
Facebook’s 99%: Later employees may pay almost double the tax rate - triketora
http://www.insidefacebook.com/2012/02/06/facebooks-99-taxes-restricted-stock-units-rsus/
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simplefish
Just to spell it out - there are three (main) reasons why we would want
capital gains taxed at a lower headline rate:

1) Capital gains are already taxed at the corporate level. People seem to
intuitively understand how this works at the dividend level (dividends are
paid with post tax dollars), but if you do the math, it works precisely the
same with capital gains. (Please note: Tax incidence is complicated. Not all
the corporate tax is borne by investors. Especially in small open economies
like the UK, it's actually mostly paid by the workers via lower salaries.)

2) Speaking of which...capital gains are a tax on investment. Investment leads
directly to increased labour productivity. Productivity leads directly to
higher salaries. If we want employees to be paid a lot, we want, as a matter
of public policy, to encourage investment. At this point the observant will
pipe up "wait, are you saying it's good for the _workers_ if we tax worker
salaries more heavily than capital gains income?!" Yes, that's exactly what
I'm saying, and it's supported by a rich body of empirical and theoretical
backing. Heavy capital gains taxes are the precise policy you'd implement if
you wanted to keep labour poor and unproductive. (If it helps, consider that
investment is saving - it's an accounting identity - and the US has a big
problem with low savings rates, which in turn means that they struggle to get
enough investment without borrowing from overseas lenders. See the problem?)

3) Finally, investment income isn't just already taxed at the corporate level
- it's also already taxed at the personal level too. Imagine two people,
Spendthrift Sally and Frugal Frank. Both work at jobs making $200k/year,
_after tax_. Sally spends all her income on consumption, and saves $0. Frank
spends 75% of his income on consumption, and saves $50k/year by purchasing
stocks which go up in value by 5% per year. After twenty years, Frank has
spent $1m total on stocks now worth a cool $1.7m (clearly he follows the buy-
and-hold school of investing). He is retiring, and wants to sell them all to
re-invest in safer bonds. What tax rate do you think is fair? He made those
investments with _after-tax_ dollars. Do we now tax him again on the result of
those investments? Don't we _want_ people to behave like Frank, instead of
Sally? And if we charge him 15% on his capital gains, he'd end up paying over
$100k MORE total tax than Sally. Does Frank, who has scrimped and saved his
whole life, _really_ deserve to pay more taxes than Sally, who never saved a
penny?

(The analysis becomes more complicated if Frank received the stock as
compensation, instead of purchasing it with his salary. But keep in mind that
he's still (1) taxed on that initial compensation and (2) is deferring
consumption; a responsible choice which we as a society probably want to
encourage.)

~~~
akeefer
To your points:

1) Sure, but effectively _all_ income is multiple-taxed. Suppose I run my own
business, and am paid by a consumer with their money that they earned as
wages. If I turn a profit, I then pay taxes on that income. By this logic, I
shouldn't have to pay taxes, because the consumer that paid me was using
after-tax dollars, so taxing my income from them would be double-taxation,
right? The double-taxation argument is simply not very-compelling because
there's no one true wellspring of money; if there were, you'd just tax the
source and call it good. But reality is way more complicated than that, and
money is always taxed multiple times as it moves around the economy.

2) I don't think you're correct about there being empirical evidence of
capital gains rates affecting those things. For example, see
[http://www.slate.com/blogs/moneybox/2012/01/19/capital_gains...](http://www.slate.com/blogs/moneybox/2012/01/19/capital_gains_taxes_and_savings_rates.html).
As far as I know, there's no credible empirical evidence that cutting capital
gains rates deterministically helps investment or saving, or that raising them
hurts those things. Sure, you can pick and choose examples with those
outcomes, but you can also find plenty of empirical examples where those
effects didn't happen. It's totally misleading to act like that's a settled
question in economics.

3) He's paying more in taxes because he ended up earning more money. So yes,
he deserves to pay more in taxes than Sally, because he earned more money.
Otherwise, you could easily say "Sally decided to work part time and made less
money than Fred. Does hard-working Fred really deserve to pay MORE in taxes
than Sally?" Yes, yes he does; unless you really think that a poll tax is a
good idea, even a flat-tax advocate would have to argue that someone who makes
more money should pay more in taxes.

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simplefish
1) Actually, no. We tax transactions. Your customer is buying a service from
you, and we tax that. When you hire an employee, you are purchasing his
labour, and we tax that.

But if you pay yourself a dividend, there is no transaction. If you own an
asset, and it goes up in value, there is no transaction. (Capital gains tax is
not on the transaction of selling your stock, but on the change in value of
the stock; it's only realized at sale. Some countries do charge a transaction
tax on stock sales, usually called a stamp duty, which is entirely different.)

More generally, we tax things when they change ownership. (We even tax things
when you give them away!) In the case of a small business owner, everything in
the business is owned by you. It's yours. You own the business, the business
owns the couch, therefore, _you_ own the couch. Ownership is inherently
transitive. Even in a large business, everything is owned by the stockholders.
Businesses are not people. (Note: At this point, people usually bring up
_Citizens United_ , despite the fact that the decision does _not_ claim that
businesses are people. Try reading it; it's actually pretty interesting.)

Thought experiment: Can we tax you on the rent you are implicitly paying
yourself for living in your own house? Why or why not? And if we can't tax you
on the value of the rent your house is providing you, why can we tax you on
the value of the things your business is providing you? (Well, obviously, we
can do it because the law says we can. But morally, the difference seems
remarkably theoretical.)

Further thought experiment: Should you be taxed if you hire yourself as an
employee? I'm actually torn on this one. Logically, the answer seems like it
should be "no"; it doesn't matter if you hire yourself as an employee for a
salary, or work for "free" in exchange for equity. Intuitively, it feels to me
like it's okay to tax an owner on his salary but not his dividends. _shrug_
Guess I'm not that logical. :)

2) Yglesias' post is suggestive, but doesn't really prove anything. As I said,
there's a LOT of research on this point, and saying, as he does, "Germany
added a capital gains tax, and their savings rate didn't immediatly change"
does not really tell us as much as he thinks. Germany has also been noted for
extremely low wage growth recently. Clearly the result of underinvestment
caused by their pernicious capital gains tax, right? I doubt it, but it's no
more implausible than Yglesias' argument.

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ck2
Meet Facebook's 1% <http://news.ycombinator.com/item?id=3561273>

Shows you how out of the loop I am about Facebook, I didn't even know who this
was

 _Dustin Moskovitz has a 5% stake in Facebook, which for an $85 billion
company would equate to $4.25 billion. That's around $157 million for every
year of his life._

(if I understand it right, he only will pay 15% tax on that - and Forbes says
he has 7.6% stake, not 5%)

~~~
shalmanese
In the movie, he was the guy trying to figure out if that chick was single or
not, giving Zuckerberg the inspiration to add relationship status to Facebook.

~~~
ck2
Unfortunately I am at least two years behind on movie releases, not even sure
I'd see that film anyway though.

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lurker17
Is the article's bogeyman description of RSUs accurate at all? My
understanding was that an RSU was equivalent an option priced at $0. The issue
is the _exercise_ date, not option-vs-RSU. Lots of public companies (Amazon,
Google, etc give at RSUs). the issue, as jpdoctor mentions in this thread, is
that you pay income tax on the value of stock (minus option price, if any) on
the day you exercise, which is some time between vest date and sell date
(option/stock-holder's choice).

RSUs are only expensive if they vest when the stock is expensive, _exactly the
same as with options_.

In either case, the earlier they vest, the lower taxes are (due to capital
gains tax rates)

The only way I can imagine the article making sense is if Facebook gave
employees _delayed vesting schedules_ beyond the usual 25%/yr, and so stock
grants vested later (at higher market price) than they would otherwise.

Yes?

~~~
sokoloff
An RSU is not exactly equal to an option with a strike of $0, because you
control the exercise date on an option. Not so on an RSU.

The taxable event with options is the date of _exercise_ (or the 83b
election), not the date of _vesting_. The option owner has control over the
date of exercise, meaning they can delay exercise until after the vesting
date.

An RSU, having a "strike price" of $0, "exercises" (and therefore is a taxable
event) the instant it vests.

In both cases, the gain (the surplus of fair market value over exercise price)
is ordinary income and taxed as such.

In both cases, the gains (or losses) after the initial taxable event are
capital gains, and the rules are not as simple as for stocks, but basically,
for employees with typical vesting, hold the shares for a year after exercise
and these gains are long-term capital gains.

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jpdoctor
They almost certainly don't understand the story: It's more likely worse than
they are mentioning.

Most reporters have never heard of the 83B election. tl;dr = Zuck already paid
the tax on his options for exercise, at par (0.001 $/share is typical.)

The tax system is truly brain-damaged.

~~~
RyanGWU82
Isn't that the whole point of the story? Zuck paid income tax on the initial
grant's value (which may be par value), and the stock's appreciation will only
be taxed at the reduced capital gains rate?

~~~
jpdoctor
> _Isn't that the whole point of the story?_

No, it is not. This sentence in bold tells you they do not understand:
"Zuckerberg will be paying taxes on $5 billion in gains from exercising
options." If you don't understand why that is different than my comment, then
you don't understand the issues of the 83B election also.

Now, odds are you a smart person. And that is _my_ point: It doesn't matter
how smart you are; The vagaries of the tax law are so numerous and extreme and
obscure that you can only come to the conclusion: The tax system is truly
brain-damaged.

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furyofantares
Can you please explain it?

~~~
jpdoctor
First, IANAL. Second:

83b election essentially says: Dear IRS, I know I received all these unvested
unexercised options, but I want you to tax me on them as though they were all
exercised when I received them. You do this in the year they are assigned to
you.

Since this is before the company actually takes funding, the shares are worth
some stupidly low number ($0.001/sh). So 1M shares is $1000 of income. Since
he was not making much money, that amounts to maybe $200 of income tax on 1M
shares.

When he goes to exercise the options, _no income tax is paid_ because he
already paid it! He can use those share for ALL SORTS of collateral for the
future. As long as he doesn't actually sell the shares, no income tax is due.

~~~
SatvikBeri
Thanks for the explanation. I'm trying to understand whether 83b elections
would apply to me-I'm an employee who received options that will vest over a
certain number of years. Should I be making a 83b election every time part of
my options vest? I expect the fair market value of the stock in the future to
be higher than when I receive my options.

~~~
jpdoctor
First, I am not knowledgeable enough to provide advice.

With that in mind: My experience is that it makes sense to go the 83b route
before any funding rounds (when the price is 0.001 $/sh).

After that, there is usually decent money going out the door to the IRS. Since
such a tiny fraction of startup shares are ever worth a damn, it just isn't
worth the time, money or hassle.

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jdludlow
Can we please knock off the nonsense of this "Buffett secretary" talking
point? Debbie Bosanke is estimated to make north of $200k per year, while
Buffet is paying capital gains rates. Of course her rate is higher.

~~~
jshen
"Of course her rate is higher."

I think the vast majority of people would expect a billionaire to pay a higher
tax rate than an upper middle class person. I wouldn't call that nonsense.

~~~
jdludlow
I'm sure that you're right, but then the vast majority of people are easily
swayed by cheap political rhetoric. If they're playing by the same rules,
which it appears that they are, then what's the problem? It's not like he
hasn't already paid income tax on that money the first time he earned it, and
his absolute tax bill is vastly larger than hers is.

If not being jealous and covetous of those who make more than I do puts me in
the minority, then I guess that's where I'm at. Sadly, I believe that to be
the case.

~~~
justincormack
Capital gains are not really double taxation. Sure he paid tax, but then he
earned more. Many countries charge income and capital gains at exactly the
same rate, eg the UK does now.

~~~
walkon
How are they not being taxed twice? A company (which has owners) pays income
tax on their profits, so the company and therefore, owners, have less capital
remaining. Then, if the owners want to cash out anything from the post-income-
taxed margin, they'll have to pay capital gains as well.

~~~
jshen
It's not that simple. One could just as easily make the case that workers get
a lower salary due to higher corporate taxes, therefore they should pay a
lower tax rate than owners. In short, it's not at all clear that a higher
corporate tax rate is purely a tax on owners, and nothing else.

~~~
walkon
Employees are payroll taxed, that is different and regardless of the company's
income, net or otherwise.

~~~
jshen
I'm certain the amount of profit after taxes affects the wages a company is
willing to pay. Do you really think they are completely independent?

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alsocasey
Yes, this is truly tragic.

