Doesn't this open up the possibility of debt slavery of the entrepreneur, to the government ?
If my stock in my biotech startup goes thru the roof and i get taxed X, i could perhaps sell some stock to cover. More likely, though, I will get into an installment plan with the IRS since the gains are so massive its going to be tough to sell so much stock without a discount, to pay the IRS off.
Next year, FDA does not approve my device, and my stock tanks to near $0. Now even if i sold all my stock, I can't even pay back the IRS for my tax debt.
I now have lost my company, but I have also incurred massive debt in the process. And if I am not mistaken, IRS debt is not dis-chargeable in bankruptcy.
> If my stock in my biotech startup goes thru the roof and i get taxed X, i could perhaps sell some stock to cover.
You don't have to unless your company is publicly traded (or has shares readily tradable in a secondary market), and your personal shares in the company are worth in excess of $1B.
> More likely, though, I will get into an installment plan with the IRS since the gains are so massive its going to be tough to sell so much stock without a discount, to pay the IRS off.
No, you don't have to do that. The law allows you to carry-forward your first payment over 5 years. That's different from a payment plan, because if the stock goes to 0 in year 3, you no longer owe anything.
So, I'd argue you are reading it incorrectly. Tim Sweeny gets a fair bit wrong, and I'd highly recommend starting with the actual legislative text (available here: https://www.finance.senate.gov/chairmans-news/wyden-unveils-...) to get more details on the law.
The idea of this is that private control of companies by independent minded founders should not exist. Only large financial companies like Vanguard and Blackrock should own large stakes in public companies. The practical effect is not to raise more tax revenue, it's to seize control from founders and give it to the financial oligarchy by forcing them to sell.
This is what happens in Russia, Eastern Europe, Saudi Arabia, and other corrupt oligarchies. When a business gets successful enough, the oligarchs of the countries show up and offer a deal that the person running the company can't refuse and force them to sell to the local oligarch gang at a bad price.
If they wanted to raise more tax revenue, they could just raise the top marginal income tax rate up to 98% or raise capital gains tax rates and not totally screw up things by forcing the confiscation of companies from their founders.
If you have high net worth that means you have control, not that you are necessarily living lavishly. If you want to pay for personal expenses and buy yachts and the usual kinds of things that socialist complain about, you need to take that out in income or through capital gains. Thus, they want to pay for everything by forcing founders to sell control to the country's financial oligarchs like Blackrock and Vanguard who already own large amounts of most public companies.
They could easily exert any kind of pressure on these companies though. For example, Blackrock was given exclusive access to do wealth management in China recently[1]. It's one of the few western financial institutions allowed to do so. What kind of influence do you think the Chinese government exerts on Blackrock in exchange for this privilege?
No, it's not. Plenty of other people in the thread have explained the contigencies in the legislative text that mean that Sweeney's claims about it are at best misleading and at worst outright wrong.
This isn't true. There are lots of recorded instances of wealth taxes (e.g. France prior to the abolition of the ISF several years ago; many countries which levied temporary wealth taxes after WWII, etc.)
Sweden did the same. A lot of people suffered during the dot com bust because they were taxed on enormous unrealised profits that had completely disappeared by the time they had to pay them (because the stock had tanked)
That happened to a friend of mine in the US. He had a "taxable event" when his stock options vested. By the time the tax bill was due, his stock was worthless, and he went bankrupt.
He lost his home and last I saw was living in an RV.
Stock options are the same as having a cash payment, which is then immediately used to purchase the stock.
It's correct to tax stock options when they vest.
> By the time the tax bill was due, his stock was worthless
if you could not afford the tax bill with free cashflow, you need to sell to cover. Not selling means you're taking the tax debt owed, and gambling it on stocks. It sucks that your friend lost everything - often people who have vested stocks don't think about the consequences of what they're doing, and just go for the greediest (and most risky) option of holding and hoping.
He did not realize that he would owe income taxes on the difference between the option price and the value of the stock the day he bought it. He thought the option price would be his basis and he'd owe capital gains when he sold the stock.
That was the way things used to be, but Congress had changed the rules.
Quite a few people have been caught unawares by that.
Most evidence suggests that wealth taxes levied in the past have indeed reduced inequality and have not led to the type of tax avoidance their detractors would suggest.
"Complexity is one reason European countries, including France, Germany and Sweden, abandoned broad-based wealth taxes. Many of the rich dodged wealth taxes by exploiting carve-outs or moving. The very rich will find ways to avoid confiscatory taxes, but bad tax policy distorts investment.
Sweden abolished its wealth tax in 2007 following an exodus of capital and business tycoons. France repealed its net wealth tax in 2018, estimating that some 10,000 people with 35 billion euros worth of assets had left in the previous 15 years for tax reasons. The government was losing revenue from income taxes that the wealthy would have paid."
Sure, some people will move their assets around in order to avoid wealth taxes (to which there are, of course, solutions). That being said, in France revenue from the wealth tax grew at more than twice the rate of GDP from 1990-2018. Which means that even though some people were avoiding the tax, and oversight was extremely lax, there's no evidence that it was being serially evaded. And this is in the context of the European Union, perhaps the most hostile environment to wealth taxes that you can imagine given the free flows of people and capital.
First, I assume the estimates on capital flight in the WSJ are based on Pichet's 2007 paper, which makes a number of huge assumptions to arrive at its estimate. This isn't necessarily a criticism, more a statement that there isn't a lot of good evidence and other approaches to estimation yield much more modest sums.
Second, the article does not say that "the wealth taxes generated less revenue than the ordinary income taxes would have." It says that "the government was losing revenue from income taxes that the wealthy would have paid." There isn't a comparison there. Sure, the government was losing some revenue from income taxes, but nothing on the order of magnitude of the revenue brought in by the ISF. Those who are extremely wealthy actually do not tend to pay much in income taxes, especially outside of the US where top salaries are significantly lower.
Third, the assertion of widespread capital flight in France is provably false. If we look at French national accounts, the larger a fortune (and therefore the greater percentage of which is made up of financial assets), the more it grew relative to smaller estates (which are predominantly composed of property). Under the hypothesis of capital flight, we'd expect to see exactly the opposite.
Fourth, the effectiveness of the wealth tax had nothing to do with its repeal - it had to do, in large part, with the specific politics of the internationalist-global coalition that Macron spearheaded.
Fifth, even if capital flight becomes an important concern (and I do believe it is important, simply not at the level that is often cited), there are plenty of ways it can be circumvented, especially given the very different dynamics of the US tax system and the US place in the world.
> the article does not say that "the wealth taxes generated less revenue than the ordinary income taxes would have."
The loss of income tax revenue from the departure of the wealthy was twice as much as the revenue generated from the wealth tax from all of those who didn't leave. Therefore the tax was a net negative, hurting French finances to the tune of 7 billion euros of lost revenue as a result of the tax[2]
"The revenue it raised was rather paltry; only a few billion euros at its peak, or about 1% of France’s total revenue from all taxes. At least 10,000 wealthy people left the country to avoid paying the tax; most moved to neighboring Belgium, which has a large French-speaking population. When these individuals left, France lost not only their wealth tax revenue but their income taxes and other taxes as well. French economist Eric Pichet estimates that this ended up costing the French government almost twice as much revenue as the total yielded by the wealth tax."[1]
> Those who are extremely wealthy actually do not tend to pay much in income taxes, especially outside of the US
In France they certainly do, but they did not pay much in wealth taxes due to the difficulty in collecting the tax.
And here we have the main problem. Perhaps there is debate about how many tax refugees left and how much capital left the country -- that's fine.
But is the purpose of the tax to hurt the rich or is the purpose of the tax to raise money?
There is no debate about how much money the tax raised, regardless of whether you agree with Pichet's study. The money raised is known and was just 5.2 billion euros in 2015[2]. For all of France - a nation whose 2015 GDP was 2.2 Trillion euros. And this was a tax valued at 0.5% for all wealth above 1.3 million and an extra 1% for wealth above 10 million euros (so two rates of .5% and 1.5%). So even if you disagree that the net effect was negative because you don't agree with Pichet's methodology, there is no disputing the tax was ineffective at raising money.
I think that the proposal is, much as with taxes on realized gains and losses, unrealized losses would be allowed to offset unrealized gains and be carried forward if there was an excess of losses.
Ouch. If I understand you correctly, this is then a really awful scenario for founders.
As a founder, my only assets were the stock of my company . I don't own any other stock, certainly none that would go thru the roof over a year or 2.
If the company goes south after a hot streak, I end up with excess unrealized losses that I can't use, because I have no other assets with unrealized gains to book against my carryforward losses.
> As a founder, my only assets were the stock of my company . I don't own any other stock, certainly none that would go thru the roof over a year or 2.
- Is it a publicly traded company? Or do you readily trade shares of it on the secondary market? If not, then you wouldn't owe any taxes under this scheme, which only applies to "tradable covered assets" (leg. text is here: https://www.finance.senate.gov/chairmans-news/wyden-unveils-...)
- Are your personal shares of the company worth > $1B? If not, then you also wouldn't owe any taxes under this scheme, which allows you to designate up to $1B of normally "tradable covered assets" as "non-tradable covered assets".
> If I understand you correctly, this is then a really awful scenario for founders.
It makes having all your eggs in one basket (very slightly) worse than the generally bad idea it already is (if its a billion dollar basket so that you qualify for this treatment in the first place.)
But if all your eggs are in that basket, either the company bounces back later or you are wiped out anyway, so its not that much of a change from the status quo in that respect.
I am not an accountant, but I believe this to indeed be the case. If you previously took losses, you can carry them forward but not get an actual refund. It might not be practical to do because what tax bracket do you use? It's simpler as an offset, so I guess they just have to pick a rule and so they picked one that is advantageous to them.
The only other option that comes to mind is that if you take a significant loss, you get to retroactively get refunded from a previous year. This actually doesn't seem that intractable, it shouldn't be all that complicated to implement.
that's going to wreak havoc on finances during a recession. if the economy goes to shit, the government has to come up with money to stimulate the economy AND pay back all the capital gains taxes they collected during the boom times, all while tax revenues are down because businesses are imploding.
which is why academic professionals such as Aswath Damodaran say that this law is a bit stupid, and poorly thought out - it appeals to popular mindset, but it would be ineffective at collecting new tax revenue, and at worst discourage entrepreneurship leading to long term damage.
> that's going to wreak havoc on finances during a recession.
No, among other reasons, because its not going to happen, just as it doesn't with the taxes on realized capital gains and losses, where losses can offset gains, and if there is excess a certain amount of regular income, and if there is still excess (or not enough taxable regular income to use the full offset) end up as carryforward losses that can be used as future-year losses, but don't result in negative liability on their own.
> if the economy goes to shit, the government has to come up with money to stimulate the economy AND pay back all the capital gains taxes they collected during the boom times
If they were to write the law so that unrealized capital losses resulted in tax refunds, that would be stimulus, not an extra thing on top or stimulus. It might not be optimally targeted stimulus, but that rarely happens, anyway.
Yes, you're reading this wrong. Referring to tax obligations as "Slavery" is disconnected from reality, and pretty insulting to all the Americans for whom real, actual American slavery is still impactful.
Doesn't this open up the possibility of debt slavery of the entrepreneur, to the government ?
If my stock in my biotech startup goes thru the roof and i get taxed X, i could perhaps sell some stock to cover. More likely, though, I will get into an installment plan with the IRS since the gains are so massive its going to be tough to sell so much stock without a discount, to pay the IRS off.
Next year, FDA does not approve my device, and my stock tanks to near $0. Now even if i sold all my stock, I can't even pay back the IRS for my tax debt.
I now have lost my company, but I have also incurred massive debt in the process. And if I am not mistaken, IRS debt is not dis-chargeable in bankruptcy.
Am I reading this wrong ?