avoidance.asp)—to include deferring realizing gains in the hopes of finding a more favorable tax treatment in the future. A Roth IRA is such an example (as mentioned in the above link).
>> “Instead of stepping back to wonder what the positive motivations might be for not taxing capital gains until they’re realized..."
As ProPublica notes, some countries *do* tax wealth—which of course includes unrealized gains.
>>”I don’t know how to explain how batshit this is without sounding hyperbolic."
Knowing at least as much as you do about the field, none of this sounds “batshit.” As ProPublica notes, the senior Senator from Oregon has proposed taxing unrealized gains; a meaningful minority of large economies do this as well (by way of wealth taxes).
I do find the article’s vague tone of favor toward taxing unrealized gains instead of net wealth a bit strange, since the latter is workable and in use multiple places, whereas the former, to my knowledge, is not, but I don’t think that’s really dispositive.
>> “If letting a pool of money grow would mean far more to tax later, letting it grow is good. The government can effectively borrow the money it would have taken from the pool..."
I think the point you are trying to make here is, “let's not tax people now, because if their assets grow we'll have more to tax later?" If so, this is a facile point which is trivially true for income tax just as much as it is for gains or wealth tax.
>> “The trouble is that there’s basically no good way to do this that doesn’t introduce similar or worse problems."
Again, this is equivalent to arguing that any tax on assets results in lower asset pricing, which is trivially true but not meaningful.
>> “So instead of this obviously bad system, most countries use the very sane solution of staggering sales by only imposing a tax when an asset is sold."
Two things wrong with your point here: a) many countries require estimated tax payments (or favor them with interest), which would stagger such sales, b) buyers who believe that such sales artificially depress stock would be able to buy those depressed assets, counterbalancing this pressure.
A good analogy for this would be quarterly employee sales of stock grants, which have no meaningful effect on large company stock prices.
>> “Though stock markets are mostly global savings accounts loosely tied to the value of the individual companies underneath, those companies do things like grant employee stock options and sometimes sell stock to the public. When they do this at higher valuations, it generates more end taxation."
I have no idea what this word salad is trying to say. I think it might be some sort of Laffer Curve “don’t tax now and you’ll have more tax revenue later” argument, which is just laughable (Laffable?).
>> “Even if you only force the wealthy to liquidate, they're going to start with their common shares. And that will depress prices for all common shareholders (i.e., everyone). This is bad."
Of course this isn't true; buyers who do not care about preferred shares will simply buy the slightly depressed common stock instead. Keeping preferred and common stock equivalently priced is already something market arbitrageurs efficiently do today.
>> “Forcing serious stock liquidation every year will hurt smaller companies more, which is harmful for long-term innovation / competition."
Of course this isn't true either; smaller companies will have proportionately lower taxes levied on their shareholders because, like, that's how "percentages" and "rates" work, you ninnie.
>> “Sometimes stock prices go down, and that's generally not a write-off. So taxing the upside at an arbitrary point is unfair and kind of just silly."
"Fair" is pretty subjective. We tax real property (and have since the 17th century in some countries), but don't give money back to citizens when their property declines in value.
Maybe you should write an op-ed about how that commie Adam Smith supported property taxes?
>> “Successful companies induce enormous tax receipts for governments at all levels (corporate taxes, income taxes, property taxes, payroll taxes, headcount taxes, etc). If Bezos is paying less percentage-wise today because he's holding his Amazon stock, where said holding makes Amazon more valuable, that's a good net deal."
This facile argument is equally applicable to any corporate (or individual) taxes. If your point is just "all taxes are bad", sure, OK. But you seem to think you are making a point uniquely about unrealized capital gains taxes, which is just not true.
>> “This is not a revelation."
Seems the amount of interest this story has gotten would disagree with you.
>> “This is an … insane statement? — both rationally and morally. Truth can't ever be a sole criteria for publishing. "
Yes, that statement that you made up after misinterpreting the quote is indeed insane, but this is not what the quoted text says. The quoted text says that motives are irrelevant; it does not say that "truth is the sole criterion."
>> “So they think what they’ve done is legal (and just morally swell) because they didn't directly induce the theft of information."
Erm, you know about "Times v Sullivan", right? Since you're, like, into the whole journalism thing?
>> The public has no right to private info where no crime (or serious moral evil) has been committed."
Again, the mainstream view in the US—as well as the result of jurisprudence like Times v Sullivan—is that presence of a crime is not necessary to justify such a journalistic choice. You might disagree, but instead of making the case for why your heterodox view of journalistic ethics is correct, you just sort of beg the question by throwing it out there in the end.
1. I agree that "deferring realizing gains in the hopes of finding a more favorable tax treatment in the future" is a form tax avoidance! But that's not what's happening. If I believe my asset will grow by 8-10% a year and I can borrow against it for 3%, I'm going to borrow vs. sell. (I don't doubt that many of the rich do use tax avoidance strategies in other senses. But Bezos et al aren't holding stocks because they think 15% is too high of a cap gains tax. If anything, they'd expect with the winds that the rate they'll eventually be forced to pay is materially higher.)
2. Wealth taxes are related but distinct from taxing unrealized gains in a direct sense. They factor unrealized gains in an obvious way, but aren't meant to force realization, nor are they indexed on actual gains. Your wealth could drop and you'd still pay on the value of what you have left. Two totally distinct things. (ProPublica brings up wealth taxes at the very end of their piece and more or less immediately dismisses them. It's clear throughout that their focus is on *direct* gains realization.)
3. FWIW, wealth taxes haven't proven workable at any meaningful scale. A dozen or so European countries tried them, and I think four small economies there still use them. (The largest is Spain, but they exempt lots of securities.)
4. Taxing income is different conceptually because there's no liquidation there. But should the US gov give taxpayers the option of putting their tax payments into a market fund and then make a claim on the fund's proceeds instead? They already do! Retirement accounts etc aren't just about diminishing future burdens on the state. It's just good economics.
5. Big companies can handle widespread liquidation easier because they're heavily insulated by index funds and have more means of buying back their own stock to stabilize pricing.
6. My point is that Amazon's wealth generation is already being taxed in an immediate sense at a bunch of levels, and that letting gains accumulate for Amazon shareholders just accelerates those other forms of taxation without taking anything away from the gov. And when those shares gains are eventually realized, they'll be worth more to the gov's coffers than any payments today would be.
7. Sullivan was a defamation/1A case and has nothing to do with what I said.
Anyway you clearly like to sound smart, and to come off as the clever type of snarky. I encourage you to use such wattage as you have to better consider your own arguments. There's no audience here, and I assure you that your barbs mean nothing to me. If you have useful feedback that will improve the accuracy of the piece, I'm happy to hear it. So far you've just offered an angry litany of grievances, most of which were based on bad readings.
>3. FWIW, wealth taxes haven't proven workable at any meaningful scale. A dozen or so European countries tried them, and I think four small economies there still use them. (The largest is Spain, but they exempt lots of securities.)
1. Surely they're doing both. You sort of hung your whole piece on ProPublica not understanding what tax avoidance is, which is just silly.
2. "but aren't meant to force realization" — Nor is a wealth tax or a tax on unrealized gains. As you noted before, you can just pay for such a tax by borrowed funds. [Transparency: I deleted an earlier reply where I was less clear with what I meant on this bullet.]
3. This is a little bit too dismissive. Norway, Switzerland, Spain, and the Netherlands are all midsized developed economies. In any event, the US is in a substantially different position, since it already (uniquely!) has a global tax regime.
4. I've lost track of to what you are replying here. In any case, taxation on unrealized gains—be they wealth taxes or unrealized gains taxes—do not force liquidation, as you yourself noted earlier.
5. As a percentage of market cap? [citation needed]?
6. This is probably the fundamental mistake you are making. Yes, taxation happens at multiple levels; the point of the ProPublica piece was obviously that, at the end of the day, the fraction of that wealth generation that becomes Bezos' is taxed at a much lower rate than that which becomes a warehouse worker's. Is that surprising? Not really, I agree! Is it relevant? Definitely! As Piketty famously argued, those disparities in returns result in increasing disparities in wealth over time.
7. Right. I meant NY Times vs US. Sorry about that. In Times v US the court ruled against prior restraint with no such caveat as you applied (i.e., the reporting exposed illegal behavior—you made this standard up from whole cloth!).
>> Anyway you clearly like to sound smart
Yes. I post things anonymously online because I like to sound smart. You got me.
I also want to take a *really* *big* step back and look again at why you think ProPublica is doing something bad here.
As I understand it, your argument is:
1. This article is ignorant of economics and thus misleading.
2. This article reveals private information even though no crime is committed and is thus unethical.
#2 I think I addressed—"illegal activity" is not, broadly, considered a prerequisite for journalists to share such information. Should it be? I don't know. It seems to me that, since such an argument is contrary to norms and law, the burden is on you to make the case.
For #1, though, I think you and I both got distracted. So let's take a big step back. At heart, ProPublica is arguing that Bezos and similar billionaires pay a much lower effective tax—when calculated as "taxes paid" vs "gains earned"—than most.
I believe your counterargument is "they *will* pay that tax when they realize those gains." Is that correct?
If so, most obviously—they won't. The highest income tax rate in the US is 37%, whereas the highest long term capital gains rate is about 24%. So even if they realized those gains at some future date and paid full long-term capital gains on them, they would not pay the same rate as income (obviously).
Of course, 24% is a far cry from 0.1%—though note in Buffet's case he has pledged half his wealth to charity before he dies, and such donations allow the donee to deduct the *market value* of the charitable contribution, but without ever taking on the tax liability from realizing gains!
So, if you had to bet, what do you think the effective lifetime tax rate on Bezos' earnings will be?
As addressed elsewhere, it's not about crime per se. It's about *badness*. If you're going to leak private info, it needs to be in the service of shining light on some bit of serious badness that was covered in darkness and was unlikely to be discovered by better means. That wasn't the case here. Everything that ProPublica said they could have said with a mix of guesstimates and already public info. But no one would read their op-ed, so they made it a news feature by adding stolen info and then sensationalizing the fuck out of it. If that's not bad journalism, I don't understand the meaning of the word bad.
I have no qualms with cap gains being higher. There's lots of room for informed debate about what the right number is, if/what the long-term discount should be, and if/what the delta to income taxes should be. Same for if the charitable loopholes should be modified or closed.
My point was that if someone wants to write an op-ed to that end, fine! I may dislike the arguments. I may like them. It doesn't matter. But what ProPublica intimated here is that somehow these rich people weren't paying their fair share, based purely on a fundamental misunderstanding of how these taxes work -- and why we've structured them as we have.
As for Bezos, impossible to say. But I do know this: if you ask the US Treasury "would you like a cash payment equivalent to 3% of Amazon now or at their valuation in x years", no one is going to say "now" without giving it careful thought. As US borrowing costs seem likely to stay ~2% for a long time, you'd need a real bear assessment (or a really strong thesis about equality optics or improving price discovery etc) to want to sacrifice the obvious upside.
I can't believe we're still arguing about whether ProPublica "fundamentally misunderstands" how taxes work.
Did we read the same article? The one that contains this:
"The tax math provides a clear incentive for this. If you own a company and take a huge salary, you’ll pay 37% in income tax on the bulk of it. Sell stock and you’ll pay 20% in capital gains tax — and lose some control over your company. But take out a loan, and these days you’ll pay a single-digit interest rate and no tax; since loans must be paid back, the IRS doesn’t consider them income. Banks typically require collateral, but the wealthy have plenty of that."
Or this?
"Normally when someone sells an asset, even a minute before they die, they owe 20% capital gains tax. But at death, that changes. Any capital gains till that moment are not taxed. This allows the ultrarich and their heirs to avoid paying billions in taxes. The “step-up in basis” is widely recognized by experts across the political spectrum as a flaw in the code.
Then comes the estate tax, which, at 40%, is among the highest in the federal code. This tax is supposed to give the government one last chance to get a piece of all those unrealized gains and other assets the wealthiest Americans accumulate over their lifetimes.
It’s clear, though, from aggregate IRS data, tax research and what little trickles into the public arena about estate planning of the wealthy that they can readily escape turning over almost half of the value of their estates. Many of the richest create foundations for philanthropic giving, which provide large charitable tax deductions during their lifetimes and bypass the estate tax when they die."
Elsewhere you seem to imply that ProPublica don't mention the 40% estate tax, don't understand how CGT basis works, etc. Clearly that's not true.
You may indeed disagree with the position you feel the article advocates for. (And rather obviously do disagree with it.) I, too, feel the article is "advocacy journalism."
But what I react to in your piece is the entirely misplaced claim that the authors *misunderstand* or *misrepresent* the issue.
They imply: (i) that the rich are holding because of CGT, (ii) that holding for upside reasons is tax avoidance, (iii) that giving money to charity is primarily about tax avoidance, (iv) that "true tax rates" are a real/meaningful thing.
They also fail to mention: (i) that estate taxes are priced at 40% in part to offset the loss of CGT income, (ii) that the gov can borrow at rates much lower than the growth of their unrealized gains on those unrealized gains, (iii) that borrowing against equity self-solves for the gov's biggest risk of never getting their cut, (iv) that execs taking and holding comp in equity improves the value of everyone's 401ks etc. in a way that being paid in cash doesn't, (v) that there are lots of compelling and well-understood reasons why directly taxing unrealized gains isn't a thing done almost anywhere.
That's either misunderstanding how this works or misrepresenting it. I guess there's room to allow for the latter interpretation. But it's a less charitable one.
1. If there are two motivations for doing a thing and you aren't sure which is in play, writing an article about how they're definitely doing it for one reason (without even mentioning the other) is classically bad journalism that deserves to be critiqued. And we have great cause to doubt that *the specific people targeted in the article* are factoring CG much in their decisions to hold. For founders especially they want voting power and economic exposure to their rocketships.
3. My point about size is that some things work at scale and some don't. When larger economies (France, Germany, UK) tried said taxes, they didn't really work. The US would have an even harder time. (It's true that they have a global tax regime already. But citizenship can be changed and relocating corporate HQ is easier in the digital age. If a major wealth tax passes in the US, Vancouver will become the new Delaware.)
4. I was responding to "If so, this is a facile point which is trivially true for income tax just as much as it is for gains or wealth tax.".
5. Companies are usually indexed based on market cap, yes. And if you're in the S&P 500 especially, over half your stock is owned by indexers.
6. You can't divorce "Bezos is rich" from "Bezos is rich because he owns a fuckton of Amazon stock". If you force him to liquidate, that selling pressure lessens the value for all shareholders. Plus you decrease his economic exposure to Amazon, which lessens his incentive to push Amazon's growth, which lessens the likelihood that those other taxes keep paying out. None of this is ideal when you can just wait for him to sell shares gradually, or for him to get divorced again, to die, etc, where the waiting lets more value accrete to the gov's share.
7. I wrote "[t]he public has no right to private info where no crime (or serious moral evil) has been committed." Note the parenthetical. Now look at Black's comment from NYT v. US: " Only a free and unrestrained press can effectively expose deception in government. And paramount among the responsibilities of a free press is the duty to prevent any part of the government from deceiving the people and sending them off to distant lands to die of foreign fevers and foreign shot and shell." That's a serious moral evil.
[Skipping a bunch of points here because I don't think they're that important. Feel free to flag anything I missed.]
2. Again, the intent is clearly to equalize income and capital gains, from a tax perspective. I don't actually agree—as should be obvious, I'm more of a fan of a blanket wealth tax—but the *intention* is clearly not to force selling per se.
3. The US imposes a tax assessment at citizenship revocation. Employer location is irrelevant for personal income taxes.
6. I think it's strange to argue that founders are insensitive to CGT as an incentive but that their desire to push their company's growth is sensitive to how much of the stock they hold. That said, this is one reason I think a lower wealth tax is better.
7. It's obvious that Pro Publica felt that this was of substantial public interest because of what it reveals about effective tax rates. Given prior history (e.g. the Panama Papers), I don't think this is outlandish.
2. If you're M2M at EOY and taxing at 37%, you're forcing liquidation.
3. I mentioned both because Zuck getting a CAD passport and then coming to work in Menlo Park on a work visa obviously wouldn't fly.
6. They're not insensitive. It's just not the primary point. Even if CGT didn't exist they wouldn't sell much (if any) more than they do.
7. It doesn't reveal anything we didn't already know so far as broad strokes. And for the very marginal benefit of being able to be precise, they've violated the privacy of several people, normalized publishing private info, and given incentives to the next person to steal/leak private info.
2. Of course you can just borrow against the unsold assets at a rate that factors in the risk, as I think you argued earlier.
3. I think you misunderstand yet again. Zuck getting a Canadian passport and relocating HQ to Vancouver would not work, either. The US imposes an "exit tax" on citizens. Revocation of his US citizenship would be a potentially taxable event.
7. That I certainly agree with, but I think for many readers it's evocative in a way that numbers alone would not be. I am frankly undecided on whether that's worth it, but it's not *obviously* in the "unethical" zone as you crow, and you do a disservice by not even engaging with the (very long) piece ProPublica wrote on why they made this decision.
"b) buyers who believe that such sales artificially depress stock would be able to buy those depressed assets, counterbalancing this pressure."
Same with building gift taxes/valuation. As famously outlined by the NYT re: the Trumps, they intentionally devalued their buildings to save hundreds of millions in taxes. But since there is no vehicle for them to be forced to sell those assets at those valuations, the taxes are effectively lost forever.
"The Trumps dodged hundreds of millions in gift taxes by submitting tax returns that grossly undervalued the properties, claiming they were worth just $41.4 million.
The same set of buildings would be sold off over the next decade for more than 16 times that amount."
I also want to note that serious analyses of the current CGT reveal distortionary effects on investor behavior:
1. CGT incentivizes investments in asset classes that yield capital returns instead of income (including ETFs that do exactly this!).
2. CGT incentivizes holding onto appreciated assets even if the investor believes those assets are no longer the optimal investment choice, reducing market liquidity and efficient price discovery. (Similarly, it incentivizes complicated tax optimization strategies like tax-loss harvesting, which have similar distortionary effects.)
Jeremy obviously doesn't know a bit about economics, but any serious discussion of CGT would acknowledge these effects, which are, ironically, mitigated or eliminated by taxing wealth or unrealized gains.
Investors put money that they don't need anytime soon into whichever investments they think will pay the greatest total return.
Why do loads of people think ETFs are a good answer here? Tax-efficiency sure. But also because we've all sort of agreed to treat the major indices as general savings funds, thus ensuring a lot of continual inflows somewhat regardless of economic performance. (And of course because they're just amazingly liquid for when that matters.)
But lots of investors still buy lots of apartment buildings and bonds, along with income-generating businesses. Those markets are still robust.
I do agree with part of what you're saying though. The relentless flow of capital into stocks has more or less unmoored them from performance, which comes with downsides. And there are things we could to taxwise to adjust there. But there are tradeoffs everywhere, and getting into them all is well outside scope here.
ProPublica argued that a number of specific billionaires aren't paying their fair share, suggesting that taxing unrealized gains would solve for that. My criticism was that they skipped over the entire debate and just assumed it to be a good idea. I did not mean, or claim, to be presenting that entire debate in a ~2k word article. My object was to give the shape of the thing. Which I did.
I think you are misunderstanding my criticism, especially my second point.
The way CGT works, you don't pay taxes until you realize the gain. (I think you know this.) So rational investors who have an unrealized gain have a disincentive to sell the asset, *even* *if* they believe selling it and investing in *some* *other* asset would give slightly better performance. This thwarts what is known as "price discovery", i.e., the efficient market accurately pricing assets.
To my first point, certainly other asset classes still exist. I'm not sure how that is evidence that the market is not being distorted.
Taxing gains encourages holding, sure. That's somewhat the point. And holding has upsides and downsides, sure. If your real criticism here is just "you should have gotten into the downsides", I dunno. I often write exhaustively about these sorts of things and readers fall asleep. Even at the length it was I got a lot of feedback about it being too long. Getting discursive about price discovery is pretty extra in context.
The sentiment that the rich should pay more taxes is an emotional response to the fact that the country doesn't work. I've heard the Military Budget allows for 2 Billion dollars a day to be spent. Even if the rich pay our taxes, what is going to change? Fundamentally, there is no health care in the USA, the richest first world country in the world. We have a war machine that has been used to attack anyone who doesn't want the dollar as their reserve currency. Why don't the Uber rich change the system? Instead of paying taxes to a greedy, dysfunctional government, why don't they set up a better private health care system? Spend their money fixing infrastructure? Hell, Bezos could literally "save the AMAZON rain forest" with his money. The apathy of people moving from NY to FLA and CA to TX is because we've come to this point. The USA is business, not a country. It doesn't care about its people, proportionate to the amount of money it has. I would gladly pay more taxes myself If i saw the quality of life actually getting better.
I realize i'm not adding anything to technical clarity of the pro publica, i understand people's frustration. I'm just frustrated with the whole system. Paying taxes isn't the answer. What is done with the taxes is.
"why virtually all developed countries don’t tax unrealized capital gains". Quite a few countries do tax, under conditions: Sweden, Japan (and Germany if I understand it correctly).
Going to paste in a reply I left on Hacker News to a similar comment:
====
OP here. I sort of agree with you, but it's a bit complicated and it wasn't obvious what the right way to word that was.
To get granular:
Wealth taxes are a bit distinct from taxing unrealized gains directly (even though they often have that effect, and there is some obvious overlap). If we look at, say, the Netherlands, they're assessing a ~1.7% wealth tax on assets over €1m independent of the performance of the assets over the year in question, which then exempts the payer from capital gains taxes upon sale. So we can call this taxing unrealized gains, but it's a bit imprecise in that they aren't taxing the gains themselves (which are unknown, and could be losses), but rather wealth at a prior point in time based on a fixed formula. If the asset in question went up 20%, the Dutch gov isn't going to tax the excess or force realization on any specific timeline. They'll just keep taking their 1.7% every year on whatever is there on Jan 1st.
There also aren't a lot of countries doing anything like this as touching upon non-real estate investments, and most European countries that have experimented with them are in the process of reversion (e.g., Norway, France) as it basically hasn't proved workable in most instances.
So maybe I should have left something like this as a footnote to clarify.
We have something called "wealth tax", but it merely refers to an additional _income tax_ level that you only reach when you have a yearly income of > 250k. Germany does not tax unrealized capital gains.
And it's a terrible idea, because you all are only talking about stocks. What about property owners as in owning your own house, which naturally increases in value over time and therefore increases your wealth? You would have to pay taxes for the value increase of your house even if you have no intention of ever selling your house - even if you are retired.
You wrote "virtually all developed countries don’t tax unrealized capital gains."
In fact, a number of countries do levy taxes on unrealized capital gains, in exactly the way the ProPublica article suggests: as someone's wealth increases due to asset appreciation, so would their tax burden.
Your argument seems to be, "No, no, that would be a tax on unrealized capital gains *and* the basis, so that's *totally different*." Okay, dude. Whatever you say.
i agree mostly, the only thing the ProPublica article mentions that is worth debating is the practice of using the assets as collatoral for a credit lines and then in addition using the interest to offset any remaining income gains.
If the asset is used as collatoral for a credit line it should become a gain realizing tax event. The argument would be that the current worth of the asset is used. So the gain is realized, meaning it becomes an externally referenced property of the asset at that point in time, therefor it is realized (like a collpased state in quantum entanglement).
Of course this only applies to the part of the asset that was used as collatoral (so not all of the stock but only that portion of the stock that corresponds to the amount of the collatoral at the time of the credit contract where it was used.) This also avoids the liquidity problem, since it was used as collatoral for a very liquid asset, a credit line. (technically it is similar to selling and buying back the stock).
Some exceptions can be made to lessen the impact if homeowners use their appreciated home as collatoral (2nd mortgage or sth. like this).
The rest of the ProPublica article is as you pointed out quite ignorant of the reality.
crazy idea to take it ad absurdum: since being listed in the Forbes lists gives you networking influence on people it should become a gain realizing tax event, too. Jeff Bezos is introduced as the multi-billion dollar person, then he really should be that multi-billion dollar person. Otherwise it should just be told by the truth, Jeff Bezos the maybe-billionair.
I think this is a good argument for a wealth tax instead of an unrealized gains tax. But what you say isn't exactly correct: Wyden's proposal questions whether unrealized losses should be available to offset gains (at least to my read of it).
Obviously a system in which unrealized capital gains and losses are figured via mark-to-market at the end of the tax year—and in which they net out, as they do today for realized gains and losses—is one which avoids the issue you describe. I'm not aware of any *implemented* unrealized gains tax that is *not* simply a wealth tax, so ultimately this would be a question of implementation, no?
holding collateral in the billions, requiring annual spending in the 10s of millions, running a multi-period cycle of borrow n spend, there is plenty of room to repay period n's principal in period n +5 by rolling it over. In n +5 simply borrow MORE, covering both current period income reqmts AND the rollover of a prior periods principal. Its not like repaying the principal from period n is gonna dent your available collateral.
By period n +5, in addition, there maybe occurred compound growth in value in both the original asset, thereby growing collateral against which to borrow and spend.
The different rules enjoyed only at the top could be changed by the bottom 99%. Maybe these bogus propublica pieces and the ensuing discussion lead somewhere?
Not zero tax. The tax just comes later. And it's more when it does come.
The way to think about it is that lenders have strong interests in risk-management. If the pledged asset is showing signs of wavering, they'll call their loans and force liquidation. This gets the gov their money. If the lenders have no concern, it's a good sign that the asset is healthy and the debt ratio is fine. This means the gov's share is growing healthily, so they're better to let it grow and just borrow themselves at a lower cost as they wait to collect.
And when the owner of the shares dies, the heir gets the basis stepped up. All that capital gains that was accumulating while the owner lived on loans disappears. If the heir sells immediately on inheriting, they pay no capital gains, pay off the owner's original loan, and the remainder of growth is never-taxed cash.
Interest generally is, but that's neither here nor there. The point is that the gov needs to decide when to take their cut. If they take it today, they get the same size piece of a smaller pie. And because they can trivially raise cheap debt to pay their bills while they wait for that pie to grow, they're smart to do so.
The step-up is offset by the estate tax being set at 40% for assets above the baseline (something like $12m depending on exemptions).
"Depress the prices for the common stockholder (ie everyone)" Uhh... You DO realize that not everybody owns stock, right? Homeless people don't own stock, generally.
Even if it's in their 401k, most people own stock. If the hangup is the word "everyone", then you are right on that. But let's focus on teaming up to be pedantic about how wrong ProPublica is.
Just for the record, barely half the US population own stocks of any kind, including in a 401(k). The number is significantly lower as you move down the wealth scale, obviously.
If I have zero dollars in wealth, it means the state is taxing my wealth at 100% as the amount I pay in tax (direct or indirect) would contribute to my wealth. Why do we tax the poor people wealth at 100% but are reluctant to do the same with rich people? The distinction between income and wealth is a red herring and can be massaged arbitrarily.
Not really, it would have taxed me <tax paid>/(<tax paid> + 1) %. It converges to zero indeed the richer I become. So it is progressive but in the wrong direction... Taxes aren't that complicated indeed.
Politely, your agrument about "why we don't tax unrealized gains" is deeply faulty. While there are a number of reasons, and you've listed those as "angles" (they're not angles, they're reasons), the number one reason is it is very hard to set a price on an unrealized gain --- because the gain hasn't been realized. Only in the case of a highly liquid publicly traded fully fungible asset can we make such a claim without stepping through great pains - and then we'd get it wrong. Even in the one clearest case, a major holding in a public company is "worth" a certain amount, the amount of variance between the posted closing price of a stock and the value of that position is speculation. If Bezos sold all of his shares, he wouldn't get the price posted on the wall - the value would fall. Any value set by taking the price on a certain day, or an average, is speculation.
An unrealized gain has no known value. It is actually the definition of "unrealized" -- the asset was not traded on the open market for currency, where we would know its value.
But that's the case of a few highly liquid highly fungible assets (stocks). You, and propublica, have focused on this case because it's an asset we think we can value.
If we apply the general principle of taxing unrealized gains, we'd have to tax all unrealized gains - or the oligarchs would simply put their wealth into these assets that are untaxed.
If we have a general principle of taxing unrealized gains, we'll have to speculate the value of every thing every person has. Every person, every asset, let the insanity (your word) sink in. Take me. The most expensive thing I own is a musical instrument. I was flush one year, I'm a semi-pro player, and I splurged and bought it, knowing it would be a treasure and joy my entire life. I have never, in my entire life, owned any single thing as expensive as this, even to this day. I've also never attempted to find out its value - it's not a strad - but instrument prices have gone up. Perhaps the maker got trendy and it's now worth millions of dollars - I have no idea. Maybe it's nearly worthless. Or maybe this maker only made 6, and none have ever changed hands.
Maybe you have an ugly rug given to you by an aunt. Would you go to jail for not having it valued? Or only if a friend who is a rug dealer spotted it in your house, realized its worth, and called the tip line for your tax evasion (netting a commission)?
Imagine if every asset every person owns had to be valued every year, and each and every one of us had to submit a full accounting of our net worth based on this speculation and pay more.
Ok, you say, that's silly. We'll exempt people without large assets. How do I prove I don't have a large asset, that my instrument isn't worth a billion dollars? I guess I have to find its value, to make sure I'm not breaking the law. And what if I'm wrong, and when I decide to sell it next year I find out it was worth a billion last year, do I got to jail? I guess I would. Ok, then, we'll write into the law certain safe harbors - which the super rich would exploit.
That's my #1 reason why we don't tax unrealized gains. An unrealized gain has not been valued, and speculating on the value leads to opinions, and we don't want our tax system to be based on opinions. Nor do we want to value every asset of every person - it's too much work.
1. "Deeply fault", angles vs. reasons. C'mon. Let's be nice here. You have extra lenses for consideration. Great. I appreciate them.
2. Agree that price volatility (influenced by major sales) is a good point. I tried to get to that. Maybe I wasn't clear enough. Either way, appreciate you flagging.
3. The degree to which the wealthy would migrate capital into harder-to-M2M assets is an interesting debate point that's irresolvable here, as tax-optimization is only one factor. The advantages of liquidity and generally-good price discovery available in the public markets are high. So there's a set of tradeoffs there that would vary with the specifics. But again I think a good bullet to consider.
Give me a break. You call publishing some basic tax numbers of the richest people an invasion of privacy, but have no (visible) concern about Amazon workers bathroom time being monitored etc. Tax information should be public anyway, like in Norway.
The only reason we know the rich don't pay their fair share of taxes (often because they endlessly defer them) is due to leaks like this. Corroboration of well known facts aren't a negative thing.
The one flaw with the ProPublica article was that it didn't mention a wealth tax. A 1% wealth tax on assets over $200 000 would be a very workable solution to prevent legal tax avoidance by endless tax deferment.
It's not just "basic tax numbers". Go re-read ProPublica's lead article again and look at what they describe the dataset as containing, and what they plan on publishing.
It may be true that some of this is public info in other places. That has precisely zero impact on whether it's a normative or legal invasion of privacy in an entirely different culture. If I break a law in the UK, telling the judge "well the laws are different back home and I like those more" will not be entertained as a meaningful defense.
Also, I have no idea why on earth my opinion on Amazon's bathroom policies would have any bearing on whether I think privacy laws/norms were violated here. Those are obviously two entirely different things.
I only went off what they've published so far. From what I read they promise to online publish specific information to expose tax avoidance strategies, I don't see the problems with that.
For your second paragraph - US laws were obviously broken here, that's not in question, and not an interesting issue anyway. Going ex-Islam is a capital offense in many countries - that doesn't mean I can't call the law stupid. You're basically arguing that a wrong was committed just because the action is illegal - a well known circular argument.
The issue is that you seem to only care about the rights of the richest. When the richest does wrong it doesn't get mentioned on this blog, but when someone corroborates their massive tax avoidance it's suddenly a problem.
Quoting for you: "In the coming months, ProPublica will use the IRS data we have obtained to explore in detail how the ultrawealthy avoid taxes, exploit loopholes and escape scrutiny from federal auditors."
[Banned user for one month for leaving identical comments here and on HN and being uncooperative and uncharitable about managing multiple threads. See continued thread with him on HN here: https://news.ycombinator.com/item?id=27444481.]
Thanks for writing this, it needed to be said.
So what happens with AMZN if down for a year and Bezos liquidates his stocks? Would ProPublica run a story about Bezos' negative tax rate for the year?
If AMZN was down*
In the privacy angle, you comment on the third quote with: "This is an … insane statement? — both rationally and morally. Truth can't ever be a sole criteria for publishing. It's necessary, but not sufficient. To suggest otherwise ought to flunk someone out of first year journalism school."
But they're not saying that they would publish any information that comes into their hands with no criteria besides reliability. They are just saying that they won't take into account the *provider's* motivation.
Ok, slept on this.
I said in that same segment "if your only criteria for publishing are some measure of verification and some measure of newsworthiness". In re-reading their piece, that's all they checked for. So what I said seems substantially accurate to me.
But as a matter of phrasing, it's true that I used "sole criteria" above, which was sloppy. So I'll award a bounty on that. Someone else emailed me about it at roughly the same time, so I'll send you $15 each for flagging it. If you can DM your email to @jdotarnold on Twitter please, along with whether you want PayPal $ or an Amazon card.
One more reason against taxing unrealized gains:
Stocks represent ownership and founders shouldn’t have that control taken away from them forcibly without making their own choices. Most founders would lose control of their company after several years as their stake dilutes.
Yeah this can be somewhat avoided by having multiple share classes. But even losing common shares dilutes their power somewhat (along with their economic interest), and it’s hard to see how either are good outcomes!
Since you called this "bullshit", I'm going to be similarly harsh: your criticisms are bullshit. Point-by-point comments below; your text is prefixed by “>>” and my replies below.
>> “Delaying a tax is not avoiding a tax. Tax avoidance is a term of art..."
This is at best a nitpick and at worst a disingenuous attempt to imply ProPublica are ignorant (something you do throughout this piece). "Tax avoidance" is commonly understood—as in this Investopedia definition (https://www.investopedia.com/terms/t/tax_avoidance.asp)—to include deferring realizing gains in the hopes of finding a more favorable tax treatment in the future. A Roth IRA is such an example (as mentioned in the above link).
>> “Instead of stepping back to wonder what the positive motivations might be for not taxing capital gains until they’re realized..."
As ProPublica notes, some countries *do* tax wealth—which of course includes unrealized gains.
>>”I don’t know how to explain how batshit this is without sounding hyperbolic."
Knowing at least as much as you do about the field, none of this sounds “batshit.” As ProPublica notes, the senior Senator from Oregon has proposed taxing unrealized gains; a meaningful minority of large economies do this as well (by way of wealth taxes).
I do find the article’s vague tone of favor toward taxing unrealized gains instead of net wealth a bit strange, since the latter is workable and in use multiple places, whereas the former, to my knowledge, is not, but I don’t think that’s really dispositive.
>> “If letting a pool of money grow would mean far more to tax later, letting it grow is good. The government can effectively borrow the money it would have taken from the pool..."
I think the point you are trying to make here is, “let's not tax people now, because if their assets grow we'll have more to tax later?" If so, this is a facile point which is trivially true for income tax just as much as it is for gains or wealth tax.
>> “The trouble is that there’s basically no good way to do this that doesn’t introduce similar or worse problems."
Again, this is equivalent to arguing that any tax on assets results in lower asset pricing, which is trivially true but not meaningful.
>> “So instead of this obviously bad system, most countries use the very sane solution of staggering sales by only imposing a tax when an asset is sold."
Two things wrong with your point here: a) many countries require estimated tax payments (or favor them with interest), which would stagger such sales, b) buyers who believe that such sales artificially depress stock would be able to buy those depressed assets, counterbalancing this pressure.
A good analogy for this would be quarterly employee sales of stock grants, which have no meaningful effect on large company stock prices.
>> “Though stock markets are mostly global savings accounts loosely tied to the value of the individual companies underneath, those companies do things like grant employee stock options and sometimes sell stock to the public. When they do this at higher valuations, it generates more end taxation."
I have no idea what this word salad is trying to say. I think it might be some sort of Laffer Curve “don’t tax now and you’ll have more tax revenue later” argument, which is just laughable (Laffable?).
>> “Even if you only force the wealthy to liquidate, they're going to start with their common shares. And that will depress prices for all common shareholders (i.e., everyone). This is bad."
Of course this isn't true; buyers who do not care about preferred shares will simply buy the slightly depressed common stock instead. Keeping preferred and common stock equivalently priced is already something market arbitrageurs efficiently do today.
>> “Forcing serious stock liquidation every year will hurt smaller companies more, which is harmful for long-term innovation / competition."
Of course this isn't true either; smaller companies will have proportionately lower taxes levied on their shareholders because, like, that's how "percentages" and "rates" work, you ninnie.
>> “Sometimes stock prices go down, and that's generally not a write-off. So taxing the upside at an arbitrary point is unfair and kind of just silly."
"Fair" is pretty subjective. We tax real property (and have since the 17th century in some countries), but don't give money back to citizens when their property declines in value.
Maybe you should write an op-ed about how that commie Adam Smith supported property taxes?
>> “Successful companies induce enormous tax receipts for governments at all levels (corporate taxes, income taxes, property taxes, payroll taxes, headcount taxes, etc). If Bezos is paying less percentage-wise today because he's holding his Amazon stock, where said holding makes Amazon more valuable, that's a good net deal."
This facile argument is equally applicable to any corporate (or individual) taxes. If your point is just "all taxes are bad", sure, OK. But you seem to think you are making a point uniquely about unrealized capital gains taxes, which is just not true.
>> “This is not a revelation."
Seems the amount of interest this story has gotten would disagree with you.
>> “This is an … insane statement? — both rationally and morally. Truth can't ever be a sole criteria for publishing. "
Yes, that statement that you made up after misinterpreting the quote is indeed insane, but this is not what the quoted text says. The quoted text says that motives are irrelevant; it does not say that "truth is the sole criterion."
>> “So they think what they’ve done is legal (and just morally swell) because they didn't directly induce the theft of information."
Erm, you know about "Times v Sullivan", right? Since you're, like, into the whole journalism thing?
>> The public has no right to private info where no crime (or serious moral evil) has been committed."
Again, the mainstream view in the US—as well as the result of jurisprudence like Times v Sullivan—is that presence of a crime is not necessary to justify such a journalistic choice. You might disagree, but instead of making the case for why your heterodox view of journalistic ethics is correct, you just sort of beg the question by throwing it out there in the end.
Alright, spongebob. Let's get into it.
Focusing on the main points here:
1. I agree that "deferring realizing gains in the hopes of finding a more favorable tax treatment in the future" is a form tax avoidance! But that's not what's happening. If I believe my asset will grow by 8-10% a year and I can borrow against it for 3%, I'm going to borrow vs. sell. (I don't doubt that many of the rich do use tax avoidance strategies in other senses. But Bezos et al aren't holding stocks because they think 15% is too high of a cap gains tax. If anything, they'd expect with the winds that the rate they'll eventually be forced to pay is materially higher.)
2. Wealth taxes are related but distinct from taxing unrealized gains in a direct sense. They factor unrealized gains in an obvious way, but aren't meant to force realization, nor are they indexed on actual gains. Your wealth could drop and you'd still pay on the value of what you have left. Two totally distinct things. (ProPublica brings up wealth taxes at the very end of their piece and more or less immediately dismisses them. It's clear throughout that their focus is on *direct* gains realization.)
3. FWIW, wealth taxes haven't proven workable at any meaningful scale. A dozen or so European countries tried them, and I think four small economies there still use them. (The largest is Spain, but they exempt lots of securities.)
4. Taxing income is different conceptually because there's no liquidation there. But should the US gov give taxpayers the option of putting their tax payments into a market fund and then make a claim on the fund's proceeds instead? They already do! Retirement accounts etc aren't just about diminishing future burdens on the state. It's just good economics.
5. Big companies can handle widespread liquidation easier because they're heavily insulated by index funds and have more means of buying back their own stock to stabilize pricing.
6. My point is that Amazon's wealth generation is already being taxed in an immediate sense at a bunch of levels, and that letting gains accumulate for Amazon shareholders just accelerates those other forms of taxation without taking anything away from the gov. And when those shares gains are eventually realized, they'll be worth more to the gov's coffers than any payments today would be.
7. Sullivan was a defamation/1A case and has nothing to do with what I said.
Anyway you clearly like to sound smart, and to come off as the clever type of snarky. I encourage you to use such wattage as you have to better consider your own arguments. There's no audience here, and I assure you that your barbs mean nothing to me. If you have useful feedback that will improve the accuracy of the piece, I'm happy to hear it. So far you've just offered an angry litany of grievances, most of which were based on bad readings.
fwiw, despite the smarty pants tone of the comment I feel like the back and forth clarified some things for me
>3. FWIW, wealth taxes haven't proven workable at any meaningful scale. A dozen or so European countries tried them, and I think four small economies there still use them. (The largest is Spain, but they exempt lots of securities.)
What nonsense. Property tax IS a wealth tax.
You should really read the footnotes.
1. Surely they're doing both. You sort of hung your whole piece on ProPublica not understanding what tax avoidance is, which is just silly.
2. "but aren't meant to force realization" — Nor is a wealth tax or a tax on unrealized gains. As you noted before, you can just pay for such a tax by borrowed funds. [Transparency: I deleted an earlier reply where I was less clear with what I meant on this bullet.]
3. This is a little bit too dismissive. Norway, Switzerland, Spain, and the Netherlands are all midsized developed economies. In any event, the US is in a substantially different position, since it already (uniquely!) has a global tax regime.
4. I've lost track of to what you are replying here. In any case, taxation on unrealized gains—be they wealth taxes or unrealized gains taxes—do not force liquidation, as you yourself noted earlier.
5. As a percentage of market cap? [citation needed]?
6. This is probably the fundamental mistake you are making. Yes, taxation happens at multiple levels; the point of the ProPublica piece was obviously that, at the end of the day, the fraction of that wealth generation that becomes Bezos' is taxed at a much lower rate than that which becomes a warehouse worker's. Is that surprising? Not really, I agree! Is it relevant? Definitely! As Piketty famously argued, those disparities in returns result in increasing disparities in wealth over time.
7. Right. I meant NY Times vs US. Sorry about that. In Times v US the court ruled against prior restraint with no such caveat as you applied (i.e., the reporting exposed illegal behavior—you made this standard up from whole cloth!).
>> Anyway you clearly like to sound smart
Yes. I post things anonymously online because I like to sound smart. You got me.
I also want to take a *really* *big* step back and look again at why you think ProPublica is doing something bad here.
As I understand it, your argument is:
1. This article is ignorant of economics and thus misleading.
2. This article reveals private information even though no crime is committed and is thus unethical.
#2 I think I addressed—"illegal activity" is not, broadly, considered a prerequisite for journalists to share such information. Should it be? I don't know. It seems to me that, since such an argument is contrary to norms and law, the burden is on you to make the case.
For #1, though, I think you and I both got distracted. So let's take a big step back. At heart, ProPublica is arguing that Bezos and similar billionaires pay a much lower effective tax—when calculated as "taxes paid" vs "gains earned"—than most.
I believe your counterargument is "they *will* pay that tax when they realize those gains." Is that correct?
If so, most obviously—they won't. The highest income tax rate in the US is 37%, whereas the highest long term capital gains rate is about 24%. So even if they realized those gains at some future date and paid full long-term capital gains on them, they would not pay the same rate as income (obviously).
Of course, 24% is a far cry from 0.1%—though note in Buffet's case he has pledged half his wealth to charity before he dies, and such donations allow the donee to deduct the *market value* of the charitable contribution, but without ever taking on the tax liability from realizing gains!
So, if you had to bet, what do you think the effective lifetime tax rate on Bezos' earnings will be?
As addressed elsewhere, it's not about crime per se. It's about *badness*. If you're going to leak private info, it needs to be in the service of shining light on some bit of serious badness that was covered in darkness and was unlikely to be discovered by better means. That wasn't the case here. Everything that ProPublica said they could have said with a mix of guesstimates and already public info. But no one would read their op-ed, so they made it a news feature by adding stolen info and then sensationalizing the fuck out of it. If that's not bad journalism, I don't understand the meaning of the word bad.
I have no qualms with cap gains being higher. There's lots of room for informed debate about what the right number is, if/what the long-term discount should be, and if/what the delta to income taxes should be. Same for if the charitable loopholes should be modified or closed.
My point was that if someone wants to write an op-ed to that end, fine! I may dislike the arguments. I may like them. It doesn't matter. But what ProPublica intimated here is that somehow these rich people weren't paying their fair share, based purely on a fundamental misunderstanding of how these taxes work -- and why we've structured them as we have.
As for Bezos, impossible to say. But I do know this: if you ask the US Treasury "would you like a cash payment equivalent to 3% of Amazon now or at their valuation in x years", no one is going to say "now" without giving it careful thought. As US borrowing costs seem likely to stay ~2% for a long time, you'd need a real bear assessment (or a really strong thesis about equality optics or improving price discovery etc) to want to sacrifice the obvious upside.
I can't believe we're still arguing about whether ProPublica "fundamentally misunderstands" how taxes work.
Did we read the same article? The one that contains this:
"The tax math provides a clear incentive for this. If you own a company and take a huge salary, you’ll pay 37% in income tax on the bulk of it. Sell stock and you’ll pay 20% in capital gains tax — and lose some control over your company. But take out a loan, and these days you’ll pay a single-digit interest rate and no tax; since loans must be paid back, the IRS doesn’t consider them income. Banks typically require collateral, but the wealthy have plenty of that."
Or this?
"Normally when someone sells an asset, even a minute before they die, they owe 20% capital gains tax. But at death, that changes. Any capital gains till that moment are not taxed. This allows the ultrarich and their heirs to avoid paying billions in taxes. The “step-up in basis” is widely recognized by experts across the political spectrum as a flaw in the code.
Then comes the estate tax, which, at 40%, is among the highest in the federal code. This tax is supposed to give the government one last chance to get a piece of all those unrealized gains and other assets the wealthiest Americans accumulate over their lifetimes.
It’s clear, though, from aggregate IRS data, tax research and what little trickles into the public arena about estate planning of the wealthy that they can readily escape turning over almost half of the value of their estates. Many of the richest create foundations for philanthropic giving, which provide large charitable tax deductions during their lifetimes and bypass the estate tax when they die."
Elsewhere you seem to imply that ProPublica don't mention the 40% estate tax, don't understand how CGT basis works, etc. Clearly that's not true.
You may indeed disagree with the position you feel the article advocates for. (And rather obviously do disagree with it.) I, too, feel the article is "advocacy journalism."
But what I react to in your piece is the entirely misplaced claim that the authors *misunderstand* or *misrepresent* the issue.
They imply: (i) that the rich are holding because of CGT, (ii) that holding for upside reasons is tax avoidance, (iii) that giving money to charity is primarily about tax avoidance, (iv) that "true tax rates" are a real/meaningful thing.
They also fail to mention: (i) that estate taxes are priced at 40% in part to offset the loss of CGT income, (ii) that the gov can borrow at rates much lower than the growth of their unrealized gains on those unrealized gains, (iii) that borrowing against equity self-solves for the gov's biggest risk of never getting their cut, (iv) that execs taking and holding comp in equity improves the value of everyone's 401ks etc. in a way that being paid in cash doesn't, (v) that there are lots of compelling and well-understood reasons why directly taxing unrealized gains isn't a thing done almost anywhere.
That's either misunderstanding how this works or misrepresenting it. I guess there's room to allow for the latter interpretation. But it's a less charitable one.
1. If there are two motivations for doing a thing and you aren't sure which is in play, writing an article about how they're definitely doing it for one reason (without even mentioning the other) is classically bad journalism that deserves to be critiqued. And we have great cause to doubt that *the specific people targeted in the article* are factoring CG much in their decisions to hold. For founders especially they want voting power and economic exposure to their rocketships.
2. For Wyden, see page 9 here: https://www.finance.senate.gov/imo/media/doc/Treat%20Wealth%20Like%20Wages%20RM%20Wyden.pdf. The pitch was M2M on Dec 31st and taxing gains as income.
3. My point about size is that some things work at scale and some don't. When larger economies (France, Germany, UK) tried said taxes, they didn't really work. The US would have an even harder time. (It's true that they have a global tax regime already. But citizenship can be changed and relocating corporate HQ is easier in the digital age. If a major wealth tax passes in the US, Vancouver will become the new Delaware.)
4. I was responding to "If so, this is a facile point which is trivially true for income tax just as much as it is for gains or wealth tax.".
5. Companies are usually indexed based on market cap, yes. And if you're in the S&P 500 especially, over half your stock is owned by indexers.
6. You can't divorce "Bezos is rich" from "Bezos is rich because he owns a fuckton of Amazon stock". If you force him to liquidate, that selling pressure lessens the value for all shareholders. Plus you decrease his economic exposure to Amazon, which lessens his incentive to push Amazon's growth, which lessens the likelihood that those other taxes keep paying out. None of this is ideal when you can just wait for him to sell shares gradually, or for him to get divorced again, to die, etc, where the waiting lets more value accrete to the gov's share.
7. I wrote "[t]he public has no right to private info where no crime (or serious moral evil) has been committed." Note the parenthetical. Now look at Black's comment from NYT v. US: " Only a free and unrestrained press can effectively expose deception in government. And paramount among the responsibilities of a free press is the duty to prevent any part of the government from deceiving the people and sending them off to distant lands to die of foreign fevers and foreign shot and shell." That's a serious moral evil.
[Skipping a bunch of points here because I don't think they're that important. Feel free to flag anything I missed.]
2. Again, the intent is clearly to equalize income and capital gains, from a tax perspective. I don't actually agree—as should be obvious, I'm more of a fan of a blanket wealth tax—but the *intention* is clearly not to force selling per se.
3. The US imposes a tax assessment at citizenship revocation. Employer location is irrelevant for personal income taxes.
6. I think it's strange to argue that founders are insensitive to CGT as an incentive but that their desire to push their company's growth is sensitive to how much of the stock they hold. That said, this is one reason I think a lower wealth tax is better.
7. It's obvious that Pro Publica felt that this was of substantial public interest because of what it reveals about effective tax rates. Given prior history (e.g. the Panama Papers), I don't think this is outlandish.
2. If you're M2M at EOY and taxing at 37%, you're forcing liquidation.
3. I mentioned both because Zuck getting a CAD passport and then coming to work in Menlo Park on a work visa obviously wouldn't fly.
6. They're not insensitive. It's just not the primary point. Even if CGT didn't exist they wouldn't sell much (if any) more than they do.
7. It doesn't reveal anything we didn't already know so far as broad strokes. And for the very marginal benefit of being able to be precise, they've violated the privacy of several people, normalized publishing private info, and given incentives to the next person to steal/leak private info.
2. Of course you can just borrow against the unsold assets at a rate that factors in the risk, as I think you argued earlier.
3. I think you misunderstand yet again. Zuck getting a Canadian passport and relocating HQ to Vancouver would not work, either. The US imposes an "exit tax" on citizens. Revocation of his US citizenship would be a potentially taxable event.
7. That I certainly agree with, but I think for many readers it's evocative in a way that numbers alone would not be. I am frankly undecided on whether that's worth it, but it's not *obviously* in the "unethical" zone as you crow, and you do a disservice by not even engaging with the (very long) piece ProPublica wrote on why they made this decision.
"b) buyers who believe that such sales artificially depress stock would be able to buy those depressed assets, counterbalancing this pressure."
Same with building gift taxes/valuation. As famously outlined by the NYT re: the Trumps, they intentionally devalued their buildings to save hundreds of millions in taxes. But since there is no vehicle for them to be forced to sell those assets at those valuations, the taxes are effectively lost forever.
"The Trumps dodged hundreds of millions in gift taxes by submitting tax returns that grossly undervalued the properties, claiming they were worth just $41.4 million.
The same set of buildings would be sold off over the next decade for more than 16 times that amount."
https://www.nytimes.com/interactive/2018/10/02/us/politics/donald-trump-tax-schemes-fred-trump.html
I also want to note that serious analyses of the current CGT reveal distortionary effects on investor behavior:
1. CGT incentivizes investments in asset classes that yield capital returns instead of income (including ETFs that do exactly this!).
2. CGT incentivizes holding onto appreciated assets even if the investor believes those assets are no longer the optimal investment choice, reducing market liquidity and efficient price discovery. (Similarly, it incentivizes complicated tax optimization strategies like tax-loss harvesting, which have similar distortionary effects.)
Jeremy obviously doesn't know a bit about economics, but any serious discussion of CGT would acknowledge these effects, which are, ironically, mitigated or eliminated by taxing wealth or unrealized gains.
Investors put money that they don't need anytime soon into whichever investments they think will pay the greatest total return.
Why do loads of people think ETFs are a good answer here? Tax-efficiency sure. But also because we've all sort of agreed to treat the major indices as general savings funds, thus ensuring a lot of continual inflows somewhat regardless of economic performance. (And of course because they're just amazingly liquid for when that matters.)
But lots of investors still buy lots of apartment buildings and bonds, along with income-generating businesses. Those markets are still robust.
I do agree with part of what you're saying though. The relentless flow of capital into stocks has more or less unmoored them from performance, which comes with downsides. And there are things we could to taxwise to adjust there. But there are tradeoffs everywhere, and getting into them all is well outside scope here.
ProPublica argued that a number of specific billionaires aren't paying their fair share, suggesting that taxing unrealized gains would solve for that. My criticism was that they skipped over the entire debate and just assumed it to be a good idea. I did not mean, or claim, to be presenting that entire debate in a ~2k word article. My object was to give the shape of the thing. Which I did.
I think you are misunderstanding my criticism, especially my second point.
The way CGT works, you don't pay taxes until you realize the gain. (I think you know this.) So rational investors who have an unrealized gain have a disincentive to sell the asset, *even* *if* they believe selling it and investing in *some* *other* asset would give slightly better performance. This thwarts what is known as "price discovery", i.e., the efficient market accurately pricing assets.
To my first point, certainly other asset classes still exist. I'm not sure how that is evidence that the market is not being distorted.
Taxing gains encourages holding, sure. That's somewhat the point. And holding has upsides and downsides, sure. If your real criticism here is just "you should have gotten into the downsides", I dunno. I often write exhaustively about these sorts of things and readers fall asleep. Even at the length it was I got a lot of feedback about it being too long. Getting discursive about price discovery is pretty extra in context.
The sentiment that the rich should pay more taxes is an emotional response to the fact that the country doesn't work. I've heard the Military Budget allows for 2 Billion dollars a day to be spent. Even if the rich pay our taxes, what is going to change? Fundamentally, there is no health care in the USA, the richest first world country in the world. We have a war machine that has been used to attack anyone who doesn't want the dollar as their reserve currency. Why don't the Uber rich change the system? Instead of paying taxes to a greedy, dysfunctional government, why don't they set up a better private health care system? Spend their money fixing infrastructure? Hell, Bezos could literally "save the AMAZON rain forest" with his money. The apathy of people moving from NY to FLA and CA to TX is because we've come to this point. The USA is business, not a country. It doesn't care about its people, proportionate to the amount of money it has. I would gladly pay more taxes myself If i saw the quality of life actually getting better.
I realize i'm not adding anything to technical clarity of the pro publica, i understand people's frustration. I'm just frustrated with the whole system. Paying taxes isn't the answer. What is done with the taxes is.
Thank you for writing this piece. I cannot believe how wrong ProPublica is on this, and how few people are challenging them.
"why virtually all developed countries don’t tax unrealized capital gains". Quite a few countries do tax, under conditions: Sweden, Japan (and Germany if I understand it correctly).
Going to paste in a reply I left on Hacker News to a similar comment:
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OP here. I sort of agree with you, but it's a bit complicated and it wasn't obvious what the right way to word that was.
To get granular:
Wealth taxes are a bit distinct from taxing unrealized gains directly (even though they often have that effect, and there is some obvious overlap). If we look at, say, the Netherlands, they're assessing a ~1.7% wealth tax on assets over €1m independent of the performance of the assets over the year in question, which then exempts the payer from capital gains taxes upon sale. So we can call this taxing unrealized gains, but it's a bit imprecise in that they aren't taxing the gains themselves (which are unknown, and could be losses), but rather wealth at a prior point in time based on a fixed formula. If the asset in question went up 20%, the Dutch gov isn't going to tax the excess or force realization on any specific timeline. They'll just keep taking their 1.7% every year on whatever is there on Jan 1st.
There also aren't a lot of countries doing anything like this as touching upon non-real estate investments, and most European countries that have experimented with them are in the process of reversion (e.g., Norway, France) as it basically hasn't proved workable in most instances.
So maybe I should have left something like this as a footnote to clarify.
Thank you for the feedback. This is indeed changing, and so hairy and easy to misunderstand.
I like very much your article; just this part was to me misleading. All the best.
Wealth taxes tax both realized and unrealized gains, sego, they tax unrealized gains. So you were wrong.
You publish corrections, right?
Nope, you are wrong.
A wealth tax targets unrealized gains and your cost basis, not realized gains.
For Germany:
No.
We have something called "wealth tax", but it merely refers to an additional _income tax_ level that you only reach when you have a yearly income of > 250k. Germany does not tax unrealized capital gains.
And it's a terrible idea, because you all are only talking about stocks. What about property owners as in owning your own house, which naturally increases in value over time and therefore increases your wealth? You would have to pay taxes for the value increase of your house even if you have no intention of ever selling your house - even if you are retired.
Netherlands as well, stocks held are taxed as private wealth, similar to bank savings, outstanding loans, and other investment instruments.
Makes it very hard to take anything the article seriously.
The Netherlands taxes wealth itself and allows people to realize gains whenever they want without further direct taxation on liquidation.
If A is gains taxation and B is wealth taxation, B covers A, but B =! A.
This is such a super weird argument.
You wrote "virtually all developed countries don’t tax unrealized capital gains."
In fact, a number of countries do levy taxes on unrealized capital gains, in exactly the way the ProPublica article suggests: as someone's wealth increases due to asset appreciation, so would their tax burden.
Your argument seems to be, "No, no, that would be a tax on unrealized capital gains *and* the basis, so that's *totally different*." Okay, dude. Whatever you say.
My guy. You've been in my notifs all day. Please keep your commentary to that single thread. I'll get to it shortly.
https://taxfoundation.org/wealth-tax/...they're all failing
i agree mostly, the only thing the ProPublica article mentions that is worth debating is the practice of using the assets as collatoral for a credit lines and then in addition using the interest to offset any remaining income gains.
If the asset is used as collatoral for a credit line it should become a gain realizing tax event. The argument would be that the current worth of the asset is used. So the gain is realized, meaning it becomes an externally referenced property of the asset at that point in time, therefor it is realized (like a collpased state in quantum entanglement).
Of course this only applies to the part of the asset that was used as collatoral (so not all of the stock but only that portion of the stock that corresponds to the amount of the collatoral at the time of the credit contract where it was used.) This also avoids the liquidity problem, since it was used as collatoral for a very liquid asset, a credit line. (technically it is similar to selling and buying back the stock).
Some exceptions can be made to lessen the impact if homeowners use their appreciated home as collatoral (2nd mortgage or sth. like this).
The rest of the ProPublica article is as you pointed out quite ignorant of the reality.
crazy idea to take it ad absurdum: since being listed in the Forbes lists gives you networking influence on people it should become a gain realizing tax event, too. Jeff Bezos is introduced as the multi-billion dollar person, then he really should be that multi-billion dollar person. Otherwise it should just be told by the truth, Jeff Bezos the maybe-billionair.
Some commenters are seriously misinformed about how taxing wealth and unrealized gains work here.
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Wealth Tax:
Asset appreciates - tax burden increases
Asset depreciates - tax burden decreases
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Unrealized Gain:
Asset appreciates - tax burden increases
Asset depreciates - no change in tax burden
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An unrealized gains tax is analogous to an option and penalizes owners of volatile assets much more than a wealth tax does.
I think this is a good argument for a wealth tax instead of an unrealized gains tax. But what you say isn't exactly correct: Wyden's proposal questions whether unrealized losses should be available to offset gains (at least to my read of it).
Obviously a system in which unrealized capital gains and losses are figured via mark-to-market at the end of the tax year—and in which they net out, as they do today for realized gains and losses—is one which avoids the issue you describe. I'm not aware of any *implemented* unrealized gains tax that is *not* simply a wealth tax, so ultimately this would be a question of implementation, no?
Rules of the game for the super-wealthy:
-unrealized gains equal asset, equal collateral
-use the asset, borrow and spend, borrow and spend ...
-IRS deduction of interest on this borrowing
-make and spend all you want, with zero tax
This makes no sense. The lender expects to get their principal back at some point, which involves the borrower selling some shares.
What they are doing is effectively leveraging to buy their own shares (which is reasonable for CEOs of high-growth companies).
holding collateral in the billions, requiring annual spending in the 10s of millions, running a multi-period cycle of borrow n spend, there is plenty of room to repay period n's principal in period n +5 by rolling it over. In n +5 simply borrow MORE, covering both current period income reqmts AND the rollover of a prior periods principal. Its not like repaying the principal from period n is gonna dent your available collateral.
By period n +5, in addition, there maybe occurred compound growth in value in both the original asset, thereby growing collateral against which to borrow and spend.
The different rules enjoyed only at the top could be changed by the bottom 99%. Maybe these bogus propublica pieces and the ensuing discussion lead somewhere?
Ever heard of home equity line of credits? It's the exact same concept and not some great conspiracy to evade taxes. But stay outraged!
Not zero tax. The tax just comes later. And it's more when it does come.
The way to think about it is that lenders have strong interests in risk-management. If the pledged asset is showing signs of wavering, they'll call their loans and force liquidation. This gets the gov their money. If the lenders have no concern, it's a good sign that the asset is healthy and the debt ratio is fine. This means the gov's share is growing healthily, so they're better to let it grow and just borrow themselves at a lower cost as they wait to collect.
Is the interest not deductible?
And when the owner of the shares dies, the heir gets the basis stepped up. All that capital gains that was accumulating while the owner lived on loans disappears. If the heir sells immediately on inheriting, they pay no capital gains, pay off the owner's original loan, and the remainder of growth is never-taxed cash.
Interest generally is, but that's neither here nor there. The point is that the gov needs to decide when to take their cut. If they take it today, they get the same size piece of a smaller pie. And because they can trivially raise cheap debt to pay their bills while they wait for that pie to grow, they're smart to do so.
The step-up is offset by the estate tax being set at 40% for assets above the baseline (something like $12m depending on exemptions).
"Depress the prices for the common stockholder (ie everyone)" Uhh... You DO realize that not everybody owns stock, right? Homeless people don't own stock, generally.
Yeah I mean it was a colloquial "everyone", obviously.
Even if it's in their 401k, most people own stock. If the hangup is the word "everyone", then you are right on that. But let's focus on teaming up to be pedantic about how wrong ProPublica is.
Just for the record, barely half the US population own stocks of any kind, including in a 401(k). The number is significantly lower as you move down the wealth scale, obviously.
If I have zero dollars in wealth, it means the state is taxing my wealth at 100% as the amount I pay in tax (direct or indirect) would contribute to my wealth. Why do we tax the poor people wealth at 100% but are reluctant to do the same with rich people? The distinction between income and wealth is a red herring and can be massaged arbitrarily.
But as soon as you make $1 the state taxes you 0%
Not really, it would have taxed me <tax paid>/(<tax paid> + 1) %. It converges to zero indeed the richer I become. So it is progressive but in the wrong direction... Taxes aren't that complicated indeed.
Politely, your agrument about "why we don't tax unrealized gains" is deeply faulty. While there are a number of reasons, and you've listed those as "angles" (they're not angles, they're reasons), the number one reason is it is very hard to set a price on an unrealized gain --- because the gain hasn't been realized. Only in the case of a highly liquid publicly traded fully fungible asset can we make such a claim without stepping through great pains - and then we'd get it wrong. Even in the one clearest case, a major holding in a public company is "worth" a certain amount, the amount of variance between the posted closing price of a stock and the value of that position is speculation. If Bezos sold all of his shares, he wouldn't get the price posted on the wall - the value would fall. Any value set by taking the price on a certain day, or an average, is speculation.
An unrealized gain has no known value. It is actually the definition of "unrealized" -- the asset was not traded on the open market for currency, where we would know its value.
But that's the case of a few highly liquid highly fungible assets (stocks). You, and propublica, have focused on this case because it's an asset we think we can value.
If we apply the general principle of taxing unrealized gains, we'd have to tax all unrealized gains - or the oligarchs would simply put their wealth into these assets that are untaxed.
If we have a general principle of taxing unrealized gains, we'll have to speculate the value of every thing every person has. Every person, every asset, let the insanity (your word) sink in. Take me. The most expensive thing I own is a musical instrument. I was flush one year, I'm a semi-pro player, and I splurged and bought it, knowing it would be a treasure and joy my entire life. I have never, in my entire life, owned any single thing as expensive as this, even to this day. I've also never attempted to find out its value - it's not a strad - but instrument prices have gone up. Perhaps the maker got trendy and it's now worth millions of dollars - I have no idea. Maybe it's nearly worthless. Or maybe this maker only made 6, and none have ever changed hands.
Maybe you have an ugly rug given to you by an aunt. Would you go to jail for not having it valued? Or only if a friend who is a rug dealer spotted it in your house, realized its worth, and called the tip line for your tax evasion (netting a commission)?
Imagine if every asset every person owns had to be valued every year, and each and every one of us had to submit a full accounting of our net worth based on this speculation and pay more.
Ok, you say, that's silly. We'll exempt people without large assets. How do I prove I don't have a large asset, that my instrument isn't worth a billion dollars? I guess I have to find its value, to make sure I'm not breaking the law. And what if I'm wrong, and when I decide to sell it next year I find out it was worth a billion last year, do I got to jail? I guess I would. Ok, then, we'll write into the law certain safe harbors - which the super rich would exploit.
That's my #1 reason why we don't tax unrealized gains. An unrealized gain has not been valued, and speculating on the value leads to opinions, and we don't want our tax system to be based on opinions. Nor do we want to value every asset of every person - it's too much work.
1. "Deeply fault", angles vs. reasons. C'mon. Let's be nice here. You have extra lenses for consideration. Great. I appreciate them.
2. Agree that price volatility (influenced by major sales) is a good point. I tried to get to that. Maybe I wasn't clear enough. Either way, appreciate you flagging.
3. The degree to which the wealthy would migrate capital into harder-to-M2M assets is an interesting debate point that's irresolvable here, as tax-optimization is only one factor. The advantages of liquidity and generally-good price discovery available in the public markets are high. So there's a set of tradeoffs there that would vary with the specifics. But again I think a good bullet to consider.
Give me a break. You call publishing some basic tax numbers of the richest people an invasion of privacy, but have no (visible) concern about Amazon workers bathroom time being monitored etc. Tax information should be public anyway, like in Norway.
The only reason we know the rich don't pay their fair share of taxes (often because they endlessly defer them) is due to leaks like this. Corroboration of well known facts aren't a negative thing.
The one flaw with the ProPublica article was that it didn't mention a wealth tax. A 1% wealth tax on assets over $200 000 would be a very workable solution to prevent legal tax avoidance by endless tax deferment.
It's not just "basic tax numbers". Go re-read ProPublica's lead article again and look at what they describe the dataset as containing, and what they plan on publishing.
It may be true that some of this is public info in other places. That has precisely zero impact on whether it's a normative or legal invasion of privacy in an entirely different culture. If I break a law in the UK, telling the judge "well the laws are different back home and I like those more" will not be entertained as a meaningful defense.
Also, I have no idea why on earth my opinion on Amazon's bathroom policies would have any bearing on whether I think privacy laws/norms were violated here. Those are obviously two entirely different things.
I only went off what they've published so far. From what I read they promise to online publish specific information to expose tax avoidance strategies, I don't see the problems with that.
For your second paragraph - US laws were obviously broken here, that's not in question, and not an interesting issue anyway. Going ex-Islam is a capital offense in many countries - that doesn't mean I can't call the law stupid. You're basically arguing that a wrong was committed just because the action is illegal - a well known circular argument.
The issue is that you seem to only care about the rights of the richest. When the richest does wrong it doesn't get mentioned on this blog, but when someone corroborates their massive tax avoidance it's suddenly a problem.
Quoting for you: "In the coming months, ProPublica will use the IRS data we have obtained to explore in detail how the ultrawealthy avoid taxes, exploit loopholes and escape scrutiny from federal auditors."
[Banned user for one month for leaving identical comments here and on HN and being uncooperative and uncharitable about managing multiple threads. See continued thread with him on HN here: https://news.ycombinator.com/item?id=27444481.]