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.
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.
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.
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.
> 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.
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.
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.
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.