

The Zuckerberg Tax - teej
http://www.nytimes.com/2012/02/08/opinion/the-zuckerberg-tax.html

======
hristov
This is a bad idea for so many reasons. People have to understand that the
current trading price of a particular stock does not mean as much as they
think it does.

Just because a stock is trading at price X at a particular time does mean that
one can sell a million shares at price X. Thus if one has a million shares of
that company, it is unfair to assume that they have X times a million of ready
money. Thus, this tax is unfair and dangerous. It can easily cause a stock's
price to collapse as an investor is dumping shares to pay the IRS.

Furthermore, it will probably cause more large companies to go private, which
will result in great inefficiencies in our economy.

The problem here is that certain people are trying to think up some weird
exotic tax which will satisfy the popular desire to tax the rich more fairly
and yet leave those certain people untaxed.

As far as the supposed unfairness of the examples provided by the article that
is caused by a loophole that happens at death more than anything else. It
seems that when someone dies their heirs get to have a higher basis on their
assets without paying any income tax on the asset gains. We can easily close
this loophole without enacting new exotic taxes. You can simply make it so
dieing does not result in increasing the basis, which is the logical thing to
do anyways.

~~~
gaius
Author is a tax lawyer. The more nonsensical the tax code, the more money he
makes.

------
Jach
> If his Facebook shares decline in value next year, he’d get a refund.

This seems like potentially the biggest problem with the scheme, at least in a
sane world. What if, as happens in the markets, the shares decline in a big
way? The author addressed it briefly in the end but I felt it was half-assed
and an overall unsatisfying answer. The government is happy to take $X where X
is huge but next year $X is gone on government spending and the refund due to
any reason (bad economy, bad company) is basically created out of thin air.
Unless the government happens to be better at using $X to create $X+$c than
the original holder of $X, the refund has to be artificially created or
deducted from other government programs. Nothing new for our government
though, especially for amounts as insignificant as billions of dollars when
trillions are so easily created. Seriously, justifications like this:

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

don't sound very convincing to me at all. All this arguing over a few hundred
billion dollars over 10 years? The US government is still spending trillions
of dollars each year, we're still trillions of dollars in debt. Maybe the
government can keep going for another 100 years in this crazy state, maybe it
can't. If it can't, I'd rather get the worst of the possible financial
problems over with now and have the US citizens deprive the feds from all
sources of income and talk about things like taxes and valid uses of tax
revenue from a fresh start with an entirely new government (even cooler, a
saner and more distributed approach to government than massarchy). This might
be radical enough to get some downvotes but I don't think anything less than a
radical change will fix things in a way the huge majority will enjoy. (Other
radical changes I'm banking more on and care more about are things like a
positive Singularity.)

~~~
patrickaljord
> What if, as happens in the markets, the shares decline in a big way?

The government could wait a full year before spending the money so that
refunding from the previous year would be easy. I'm not sure I really
understood from the article if refund only happens from one year to the other
though and if not how fair would that be.

~~~
nasmorn
Actually holding on to cash is a serious issue at the size we are talking
about. Over night the feds would be the biggest investor in everything. A
small country can go set up a sovereign wealth fund but the US would probably
just hold its own paper which is equivalent to spending the money in the first
place.

------
frisco
This is one of the most frustrating article to read I've ever seen on HN. The
proposal is completely ridiculous. Ellison and Jobs never selling shares has
so much less to do with avoiding taxation as it does with maintaining control
and upside exposure.

This proposal would effect a slow creep of management being universally
excised from their companies over time, as they're compelled to sell shares to
cover their tax liability. I fail to see any good whatsoever that would come
of this. All it does is introduce a time decay of company control for founders
and owners. The secondary effects of trying to collect a little more tax here
would redefine industries.

~~~
asto
Yes, this is a very big problem especially for startups.

Ex: Let's say I set up a nice startup that receives attention from an investor
who purchases a 10% stake in my company for a million dollars. My company is
now worth 10 million "marked to market". So I will need to pay tax on the
appreciation of my 90% stake from next to nothing to 9 million when I haven't
actually earned a single buck!

Badly thought out article in my opinion. This move is practically untenable.

~~~
edoloughlin
There are problems with the proposal, but it does explicitly say it's for
publicly traded stocks only and, thus, wouldn't apply to startups.

------
dmbaggett
As the author off-handedly implies, this only works for liquid investments.
It's obviously unworkable for someone with a massive paper gain in an illiquid
investment -- e.g., shares in a privately held company whose stockholder
agreement prohibits transfers.

But if the proposal would be to force paper gains only in publicly traded
companies to be marked to market, then everyone will work awfully hard to
avoid ever _directly_ holding shares in publicly traded companies... which, I
don't know, seems possibly problematic.

Seems more realistic to go after the revenue on its way _in_ to companies.
(E.g., require companies with executives domiciled in the US to pay US taxes
on worldwide profits. No more "Double Irish" and zero US taxes for GE, unless
Jeff Immelt wants to move to Dublin.)

~~~
jcampbell1
Your cure is worse than the disease. Who really cares whether they work in
Geneva or New York or Sydney or SF? They are all nice places to live, and that
plan would be a national disaster.

The US just needs to tax capital gains as ordinary income, and cut the
corporate income tax to 10-15% with no exceptions to be globally competitive.
The goal is to have more multi-nationals based in the US, not less.

~~~
jseliger
_The US just needs to tax capital gains as ordinary income, and cut the
corporate income tax to 10-15% with no exceptions to be globally competitive._

This only makes sense if the income used to buy the capital hasn't already
been taxed once, when it was earned. Since it already was, you're in effect
arguing for double taxation. Which is why capital gains are taxed differently
in the first place.

~~~
jquery
The capital was taxed at ordinary income, yes, but the capital gains was not.

He's right, it's time to start treating capital gains as ordinary income. My
fifty dollars of capital generated by fixing a bug at work is equal to your
fifty dollars of capital generated by the time/risk value of money.

~~~
toomuchtodo
If anything, I would tax capital gains at 30%-40% while taxing ordinary income
at 15%. Actual labor has more utility than raw capital.

------
citricsquid
> That’s what Lawrence J. Ellison, the chief executive of Oracle, did. He
> reportedly borrowed more than a billion dollars against his Oracle shares
> and bought one of the most expensive yachts in the world.

I believe this is also what Markus Persson (Notch) of Minecraft fame did. He
mentioned a couple of months back about how it's cheaper for him to borrow
money than it is than for him to take money out of the company. He's not as
rich as Zuck though.

~~~
holdenc
At some point though the borrowed money needs to be repaid, and this would be
with income (capital gains or earned income) that is taxed, right? So, I am
curious how this works out in the long run. I imagine there is a twist to this
I am missing...

~~~
joshu
Yeah, I'm trying to figure this out myself.

~~~
citricsquid
He only casually mentioned it (Twitter link here:
<https://twitter.com/#!/notch/status/110068027608932352>) so I too have
absolutely no idea.

------
paulhauggis
I hate when they bring up Warren Buffett. He skirted the US tax laws for the
majority of his life and now that he's older, he wants everyone to pay more in
taxes.

If he really cared, he would have fought for higher tax laws earlier in his
life.

~~~
blcArmadillo
Agreed. Obama recently spoke at the university I attend. At one point in his
speech he mentioned that Buffett's secretary told him that they have a higher
tax rate than Warren Buffett. Then literally two minutes later in his speech
he praised Warren Buffett for addressing the issue of needing to increase
taxes on the wealthy. What a joke.

~~~
drewblaisdell
I don't see the problem here. Warren Buffett pays the 15% capital gains tax
and wants to see it increased. Are you criticizing him for not paying _more_
than he is taxed?

~~~
adharmad
If its a good idea after the government makes a legislation, surely its a good
idea even otherwise.

------
nh
Not a tax lawyer, but doesn't the Jobs family pay 35% death tax? The writer
intentionally does not mention this. Although this is not income tax, its
false to suggest that they are someway cheating the system.

Edit: grammer

~~~
drewblaisdell
You are referring to the estate tax. The term "death tax" is deliberately
misleading and used as a propaganda term by those who want to repeal the
estate tax.

~~~
Jach
I'm not an admirer of Luntz's work, what he does is evil. His active spreading
of the "death tax" term, however, is one exception. "Inheritance tax" is
better of course, but "death tax" is still better than "estate tax" in terms
of conveying the actual meaning and causing less confusion than "estate tax".
In any case, this discussion has served little utility (especially considering
the GP's question on Jobs' inheritance tax) and I wouldn't mind someone
downvoting the whole comment chain.

~~~
drewblaisdell
Do you really think that spreading the term "death tax" caused _less_
confusion than before? _Really?_

It is a _brilliant_ propaganda term because it makes people think they will
have to pay when their loved ones pass away even if they own nowhere near the
$5 million cutoff (as of 2011) for paying federal estate tax. In reality,
these people are opposing taxes that they will never see.

~~~
Jach
Good point, you've raised some interesting meta-concerns. I guess it's an
interesting philosophical question if a term and its evangelical spread that
brings knowledge to more people while simultaneously confusing a subset of
them is better than never having the term in the first place and leaving more
people ignorant (and thus not confused). I know some people reason by literal
terminology and when faced with experimental fact that a term doesn't
correspond to what they think it means, they still refuse to change their mind
on what they think it means. (Or the inverse of ignoring any evidence
associated with a particular term because they think they apply their prior on
the term alone, not what it means--my poster-child on this is global warming,
every winter you'll hear the same things.)

I don't think it's that interesting that people are actively opposing things
that don't affect them, even if in some cases it's fun to point and laugh.

It is definitely a brilliant piece of viral marketing. You know your right-
wing propaganda is working when even the few progressive media outlets fall
into saying the same things. I'm just not really in agreement with how large
the subset of people confused by the term from the name alone is and I think
most people confused by the term are likely confused by so many other things
that it doesn't matter stressing over the one term causing confusion when the
aggregate should be looked at. This may explain why I used to be a grammar
nazi when I was a young teen, then realized that there are much larger
problems with people's handle on English than problems like typos,
their/they're, u/you, and so on. Unsolicited correction these days is mainly
for trolling and "lulz". I still get deeply annoyed at the most egregious
abuses of English (my pet peeve being the simple then/than), so I can see
where you're coming from now. Unlike you, I have yet to run into anyone
confused by death tax in such a way as you've mentioned. Of course, I think
saying "No, it's not death tax, it's inheritance tax" can mislead them toward
the truth in 3 seconds, while saying "No, it's not death tax, it's estate tax"
doesn't. All these terms go to the same Wikipedia article.

At the very least I think most HN readers aren't confused in the ways you've
highlighted, though they may be misinformed about specific facts like the
amount of the cutoff. Maybe I'm wrong though and overestimating the community
knowledge. If I'm right, then pointing out the potential terminology problems
reduces to a more pedantic point about encouraging habits that will save you
outside the community. Just because most of us are emotionally capable of
handling abusive statements mixed with other comments (2+2=4 you dumbass)
doesn't mean we ought to get in the habit of writing abusive comments.

------
waqf
This should be combined with my even more radical plan for fixing some
irregularities in the year-by-year accounting system for income tax (notably,
the fact that progressive taxation punishes you more for earning nothing for
nine years and then $1m the tenth year, than for earning $100k steadily each
year):

Annually, you calculate how much income you've earned over your entire life
(and of course subtract any deductions you've become entitled to over your
entire life). Then you look that up in a progressive (i.e. convex) tax
function which tells you how much tax you owe for your entire life. Subtract
the amount of tax you've already paid with all prior years' returns, and pay
the difference.

~~~
grecy
I think your suggestion is more "fair" for someone who earns a steady income
every year of their life, but is horrible for people (like me) that drop in
and out of earning money every few years.

Lets say I earn $100k for 5 years, and pay taxes on it during.. then take 5
years break, and only earn something like $10k a year to keep rent ticking
over. So I would have to pay tax on $550k over 10 years... that effectively
means my tax rate during the later 5 years was calculated on earnings of $55k
a year, even though only $10k actually came in. So I have to pay more tax that
I'm earning for those later 5 years. Lets hope I saved a bunch during the
first 5.

Conversely, my brother is a ski bum and has not earned over $10k a year for
the last 10 years. He's actually an Aerospace Engineer, so lets say he now
goes and gets a big-wig job for $200k a year for just 3 years. During those
three years, he'll only pay tax on an (average) income of $53k, even though he
had $200k coming in those 3 years.

It's certainly more appealing to not go to work until the last few years and
earn as much as you possibly can in those years... somewhat like the opposite
of retirement I imagine.

~~~
waqf
You're imagining the tax rates as being much higher than they would actually
have to be (and I think you also missed that the taxes you pay always end up
being a tax-rate proportion applied to the amount you earned that year).
Assume for simplicity that people typically have a 40-year working life.

Then when you earn your first $500k in five years, that will be taxed at a
rate appropriate to someone who earns $500k over their working life (that is,
$12.5k/year). What's the U.S. tax rate at that level, currently? 15%?

So I envision your annual taxes, in your example, as looking something like:

    
    
      Year  1     Earn $100k   Rate 10%   Tax  $10k
      Year  2     Earn $100k   Rate 10%   Tax  $10k
      Year  3     Earn $100k   Rate 10%   Tax  $10k
      Year  4     Earn $100k   Rate 15%   Tax  $15k
      Year  5     Earn $100k   Rate 15%   Tax  $15k
      Year  6     Earn  $10k   Rate 15%   Tax $1.5k
      Year  7     Earn  $10k   Rate 15%   Tax $1.5k
      Year  8     Earn  $10k   Rate 15%   Tax $1.5k
      Year  9     Earn  $10k   Rate 15%   Tax $1.5k
      Year 10     Earn  $10k   Rate 15%   Tax $1.5k
    

You won't move into the 25% band until you've earned something like $1.3m over
your life.

~~~
acslater00
Let's say I earn 100K a year, steady.

When I move into the 25% band after I hit $1.3m in lifetime earnings, do I
have to pay back taxes on the rest of my income that I've been paying 10% on
the whole time? If so, then I'm going to owe about 200,000 that year, which is
more than my income. "smoothing" not the word I would use here.

Or, do I just start to pay 25% going forward? If so, your plan amounts to a
massive tax cut for young people and a massive tax increase for retirees. As a
young person, I can live with that, but it's absolutely terrible public
policy.

~~~
waqf
25% going forward.

When you introduce the system, of course, you have to give people credit for
all their past income tax paid. Most people of working age will have overpaid
and will get a windfall in the form of a huge one-off tax credit, which will
compensate them for the higher tax they will pay later in their lives.

If letting people hold onto their money early in life and give it to the
government later is considered to be undesirable public policy, it would be
possible to even out the tax by including tax deductions based on age. For
example, when computing your lifetime taxable income, subtract a "lifetime
personal exemption" of $4k times your age. This causes no problems other than
that your annual tax bill could potentially be negative (if you earned less
than $4k that year).

------
pfedor
In case you wonder what the term "superwealthy" means in practice, the HEART
Act of 2008 could offer some help. The act introduces a mark-to-market tax for
people who wish to give up their citizenship, as well as long-term Green Card
holders if they give up their Green Card. To prevent the super-rich from
avoiding taxation. Senator Kennedy called it "the billionaires' amendment".

Now who is a billionaire according to Senator Kennedy? Anyone with (a) the tax
liability above $139k on average over the past five years (inflation
adjusted), or (b) the net worth above $2M (not inflation adjusted).

Hope that helps.

------
sunsu
Taxing someone based on their unrealized gains only makes sense if you have
liquidity! Instead of making the tax system more complicated with propositions
like this, we should just switch to a consumption based tax system.

~~~
chii
A consumption based tax unfairly places more tax burden the poor, who is less
likely to be able to afford it.

~~~
kansface
The tax doesn't have to be flat- luxury goods can be taxed at a higher
percentage.

~~~
chii
And who gets to decide what is "luxury goods"? I think consumption tax is
still considered unfair, whether it's tweaked to be "unfair" to the rich, or
"unfair" to the poor.

------
cperciva
Do I understand this correctly? If an American sells an asset the day before
he dies, he pays tax on it, but if his widow sells the exact same asset the
day _after_ he dies, she doesn't pay any taxes?

I think the colloquial phrase for that is "fucked up".

~~~
jessriedel
As far as I can tell, the entire problem can be solved by just fixing this
flaw. You don't even have to tax most of the estate, just tax realized gains
by the widow/heirs when they sell the stock. And this entire 100 comment+
thread can be avoided.

Or am I missing something?

~~~
cperciva
Yes, eliminate the "tax cost of asset gets reset by death" rule and the entire
problem evaporates.

Which, incidentally, is exactly what Canada does in the case of assets
inherited by a spouse. (Assets inherited by non-spouses are usually but not
always considered to be sold at market value, resulting in a tax bill for the
estate. I am not a tax lawyer and this is not legal advice.)

------
jerfelix
This article has a fundamental flaw. It starts with the premise that some
outrageous tax revenue level is necessary, and from that premise tries to
analyze the fairness of the existing tax code.

There's one thing I would really like to understand. I've been mulling this
over for a couple of months, and I'm coming to the conclusion that a vote in
favor of ANY tax is immoral.

If I cast a vote for a tax, I am voting in favor of taking money from someone
else, with the force of gunpoint and the threat of prison. How can that be
moral?

Since coming to this conclusion, I have tried to find arguments, and they
usually start with "well, we need to have a tax, or no one will pay." (Romney
even said that in one of the debates.) But I can't find any proof to this
statement, and I find lots of things that disprove it.

1) The United States was founded with a volunteer militia funded completely
voluntarily. (And at the time, citizens had to pay tax to the enemy of the
revolution, England.)

2) Numerous organizations ranging from charities, to huge churches that have
survived several millenniums, to a complete country (Vatican City) are funded
voluntarily, and do that quite successfully.

3) Free people freely give to causes that they believe in. And people believe
in freedom. It would not be a hard sell.

The whole argument that we have to get more from the rich (or more from
anyone, for that matter) is standing on this shaky ground - that somehow it's
moral for "the majority" to steal from others through a diffuse system of
voting, representatives, laws and organizations like the IRS. But it's you and
me, stealing from other people, and using organizations like the IRS and the
police force as our weapons. And that can't be right.

Honest question: Can someone convince me that it's not immoral to vote for a
tax? Please don't down-vote me for asking a question, because I am honestly
trying to understand. If you disagree, help persuade me.

Edit: I WANT to pay for freedom. I DON'T want to FORCE someone else to pay for
freedom (which has an obvious contradiction).

~~~
chubot
Well, for starters, where did you even get the concept of "money" from? That's
not "yours"; you didn't invent it. Someone else gave it to you. It essentially
came from the same place that gave us taxes.

The premise that "taking money from someone else" is inherently immoral is
trying to assume an impossible ideal that each person is an autonomous being,
and that our lives aren't inextricably interwined with everything around us
(or at least that's as much as I can gather from your reasoning). Would you
also agree that a police officer arresting a citizen is immoral under any
circumstances?

Now I don't necessarily disagree with your notion that taxes are unnecessary
(or at least some taxes). I'm sure that it's possible for the government to be
at least an order of magnitude more efficient. One somewhat surprising thing I
learned (from Ron Paul) is that the income tax didn't even exist until the
20th century. So it's far from clear that it's even necessary.

But I would not start with the assumption that money is a inalienable right.
And I don't really understand your alternative. Who is going to beg others to
fund things like roads and sewers and subways and food inspection? Fund-
raising costs money.

Also, there are a few things that are most efficiently done by a government
monolopy -- i.e. it's not practical to have 5 competing subway systems in NYC.

So anyway, I think you're trying to come down too conclusively on one side,
whereas the answer is probably more mundane and in between.

(Also, I think you are being slightly dramatic in that in all likelihood no
will point a gun at you if you don't pay your taxes. More likely you will get
a bunch of letters from IRS over many years.)

~~~
rayiner
> One somewhat surprising thing I learned (from Ron Paul) is that the income
> tax didn't even exist until the 20th century.

Before the 20th century, the majority of Americans lived in rural areas
working on small farms. Industrialization dramatically increased the level of
division of labor in the society, and of course as you increase the degree of
social inter-dependence, it's no surprise that your organization overhead
increases, super-linearly.

If we were talking about any system other than the political system, the
proposition that bigger, more complicated systems have exponentially-
increasing amounts of organizational overhead would be completely
uncontroversial. It's a phenomenon that us engineers see in systems
constantly. Yet, when we see it in the political system, we assume something
is wrong.

When I work on a small farm, and you work on a small farm, we don't need an
EPA. When we live in a city and your factory dumps poisons into our shared
river and makes my kids sick, we do. When we work on small farms, we don't
need an SEC. When we work in the city and our savings consist of securities
rather than silos full of grain, we do. When we make all our own clothes we
don't need a Consumer Products Safety Commission, when we grow our own food we
don't need an FDA, when we work for ourselves on our own farms we don't need
an NLRB or an EEOC. When we ride horses to work we don't need an FAA. When we
don't depend critically on Middle Eastern oil we don't need a very big Army.
When people die naturally of old age at 45 we don't need Social Security. When
small, stable, farming communities take care of their poor we don't need
Medicaid.

------
kiba
At this point, congress should be focusing on cleaning up the tax code, not
trying to tax Zukerberg.

What's unfair is that we got a byzantine taxation system with all sort of
exceptions, subsidy, loopholes, plugs, punishment, etc.

~~~
rayiner
That's kind of like saying we should rewrite the Windows codebase because it
has all sorts of patches, hacks, etc. Do you have any evidence on how much
those things are actually costing us?

I don't (I'm not the one making dramatic claims), but my hunch is that most of
the real revenue losses in our tax system are from some broad failings, not
little loopholes. Our ridiculously low capital gains rate, for example.

To the point of the article, there is actually a deep-running theoretical
difference between various realization schemes. This isn't just "trying to tax
Zuckerberg" but rather figuring out how to properly compute "income = net
accession in wealth." The theoretical amount subject to tax is: Gain = Net
income + Delta(value of property). Theoretically, you could compute the latter
term at any interval you like (every year, etc). As a general policy we
compute the term at sale of property because it's the easiest time to do so
(the valuation is fixed precisely by a market transaction). But for something
like a publicly traded stock, that rationale carries much less weight. And the
counter-veiling concern of ensuring that the amount does get fairly taxed
(instead of being held on-to indefinitely) probably outweighs that rationale
in this case.

------
JOnAgain
The one aspect I'm not seeing anyone mention here is the very real
implications this has for the company in question. I don't have the numbers,
but a tax like this could (and probably would) cause Zuckerberg to no longer
have control of Facebook since he had to sell shares. Or Bezos to lose control
of Amazon, etc.

I, for one, think this is a big negative.

------
jimmyhwang
What concerns me about Mr. Miller's proposal is that if we went to a marked-
to-market and in year 1 the stock gained 100%. Then let's assume that provided
the government with $5Bil in taxes, the government would spend that money like
a kid in a candy store. Then what would happen if that stock lost 50% of it's
value in year 2? How would the government have the funds to "refund" that
$5Bil back? Would they just print more money?

This idea doesn't take into account how volatile the market is and the nature
of government to spend during any surplus. Not to mention all the overhead
needed to find fair "marked-to-market" values for pre-IPO companies.

And as other comments have stated, if this were to happen, what would be the
motivation of CEOs to drive the price of the stock higher? Wouldn't it be in
their best interest to keep it low so their tax bill would be lower?

------
Aloisius
Or you could simply regulate loans made using stocks as collateral by either
setting the minimum APR to say 20% or making the whole practice illegal.

Seems a lot easier than getting a new tax passed (loans are well regulated
already) and won't harm the poor guy who is paper wealthy but can't actually
sell his shares.

~~~
enjo
I'm still trying to figure out where they get the money to pay off the loan.

~~~
ibejoeb
I believe the implication is that it is simply cheaper to refinance.

------
greenyoda
"If Mr. Zuckerberg never sells his shares, he can avoid all income tax and
then, on his death, pass on his shares to his heirs."

Assuming that Zuckerberg has a normal life expectancy, what's the probability
that Facebook will still be around in 60 years? Not very many corporations
have lasted that long.

~~~
kansface
This is the risk the banks take using shares in a tech company IPO as
collateral. How does this weigh in on the proposed tax?

------
MarkMc
All the comments on this thread agree that the proposed tax rule sucks, so
they prefer the existing capital gains tax rules. But there is a third option
which I think would be the best.

There is clearly a problem with the current capital gains tax rules because it
favours people who hold their shares over those that trade frequently, even
when the rate of return is the same.

For example, suppose I have two trading strategies: Strategy A buys shares and
holds them for 20 years. Strategy B buys shares but trades them once a year
for 20 years. Also assume that both strategies produce an annual capital gain
of 10%. With the current capital gains rules, Strategy A pays far less tax
overall than Strategy B - distorting the market and leading to inefficiencies.

So here's my proposal: make the capital gain percentage a function of the
duration of the investment and the average rate of return. For example:

If your investment return was 10% over 1 year your capital gain tax is 15%

If your investment return averaged 10% over 3 years your capital gain tax is
16.23%

If your investment return averaged 10% over 20 years your capital gain tax is
28.21%

If your investment return was 20% over 1 year your tax capital gain is 15%

If your investment return averaged 20% over 3 years your capital gain tax is
15.94%

If your investment return averaged 20% over 20 years your capital gain tax is
21.30%

etc...

Ok, it's not the simplest tax rule, but it would greatly reduce the distortion
of the current capital gain tax system.

------
Sniffnoy
"Some would argue that it is inherently unfair to tax “paper gains” before
they are realized — Mr. Zuckerberg won’t receive $28 billion in cash; he holds
only paper. Moreover, markets are inherently volatile; one year’s paper gains
is another’s real losses. However, these arguments are far less credible when
paper losses give rise to real tax refunds."

Wouldn't it be simpler and more consistent to get rid of these tax refunds,
and have neither paper gains nor paper losses taxed or refunded, than to have
a separate tax for gains and refund for losses?

------
chi_h
To me, the loophole seems to be 'Now his widow can sell those shares without
paying any income tax on the appreciation before his death. She would have to
pay taxes only on the increase in value from the time of his death to the time
of the sale. '

Why doesn't the widow need to pay taxes on the increase from the original cost
basis to time of sale? What is the reasoning for resetting the cost basis to
'value at time of death', when no taxes are paid at that time?

------
jbarham
Sounds like the perfect get-rich-quick scheme:

1\. Buy a publicly traded company 2\. Surreptitiously drive it into bankruptcy
while maintaining semblance of fiduciary duty 3\. Collect refund from
government from loss in share price

Oh wait, they've already done that:
<http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program>

------
chris_dcosta
This could never work in practice because it would unfairly penalise founders
of small companies whose share value may not be so spectacular.

The principle of paying tax on a notional value (which is what the market
share price effectively is) is crazy - as the author points out the value can
go down. Who's to say that it doesn't go through the floor at some point,
which by his reckoning would allow for you to claim some of the tax back? Talk
about volatility - you would want the stock to be massively unstable!

The author suggests that selling stock to pay for a tax bill as a solution -
but that sale would also be taxable. Therefore you could never fully pay off
your tax bill, and what would happen if you ran out of shares to sell?

I think the rot stems from the practice of lending where shares in public
companies are used as security. This is not security at all and should be
stopped. The impact would be clear it would force companies to either pay a
(taxable) salary to it's founders and directors (like SMEs) or let them sell
shares to realise income.

------
fragsworth
Taxing the super-rich is rife with problems. They will find other ways to
avoid taxes. The only tax that makes sense to me is a sales tax on luxury
goods. Let them keep their money however long they want. It doesn't affect
anyone: until they buy that yacht that takes 100 man years of labor to make.
Charge big taxes on those yachts, etc.

~~~
neworbit
Why wouldn't they then lease it, or have it owned by some foreign entity not
subject to local/national taxes, or have an exemption lobbied into existence
for this particular yacht? Cargo ships get flagged Panama or Liberia for
roughly this sort of tax-dodge reason, I would think luxury craft would fare
the same...

------
capkutay
I still don't see the appeal of raising taxes for the wealthiest income
bracket. Do people expect faster lines at the dmv and world class public
schools to suddenly appear once we start taxing the rich more?

------
jpdoctor
How does this tax lawyer know that:

 _The $5 billion he will receive upon exercising those options will be treated
as salary_

Was it in the S-1 that Zuckerberg did no tax planning?

------
jklp
> He could sell some shares to pay the tax (and would be > left with over $20
> billion of Facebook stock after tax), > or borrow to pay the tax. > > If his
> Facebook shares decline in value next year, he’d > get a refund.

What happens if the market goes through a downturn and the government has to
refund all the superwealthy their taxes?

I can imagine this working well in a bull market, but when a bear comes around
the corner it could be disaster for the budget.

------
patrickwiseman
The simpler solution to the proposed problem is an estate tax on capital
holdings. This could be done by simple requiring the shares be sold on death
and repurchased in the beneficiaries name.

Mark-to-market adds voodoo to tax valuation, has the government managing
investor cash flow, and rewards investment losses more than the current
system. Why reward poor market performance?

Personally, I think this seems like a suggestion for bad governance trying to
appease wealth envy.

------
newbusox
If anyone would like a more detailed investigation of this topic, there's a
good article on SSRN by another tax professor
(<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734601>), or Miller's
own more expansive article
([http://www.cadwalader.com/assets/article/120505MillerTaxNote...](http://www.cadwalader.com/assets/article/120505MillerTaxNotes.pdf)).

------
rmnoon
By only taxing publicly traded equity, it seems like they'd also hit small
retail investors pretty hard too, while only serving to retard valuable new
IPOs even more.

------
kevingadd
The idea of owing tax the moment a company goes public seems tremendously
stupid. Not a single person I know who's had shares in a company that went
public was able to sell them immediately. They all had to hold onto them for
some set period, and some of them actually had to pay tax on the gains before
they could even sell the shares (to get the liquid capital to pay the tax).
Maybe I'm missing something?

~~~
rprasad
Yes, you're missing that management gets to choose the "lockout period" before
existing shareholders can cash out. Usually, management imposes a 6 month
lockout period but exempts management (i.e., board or executives)

Mr. Zuck _is_ management at Facebook.

As for the taxes, you're thinking of the imputed income from exercising
options at below the market price of the shares when exercised (i.e., an
option to buy a $10 share of PublicCo for only $2 is $8 in imputed income b/c
you could then immediately sell the shares for $8 in gains).

~~~
jonburs
It's the underwriters of the IPO that impose the lockout periods, not
management. The lockouts apply to all pre-IPO shareholders (excluding shares
explicitly included as part of the offering).

Lockouts may also include provisions that any early release granted to
management or dominant shareholders must also be granted to all other parties
on equal terms; that was true of the one lockout agreement I was subject to.

~~~
rprasad
And management chooses the underwriters, who therefore will conform their
requirements to management's demands, _as they have here_.

Underwriters frequently try to impose lockouts, but its the management who
actually sets the terms, which is why some lockouts are as short as 3 months
while others are as long as 9 months. There is no requirement that the
lockouts apply equally to management/dominant shareholders and other
shareholders, though management frequently accept such restrictions b/c its
not usually worth the cost to carve out such an exception.

------
Drbble

        Our tax system is based on the concept of "realization."
    

Interesting that the same system that un-taxes the original corporate owner
(Zuckerberg, Jobs) punitively taxes rank and file staff who exercise options
in pre-IPO stock as "realizing" gains as "ordinary income", even though the
stock is illiquid.

------
temphn
According to many people in favor of higher taxes, quantitative easing has no
ill effects. Why don't they just ease $5B into existence?

And why don't people concerned with "unfair" taxes call for Gaga's rate to be
lowered rather than Zuck's to be raised?

Miller doesn't seem to understand that the superwealthy also tend to be highly
intelligent and resourceful. They are not stationary targets. A tax like this
would push growing startups to grow outside the US a few years before IPO. A
multinational can change its base of incorporation, and many people can and
will change their citizenship over a million bucks, let alone a billion. This
kind of foolish proposal would just drive more US businesses overseas.

~~~
phillmv
Tomfoolery.

>According to many people in favor of higher taxes, quantitative easing has no
ill effects. Why don't they just ease $5B into existence?

It increases inflation. Right now, it's better to have more people
employed/have the economy growing than it is to have inflation below 2%.

QE isn't exactly a progressive tool of choice, and I'm only minimally
informed, but iirc that's the broad keynesian view as to why in theory it's at
least _better than doing nothing at all_.

>And why don't people concerned with "unfair" taxes call for Gaga's rate to be
lowered rather than Zuck's to be raised?

Because I'm not worried about Gaga's overall income. In fact, she probably
ought to be taxed at a higher rate, because people like her comprise of almost
zero per cent of the population. Cry me a river, in other words; it's not at
her income range we're concerned with inequality.

>A tax like this would push growing startups to grow outside the US a few
years before IPO.

Serious question time. Is this even reasonable?

If Zuck could have saved a cool billion in taxes, what's stopping him from
doing just that?

If I'm say a Canadian citizen and I live in Canada but I own a fuckload of
Facebook stock that qualifies as a salary, where do I file income taxes?

>This kind of foolish proposal would just drive more US businesses overseas.

These kind of astronomical windfall events are extremely rare and as I've
denoted above, what you describe is already currently possible. So… why don't
we already see this?

Other than the fact that you there are many advantages to having lots of
engineering staff located in the United States/North America.

~~~
nhaehnle
> > According to many people in favor of higher taxes, > > quantitative easing
> has no ill effects. Why don't they > > just ease $5B into existence? > > It
> increases inflation. Right now, it's better to have > more people
> employed/have the economy growing than it is > to have inflation below 2%.

There's an orthodox misconception here that is taking some time to be fixed /
properly understood by economists.

Quantitative easing is nothing more than an asset swap for banks. It increases
the reserves in the banking system, yes, but it does not actually put more
money into the hands of people who will spend it in the real economy. Its
effect is at best indirect: it pushes the interbank lending rate down, and
that can increase the pool of potential borrowers. But the effect is marginal
at best.

Note in particular how the "money multiplier" dropped after QE:
<http://research.stlouisfed.org/fred2/series/MULT?cid=25>

~~~
phillmv
Right. I tried to caveat myself, for I forgot the exact reason I wasn't
supposed to like it.

Institutionally, we seem adverse to any sort of intervention that does not go
through a banking intermediary.

------
kansface
What would stop the unscrupulous from creating a shell company, attract
investors at a huge markup for a extremely small share, then declare the loss
the next day (and split the refund check or do the same in return).

------
jacques_chester
Tax-on-profit/refund-on-losses are, in terms of economics equations,
"elegant". It appears to minimise distortion.

But there's two problems in practice.

1\. Hollywood Accounting. "I get a refund for losses? Look how much I lost
this year!" It would just lead to a new round of shuffling deck chairs.

2\. Sovereign Risk. Sure they promise to pay you back. But does anyone
honestly expect that politicians would be prepared to allow a $1 billion
cheque to be cut for a billionaire?

Both of these are why such taxes are neat in theory, economic kryptonite in
practice.

