
Bernie's plan to hike taxes on some startup employees - riazrizvi
https://www.axios.com/bernie-sanders-tax-proposal-973ef0b3-06e8-4a76-b15b-5ecbe1bb2a80.html
======
riazrizvi
These federal policies that don’t account for regional differences in income
are a problem. The salary level where this kicks in is $130k. On the peninsula
in the Bay Area where many people will be effected, the average price of a
home is about 7X the national average. $130k might be a lot where home prices
are $300k, but around here it’s barely a living wage. If your taxed an
additional 40% on a possible $100k that you may never see, then it becomes
poverty level in this area.

Maybe this guy does not know what he is doing?

~~~
gowld
$100k in stock _at vest time valuation_ is an huge amount.

If your are an employee with a quite large 0.05% equity grant _per year_ ,
that's a $2Billion unicorn already that is ready to IPO or buy back shares
from employees.

> around here it’s barely a living wage

I dare you to say that to your janitor or receptionist.

~~~
kdamica
Janitors in SF doing pretty well: [https://www.cnbc.com/2016/11/04/how-one-
bay-area-janitor-mad...](https://www.cnbc.com/2016/11/04/how-one-bay-area-
janitor-made-276000-last-year.html)

~~~
skinnymuch
That guy has some level of seniority so he can work an average of 11 hours a
day, 365 days a year. If you lower that to averaging not working 5 days every
2 months (so still working 56 of 61 days every 2 months), he’d be averaging 12
hours a day.

This possibly makes the case even worse for janitors than help showing how
they fare.

Roughly estimating. If a person has 2 days off per week (weekends) and either
12 or 24 total days off a year from federal holidays, sick days, vacation
days, that is an average of 20 or 21 working days a month.

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unlinked_dll
It's already horseshit that the income is taxed on exercise. Just treat
capital gains as normal income and tax it when the gains are realized as cash.

I hope this doesn't apply to options without liquidity. Otherwise we should
just go ahead and tax scratchers on their potential prize value at purchase.

If this goes through I guess I can't work for a startup anymore. I'm already
paying too much in taxes and rent to build wealth, might as well give up on
innovating for a small company and work someplace that can pay me and give me
options on stocks that I can sell. What a dumb idea Bernie, and I want to vote
for you.

~~~
cjbprime
If it goes through, startups will need to change their employee incentives to
compensate, and companies who don't will find that they're now way below
market rate.

For example: [https://danluu.com/startup-options/](https://danluu.com/startup-
options/)

~~~
pmiller2
Startups are already way below market rate if the market includes public
companies, and you only count liquid stock compensation. The only startups
that even come close are ones that are about to IPO.

------
rawland
From the article:

    
    
      > Sources familiar with the legislation tell me that there
      > could still be tweaks to the language, so don't be
      > surprised if all of this gets addressed. *Particularly
      > given that a top Sanders campaign advisor is Rep. Ro 
      > Khanna (D-CA), whose district includes such Silicon 
      > Valley burgs as Cupertino and Sunnyvale.*
    

I.e., gossip.

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sytelus
If I was founding a new country today, I'd put in the constitution that
governments shall not impose tax more than 33% aggregated in all forms on any
person. Between federal tax, sales tax, social security, tolls, sales tax,
property tax, registration fees, identity fees, license fees etc etc,
governments all over the world have become one money-hungry institution that
have failed to provide proportionally economically efficient services.

~~~
lapinot
> have failed to provide proportionally economically efficient services

This myth appealing to some automagical optimality of "free markets" has been
disproved in real conditions time and time again in domains like healthcare,
transports, telecoms or urban planning. Please don't pull that science string
when discussing societal choices, especially out here where there will be
people contradicting you that probably share your technical knowledge.

~~~
sytelus
Even in the developed world, governments have an enormous amount of process
overheads and forgo optimizations that are otherwise obvious in places like a
startup. This is for a reason aka very high functional guarantees which
require extensive peer-reviews and associated approvals by a long hierarchy of
authority in order to avoid corruption and abuse of its monopoly. This is the
stuff free markets don't have to worry about. This is not a myth and no need
to pull any strings. Anyone trying to prove that governments are economically
efficient agency has a far harder task in theory and practice. This is why
countries that limit government functions to things like defense and
infrastructure often achieve faster and better economic efficiency. The
countries which have expected the government to function like business to
provide any and all services in return of payment called taxes have performed
much worse.

~~~
lapinot
I think it's pretty obvious that we have deeply differing opinions about
social organizations, as such we both have to take care not to resort to
axioms of our respective ideology if we want to talk to each other. In
particular, i repeat my previous point: i do not accept your use of "economic
efficiency" (for me the material well-being is only a part of the goal).
Again, "monopoly [..] the stuff free markets don't have to worry about": no,
free markets tend to monopolies in real-life scenarios. Indeed since wealth
and power distribution is already highly unequal, any kind of structure will
be abusive, with incentives to use its leverage to grow an even bigger share.

> The countries which have expected the government to function like business
> to provide any and all services in return of payment called taxes have
> performed much worse.

Again this i do not accept. For one such a government (which is usually called
socialist) is very far from a business since it is strongly limited in scope
(shouldn't particularly seek expansion) and doesn't seek to extract marginal
profit. Two characteristics which are in contradiction with a consensual
definition of "business". It would be more accurate to describe it as a
cooperative which is very much anti-capitalistic in nature (i assume you agree
that "business" is a capitalistic concept).

~~~
sytelus
You are conflating different issues here. Income equality is not actually due
to free markets. Monopolies in free markets do emerge but in the socialist
system (defined as government providing services in return of taxes other than
infrastructure, defense and health+education safety nets) the government is
defacto army-enforced monopoly. And yes, no system is perfect.

You have perhaps not heard about how governments all over the world have
enriched themselves by monopolizing everything from entire industries, natural
resources to sports teams while promising better services to the public
(spoiler: didn't work out for vast majority except for Norway). You have
perhaps also never been involved in government grants and contracts to see
first hand how extraordinarily inefficient, bureaucratic, slow, irresponsive,
unmaliable, frustrating, insensitive and far behind the time these entities
are top to the bottom.

To anyone dreaming of a socialist system as salvation, I would highly
recommend taking up a year or two of a government job to see how it actually
functions and what are your chances to improve it even a tiny little bit.

------
diebeforei485
This would only further income inequality. Those with family funds to exercise
their options and pay the taxes immediately will be at an advantage.

~~~
jiveturkey
You've badly misunderstood the article. (Maybe the article is wrong tho, and
it's you that got it right. I didn't read the bill.)

This bill changes when taxes are due for non-quals.

You already pay taxes upon _exercise_ of non-quals. So the ability to pay at
exercise does almost nothing to further inequality. In fact it's hugely risky
and in almost all cases, a bad idea that leads to lots of money lost. In that
sense, having the money to pay the taxes (anyway) improves inequality to the
degree that it saps the assets of those with family funds and distributes it
(via programs paid for via taxes) to the less fortunate. The opposite of what
you're claiming, and what is the case today.

This bill changes the tax to become due at _vesting_. It will either not pass,
or will become immediately ineffective as vesting schedules change to a 10
year cliff, with a single [4-year] pro-rata vest upon termination. IOW, for
tax purposes you won't vest-as-you-go anymore. You'll vest all at once upon
termination. If you choose to not buy your options the company will cancel the
option agreement. If you do choose to buy them, the tax consequences are
identical as today. Such a thing would be awful for ISOs but for non-quals it
doesn't matter. For ISOs you want to buy them early as you can. For non-quals
you pay tax upon exercise, so you don't want to buy them as-you-vest anyway.

It's very poorly thought out.

~~~
sidewndr46
It's also hilarious when you think about it. For almost all startup employees,
a long enough time scale reveals that the real value of those stock options is
exactly zero dollars.

This would have people paying taxes on fictional or purported wealth. As dumb
as the tax code is, this isn't even reform.

~~~
dallbee
My understanding of the bill is that the tax would apply to the strike price
value. $100,000 in strike price is quite a lot more than what your typical
startup employee has, and that first $100,000 per year isn't even taxed. For
this to apply to you, you'd have to be receiving a ton of options.

------
awinder
“The bottom line: This isn't about how much people pay in taxes. It's about
when they pay it. It would make more sense for the timing to match the
receipt.”

It may be worse than that, and it may be about how much people pay in taxes.
It’s the same logic as tax deferred retirement accounts. The federal
government is either going to spend capital immediately (no gains) or they’re
going to make very constrained gains. Which makes a ton of sense, for a
government. But if you let wealth sit in the private sector for a period of
time, you can let it grow at rates that vastly exceed, compounded especially,
what the government can pull. The taxpayer will pay more taxes in raw dollars,
but they’re going to end up with more money, both sides are winning.

------
pablok2
So, removing incentives and expecting the same results?

~~~
Supermancho
Incentives augment the motivation to achieve, not determine it.

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hurricanetc
Get rid of corporate taxes, get rid of Roth funds, and treat all capital gains
as ordinary income at the time the gains are realized.

Problem solved.

~~~
thebean11
Why get rid of roth funds? I'm guessing you're super against progressive
taxes?

~~~
hurricanetc
Roth funds are the opposite of progressive. It’s possible to accumulate
millions in roth funds where the eventual net effective tax rate is close to
0%. We already put income caps on roth funds for this reason but it’s just too
easy to game.

More important than that is just normalizing taxes to something people pay
when they realize income instead of this convoluted system we have now.

------
np_tedious
> That means it would be most likely affect employees at later-stage startups,
> where the strike prices are higher.

Putting aside whether or not this is a good idea (I'm sure most of us think it
is not), it surely ought to be measured on fair value MINUS strike price?

~~~
tfehring
The fair value of options is heavily dependent on the strike price to begin
with (see [0]). The wording you quoted from TFA is strange at best, and it's
inaccurate if interpreted literally - an option with a higher strike price is
less valuable than an otherwise equivalent option with a lower strike price.
If anything, I'd expect later-stage startups to issue options with _lower_
strike prices relative to their current valuation (since they have less
remaining growth potential than early-stage startups), which does mean
employees at later-stage startups would be more likely to be impacted.

For what it's worth, you can get far more upside exposure from $100k worth of
options (the maximum tax-free amount per year under this plan) than you'd get
from $100k worth of equity if the options are far out of the money. I'm not
familiar with the specifics of how option values are calculated for early-
stage startups, but I'd expect that a startup worth $20M can issue options
with a strike of $100M and report those options at a fair value very close to
$0.

[0]
[https://en.wikipedia.org/wiki/Black–Scholes_model#Black–Scho...](https://en.wikipedia.org/wiki/Black–Scholes_model#Black–Scholes_formula)

------
CyanBird
Sounds like a non-issue

> Sources familiar with the legislation tell me that there could still be
> tweaks to the language, so don't be surprised if all of this gets addressed.
> Particularly given that a top Sanders campaign advisor is Rep. Ro Khanna
> (D-CA), whose district includes such Silicon Valley burgs as Cupertino and
> Sunnyvale.

> The bottom line: This isn't about how much people pay in taxes. It's about
> when they pay it. It would make more sense for the timing to match the
> receipt.

