

Senator Baucus Speaks in Favor of 0% Capital Gains Tax Rate for Startups - grellas
http://www.startupcompanylawblog.com/2010/07/articles/tax/senator-baucus-dmont-speaks-in-favor-of-0-capital-gains-tax-rate-for-startups/

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sachinag
This is a terrible idea. Big companies would set up a shell corporation for
every single thing.

I'm all for lower tax rates, but only in general and when they're paid for. I
can't support a new loophole just because it's tailored to my particular
special interest.

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asdf333
you could probably stop that by saying small businesses owned by corporations
can't claim this deduction.

you could say over 3/4 of the corporation must be owned by individuals or it
doesn't qualify.

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gojomo
Private tax arbitrageurs are faster than the regulation-writers. It doesn't
have to be ownership for the effective benefit to flow to larger, more
established organizations.

This might encourage lots of outsourcing to 'startups' that qualify for the
tax advantage. But since a guaranteed flow of big-company business removes all
risk, the big companies will negotiate a lower rate and/or exclusive deal to
make the 'startup' a de facto division -- capturing much of the tax benefit
for themselves. Then, acquire the 'startup' at year 5 to make a tax-free
payment to the 'startup' management.

It doesn't even require conscious scheming to achieve this -- the nudge of the
tax code will generally push certain kinds of business in these directions,
for certain timeframes, regardless of whether that's the wealth-maximizing (or
even jobs-maximizing) outcome.

One low tax rate for all economic activity lets the essential factors of
production -- as changed over time by culture and technology -- influence
organization choices, rather than the passing favor/disfavor of legislators.

There should be a strict complexity budget applied to the tax code: let's say
about 10KB ASCII text. Adding new special treatment would require taking old
special treatments out.

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j_baker
I'm not necessarily sure this is a good thing for startups. I see this as
having the potential to create a dotcom bubble part II.

Once you grant this kind of tax break, you're encouraging a lot of people who
aren't really interested in or know a lot about startups to pour money in.

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drawkbox
Before giving more benefits to one type of business, how about tax all
companies at the same rate instead of giving loopholes to large companies
while small companies and individual contractors end up paying all the taxes.

Everyone should just be taxed at a flat rate.

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ekidd
The 0% capital gains tax for startups was actually part of Obama's platform.
It was in the standard tax plan / business handouts. So if this makes it
through Congress, I would expect the White House to welcome it.

At the time, I thought this was a rather nice idea, because a startup involves
doing a decade plus worth of work in a few years, which tends to run up the
marginal tax rate when you finally cash out.

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chengas123
The article says the stock has to be acquired after March 15, 2010, and before
January 1, 2012. How does this play with vesting schedules? Is stock
considered "acquired" when granted or when vested?

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anamax
And, if it's acquire, does "acquire subject to repurchase restrictions" count?

I ask because founders and early employees often buy at grant time subject to
repurchase. From the company's point of view, it's just like vesting except it
gets the money up front. From the employee's point of view, that purchase (and
the 83(b) filing) lets them start the capital gains clock on their gain. The
down side is that they're out the cost of the stock if the company fails. If
you're early enough, that's not an issue because the price at that point is
negligible.

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kelnos
> From the company's point of view, it's just like vesting except it gets the
> money up front.

I'm not sure if this is standard, but that's not the case for the startup I
work for. I was told that money paid for shares under the early exercise
clause would go into escrow until my shares are vested, at which time the
company gets the money.

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anamax
Thanks for the company point of view - I'd never thought about it.

An escrow account means that the company can do repurchases. I see the logic,
but if the company doesn't have the amount of money that we're talking about,
it is probably dead, so repurchase is moot. Since the only way I see that
money is for a repurchase, not on company failure, I'd never worried about it.

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lsc
personally, I think this whole 'tax capital gains at a lower rate than income'
pushes people to build businesses to dump, rather than building them to run. I
think we'd all be a lot better off if the eliminated the double taxation on
dividends (by making them pre-tax for the corporation) then just taxing all
individual income as income.

Granted... that's just pandering to my own interests here, having built a
company to run, not to sell. (I chose an industry where the standard price to
sell is, well, silly low.) If you sell an ISP, I am told, the going rate is a
year's revenue plus the value of your equipment. Considering that I'm doubling
every six months or so, that just seems silly, and I suspect that lower price
is in part because i'd pay half as much taxes if I sell the company all at
once than if I keep it long enough to pay myself that much in salary.

still, I think capital gains being lower than salary taxes encourages short-
term thinking, and gives publicly traded companies an unfair advantage over
the rest of us.

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ww520
I'd be happy if they just fix the damn AMT, specifically on stock options.

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rhettinger
What we really need is more startups that actually have a capital gain (real
profits in excess of original investment). That would be progress.

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Ras_
Somewhat similar bill in Finland failed recently, because they couldn't
reasonably define "a startup".

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korch
s/homes/startups/

Rev your engines Wall St., here it comes!

Can this please become the foundation of the Internet Bubble 2.0? Just so I
can hope to found a startup that is ridiculous, overhyped, and doomed to have
no realistic business model, and then flip it for a nice multiple to some evil
mega-corp playing shell games in lowering their taxes. Since so many computer
geeks got rich doing this in the Dotcom era over a decade ago, it's only fair
that a new crop of geeks get the same opportunities for advancement.

In reality, this is a terrible idea. It's also indicative of just how out of
ideas our leaders are in fixing The Great Recession. Based on history, the
interfering legislative fixes to the last recession always end up becoming the
engine of the next financial bubble. Lather, rinse, repeat. I am more afraid
of the unintended consequences arising from the executive decisions of a small
number of idiot ideologues than I am of leaving things be and letting the
economy restore it's own natural equilibrium. You might say "well just look at
where so-called free markets got us back in 2008", and I would reply saying
that entire crash was the result of political tampering in the economy, not
the opposite.

Also, Baucus is a political buffoon—just go examine his track record of many,
many years. He is exactly the caricature of the permanent, pandering
politician we want out of Washington. He's the type of guy who only makes
situations worse when he's involved, so something as big as this, I say
whatever it is, if Baucus is involved, cancel it.

