

The Income Rich Take One For The Team. Thanks! - ssclafani
http://techcrunch.com/2013/01/01/the-income-rich-take-one-for-the-team-thanks/

======
hkmurakami
What's striking to me is how he doesn't even have a grasp of the basic numbers
that affect his returns. This speaks more to a "I am so rich and I made my
money so easily that I don't care what I get taxed at" attitude.

 _> Nothing the government agreed to in the last few days actually affects the
asset wealthy in this country._

The increased tax rate on dividends and capital gains definitely affects the
"asset wealthy" in the country. In fact, both the top income tax rate and the
dividend/capital gains tax rate for those making over $400k has increased by
roughly the same amount [1].

However, complete inaction by government would have increased the dividend tax
rate even more, so that it would have been considered ordinary income (43.4%
top rate) [2]. The legislation passed on 12/31 and 1/1 by Congress definitely
_helped_ the asset wealthy. Oracle pays a 18c dividend per share, and Larry
Ellison owns roughly a billion Oracle shares. The dividend tax savings he'll
receive from this legislation is massive.

[1] The top income tax rate goes from 35% to 43.4% (39.6% + 3.8% health care
tax) and the top dividend/capgains tax rate goes from 15% to 23.8% (20% + 3.8%
health care tax). If person A makes $100MM in salary and person B makes $100MM
in dividend/capgains in 2013, their relative tax rate increase compared to
2012 is about the same: 8.4% increase vs 8.8% increase.

[2] [http://www.atr.org/trillion-obamacare-tax-hike-hitting-
jan-a...](http://www.atr.org/trillion-obamacare-tax-hike-hitting-jan-a7393)

[3][http://www.bloomberg.com/news/2013-01-02/bipartisan-house-
ba...](http://www.bloomberg.com/news/2013-01-02/bipartisan-house-backs-tax-
deal-vote-as-next-fight-looms.html)

~~~
downandout
_If person A makes $100MM in salary and person B makes $100MM in
dividend/capgains in 2013, their relative tax rate increase compared to 2012
is about the same: 8.4% increase vs 8.8% increase._

Michael's point was that person A (someone with a high ordinary income) will
have approximately double the tax bill of person B (someone with capital gains
income) on an absolute basis, and that he believes this disparity to be
unfair.

~~~
smsm42
I'm not sure how to define "fair" but haven't the investment money been
already taxed as corporate profits before they are paid out to investors? I
know some investment vehicles allow to avoid that but most regular investments
do not, as far as I know.

~~~
rprasad
If you want to avoid double taxation, you are certainly free to choose a pass-
through form of entity.

If you choose to create/invest in a corporation, you accept double-taxation as
the cost of the benefits afforded by the corporate form.

~~~
downandout
You guys are all thinking in terms of forming a business and having income
from it. Our tax system doesn't encourage that. Our system heavily
incentivizes people to seek capital gains through (for example) stock market
and real estate speculation.

------
jacoblyles
It amazes me at how far to the political left is Silicon Valley. The startup
ecosystem depends on the recycling of the profits from successful ventures
into new angel investment, venture capital funds, and bootstrapped ventures.
An extreme example is Elon Musk, who famously netted $180 million from the
Paypal sale and put every last dollar into founding Space X, Tesla, and Solar
City. I'm assuming that money was taxed at the long term capital gains rate.
If the cap gains loophole were closed, either Space X or Tesla would have been
stillborn.

Yet Silicon Valley regularly supports candidates and policies that would place
large burdens on the entrepreneurial ecosystem. We have plenty of examples of
high-tax, high-regulation economies around the world with no startup scene.
You can't grow one by punishing success and preventing innovation.

The deal that happened today means the top California cap gains tax is going
up ~11% this year (PPACA, cliff deal, prop 30). That's 11% of new capital for
startups being diverted from Palo Alto to Washington.

(And yeah, I'm flagging this article because I don't like seeing pure politics
on hacker news. But I'll participate while we're having the discussion)

~~~
jacques_chester
> _It amazes me at how far to the political left is Silicon Valley._

Speaking as a foreign onlooker (I'm in Australia), I see more libertarians
than any other stripe, tbqh.

> _Yet Silicon Valley regularly supports candidates and policies that would
> place large burdens on the entrepreneurial ecosystem._

The Bay Area is home to San Francisco, a traditional hotbed of leftist
activism. It's also home to UCB, a traditional hotbed of leftist activism.
Some of the outlying suburbs are ... yes, traditional hotbeds of leftist
activism.

Mix in:

1\. The relatively lower presence of traditional / conservative / "silent
majority" voters who are motivated voters

2\. That leftists are motivated voters

3\. That libertarians are often _not_ motivated voters

4\. That voting in the USA is voluntary and not compulsory

and the electoral calculus suggests that libertarians will be out-numbered by
leftists at the ballot box.

~~~
jacoblyles
>Speaking as a foreign onlooker (I'm in Australia), I see more libertarians
than any other stripe, tbqh.

Paul Graham's informal poll of investors had two-thirds voting for Obama.
That's a stronger lean than the US as a whole. They might be libertarians, but
they're libertarians voting for the unionist/leftist/regulatory party.

~~~
mathieuh
If Obama is what leftist means in the USA (I still don't believe this), then
what would you call a communist? I don't know if there is anywhere else where
the political compass is so skewed. To most people I talked to when the US
elections were going on, Obama is considered the left of the right.

~~~
smsm42
Obama is not a communist by any measure, but he is certainly leftist by any
definition - he is for big government, strong unions, strong government
intervention in economy via both subsidies and taxation, pervasive regulation
of businesses, highly progressive income taxation, abundant welfare services,
nationalized healthcare, redistribution of wealth, identity politics. All are
common characteristic of modern left.

Could you name one mainstream left concept that Obama opposes?

------
Cookingboy
I always thought it's silly for the Congress and WH to be focusing on raising
the tax for the high income people (doctors, lawyers, senior engineers, people
who are well off but still live off paychecks), whom are already paying a very
high effective tax rate. Meanwhile the ultra-rich are mostly untouched by
these new laws and people like Romney can still get away with a 13% effective
tax rate.

The only significant portion of the new law that MAY make an impact on the
uber-riches is raising long-term capital gain to 20% for people who make over
$400k (so actually now even better reason for CEOs to take $1 salary and get
the rest in stocks) and limit deductibles to $250k per family (So hopefully
people like Romney can longer claim the expenses on their horses and
everything else as deductibles).

Well, like MA said, the aspiring rich people took a bullet for the real rich
people.

~~~
_delirium
Side question: are there really senior engineers who make >$400k in salary? I
thought you had to go into upper management to break much above $200k in
actual salary (paycheck, not equity), even in the Bay Area. But I could well
be out of touch with recent developments in Valley pay.

~~~
jspthrowaway2
A lot of people at Google are north of $500k, I've heard. We're talking
engineering and product, not management.

I mean, what would _you_ pay someone like Ken Thompson? There are the outliers
like him, of course, but I've also heard that even the less-known folks do
well.

Though I've heard all of that from Xooglers, it remains anecdotal. I also
remain slightly old-school when dealing with other peoples' salary and give
them respect; I'll freely tell you what I make (if permitted legally), but I
understand people are not as open as I am and I try to respect their privacy.

~~~
dllthomas
Anecdotes are perfectly valid evidence for "there exists", albeit checked for
all the usual biases of any testimonial evidence.

~~~
jacques_chester
The problem here is the distinction between _discrimination_ (there exists X)
and _calibration_ (X is close to true figure Y +/- Z, where Z is inflation
from anecdotal inflation bias).

------
pg
It's pretty impressive for someone running a fund to call publicly for the end
of the carried interest loophole.

~~~
chatmasta
Paul, I have a tremendous amount of respect for you. In many ways you serve as
a role model to me.

But I think you need to be careful calling what Arrington describes a
"loophole." Yes, the people running the funds are the beneficiaries of this
specific "hole" in the tax code. But have you considered that this could be a
loophole by design? In other words, an incentive?

In many ways, _capital_ is the eponymous character of capitalism. Capital
drives our economy. It feeds our society. It's also a good indicator of our
prosperity level.

No economist will argue with the fact that capital begets more capital, and
therefore we should encourage any mechanism that creates it. Normally I avoid
such generalities, but economists accept this as such a simple fact that it
would be impossible for them to disagree with it.

This "loophole" in the tax code is a great example of an incentive for
investing capital. It makes sense to place that incentive in the tax code
because investing capital leads to more capital. Policy makers _want_ people
running funds to "exploit" this "loophole." The tax benefits are a reward for
efficiently "putting the capital to work," so to speak.

If we can agree that this "loophole" in the tax code functions as an
incentive, then I think we should also agree not to call it a loophole. When
we call this a loophole rather than an incentive, we make it appear as though
our profession (well, your profession... I'm still in college) is the business
of exploiting loopholes. That is not what we value and I think we should
respect ourselves enough to avoid this perception.

Thanks Paul -- I hope you find time to read this.

~~~
jacalata
_Of course_ it was created as an incentive, there's a nice justification for
pretty much every line of the millions in the tax code, however it is
considered a loophole because it turns out that it is really easy to
manipulate the structure of investment deals so that all the income is gained
as carried interest, and it even more surprisingly turns out people actually
do this if there's sufficient incentive, so a lot of people now redefine what
would have been 'income' into 'carried interest' in a way that appears not to
have been intended when the rule was created.

If you really want people to respect your profession (I assume you intend to
go into finance?) you should focus a little more on the ethics of what you
actually do and less on how to spin it.

~~~
chatmasta
I have a lot of respect for your comment and do not mean for this to sound
like an _ad hominem_ attack, so please take it as an observation on the
societal state of affairs: what you describe as "spinning" I describe as
"offering my opinion."

I think the fact that you would describe my opinion as "spin" is indicative of
the larger societal disassociation with members of the financial sector.
Because of this, people do not like hearing the financial sector described in
positive terms. So, often when people are confronted with a positive viewpoint
of it, they have no recourse but to caste it as "spin."

Society has harbored a distaste for finance many times throughout history. The
Catholic church even went so far as to forbid usury, preferring to delegate
tasks as inferior as money lending to Jews. Not surprisingly, this distaste
becomes most evident following an economic downturn. Before the current
recession, society's view of "Wall Street" was generally very positive. Now,
things are a bit different.

The fact of the matter is that we do not live in an ideal world. But we want
to move toward one. The best way to do that is through a strong economy. A
financial sector is a necessary part of a strong economy. But I worry that
people discount its value to our country.

As long as people view the financial sector distastefully, we are going to
need to incentivize working in it. Otherwise the only people working in the
financial sector will be people who don't care if they are viewed as working
in the dregs of society. That is not the type of person we want in charge of
the economy.

(FYI - No, I am not going into finance.)

~~~
gte910h
We can most certainly demonize the financial sector.

Making money with money is enough of a lure people will still do it.

------
tansey
Carried interest is just one of the loopholes that hedge funds exploit that
should be closed. When I worked for a quant fund, we were making at least one
trade a day, but because we were trading futures contracts we were mostly
paying long-term instead of short-term capital gains.

------
fossuser
Looks like high income (250k-1.2million)/small investment portfolio people
(doctors and lawyers) are going to be even more screwed since they already pay
high taxes and probably have enormous student loans.

~~~
tobias3
Can't you substract the interest from your income?

~~~
petercooper
Non-American here. Was there/is there a rationale for allowing people to
deduct interest from their incomes? It has always seemed odd to these English
eyes. Is it considered a way to encourage people to buy property/invest in
their education or is there more to it than that? As a home owner, I would
love this deduction ;-)

~~~
cperciva
_Was there/is there a rationale for allowing people to deduct interest from
their incomes?_

Yes. The situation is analogous to borrowing money to invest in the stock
market: Your profit is the profit you make from the stocks minus the interest
you pay on the loan, and that difference is what you pay tax on.

In Canada, a mortgage on a principle residence is not tax deductible, since
Canadian tax law doesn't consider where you live to be an "investment"; this
is balanced by a principle residence being exempt from capital gains tax.

~~~
Kroem3r
If you have a 'home office' then the interest you pay on your mortgage is an
expense, and is thus a business deduction, as are hydro, gas, communications,
etc.

If you have a business that borrows to buy and then rent houses, the same
principle pertains; the interest on the mortgage is an expense.

~~~
ralph
AIUI in some areas if the business claims for part of the main residence as a
home office over a prolonged period then Capital Gains Tax can be due on that
same fraction if there's a profit when the house is sold. IOW, it's not a free
lunch.

~~~
cperciva
I'm not very familiar with these rules, but you're definitely right that there
are some complications. I have a friend who works for CRA and commented that
he would never claim costs of a home office in a residence he owned, simply
because the tax savings wouldn't be enough to make up for the headaches and
tax audits which would result. (Claiming a home office in an apartment you're
renting is much easier, since there's no capital gains to worry about and
there's an easy paper trail for how much the space costs.)

------
btbuilder
There's also the qualified dividend tax rate of 15%.

This is justified by the fact that the corporation will be taxed on any income
that is paid out as a dividend. Therefore the effective tax rate on the income
is the corporation tax plus the dividend tax rate.

~~~
whackedspinach
Is the effective tax rate on the carried interest loophole just the 15%
Arrington mentions, or is it also more?

I ask because we can talk about capital gains tax rates and how low they are,
but we should always talk about effective tax rates, in my opinion. That was
why Subchapter S Corporations were created, I believe.

------
dllthomas
If his tax rate (and those of people similar and better off) did in fact jump
from 15% to 20%, then that sounds like this particular policy change (tax the
rich a little more) was successful and does not, in fact, apply only to the
"income rich". "Tax capital gains much less than ordinary income, even on
other people's money" is a seperate policy decision, which was the situation
before and is the situation now. In fact, the gap closed very slightly - tax
rates on the top income bracket went up 4.6%, whereas tax rates on capital
gains for high earners went up 5%.

One thing that is bugging the hell out of me is the news coverage. They
continually throw numbers around without being at all precise about what the
numbers mean. I saw an op-ed, in the last run, arguing that $250k didn't
amount to aaaalll that much once you take taxes out of it so let's not raise
taxes on those making around $250k - except the $250k figure everyone was
throwing around was post taxes; in pre-tax income $250k was simply not a any
sort of interesting point. Now, we're hearing that capital gains is going up
for people "making more than X", and the like - is that pre-tax? post-tax? is
capital gains counted toward that? These things hugely change the character of
the situation, and I flat out can't get it from the press, and that is absurd.
Similarly, "Extend the Bush tax cuts for people making more than X" - that's
not what anyone was talking about; they were talking about extending for
everyone the Bush tax cuts on the first X dollars of income.

~~~
smsm42
I would assume $250K and other figures relate to AGI (adjusted gross income).
That's how taxes are usually based. As to how to calculate AGI from nominal
salary, there's a reason there are 1.7 million accountants in the US :) US tax
code is one messed up piece of spaghetti code.

~~~
dllthomas
For the $250K figure, you would be wrong. When that number was being cited,
the top tax bracket started at something north of $350K ($366something, IIRC,
but I may not) which wound up being $250k after taxes. This is, of course,
precisely what is bugging me.

------
tezza
Capital gains is a tough one because the "gain" could just move to a foreign
asset

CrunchFund could start being denominated in Pesetas, Roubles, Euro or
Sterling.

The interest deduction makes the effective rate of circa 15% internationally
competitive.

There is still plenty of room to budge 5% say, but beyond that would get
limited returns and capital rehoming.

[http://accf.org/news/publication/an-international-
comparison...](http://accf.org/news/publication/an-international-comparison-
of-capital-gains-tax-rates)

------
jpwagner
If there was no "carried interest loophole" people would have no incentive to
invest money in their own business. Wouldn't this be a bad thing?

~~~
vidarh
The number of companies started in any number of countries around the world
with substantially higher tax rates demonstrate that people clearly do still
have incentive to invest in their own business even if they pay more.

~~~
jpwagner
this is not really a convincing response; starting a company doesn't have to
be capital intensive and you could do it with someone else's money.

~~~
vidarh
You did not make any claims about the amount of money invested. You made a
blanket claim that closing this loophole would remove the incentive to invest
in your own business.

This would translate to investing "someone else's" money too, as that investor
or lender would presumably be looking for a return.

More personally: I've co-founded several companies. Never once was tax
loopholes or tax levels at all any part of my consideration or the discussions
I've had with co-founders or various VC's about whether or not the business
was worthwhile. At most taxes would be some line item buried somewhere in a
spreadsheet amongst other costs of doing business.

Maybe it affects amount of capital available in the market, but it certainly
does not take away the incentive.

------
aneth4
Is there somewhere the detailed effects of the deal are spelled out? I see
conflicting reports over such things as whether the 20% capital gains rate
applies to everyone and which income the 3.8% surcharge applies too.

------
jspthrowaway2
The first thing I thought of when this bill cleared was the recent news
regarding how much Apple pays Tim Cook[1], said to be the highest-paid
executive in the country (in total, not just salary). His big RSU grant isn't
going to begin vesting until 2016, but he now makes $1.36mm and more in
incentives annually (in salary, which is Arrington's point) so presumably this
deal will affect his taxes quite a bit. I'd be curious to know just how much
to put things into a little bit of perspective.

[1]: [http://www.macworld.com/article/2023491/apple-gives-tim-
cook...](http://www.macworld.com/article/2023491/apple-gives-tim-
cook-51-percent-salary-increase.html)

