Do "these people" include entrepreneurs with equity in startups with rapidly increasing value but no way to take money off the table? It doesn't take much to cross "$100m in assets" as a startup, say, $2.5M in revenue at 40x valuation (or $5M at 20x, etc.), even while loss-making.
How should the founders and equity investors in a bootstrapped high growth unicorn that is neither public nor profit-making handle this proposed capital gains tax? Does this mean VC funds would need to set aside arbitrary amounts of cash to cover impossible-to-predict taxes on cap gains during, say, a 7 year window?
It could also make it harder to attract and keep talent, since the earliest stage employees often rely on equity grants as part of their compensation. Does this mean every early stage employee has to have deep enough pockets to cover cap gains tax pre-revenue? And what happens when the company implodes past the look-back for recouping tax overpayment?
It might make sense to focus on closing existing loopholes without creating new burdens and cash flow barriers that could disrupt the innovation and growth ecosystem with unintended second and third order consequences.
---
Edit to add:
It's true that a peeved Wall St donated a fraction to Biden this season relative to the past, and — surely entirely unrelatedly — partnerships and private equity were taken out of the latest incarnation, leaving in publicly traded and the $100M holdings.
If passed, this will be tinkered with, encircling ever more to offset the loopholes inevitably used.
> Do "these people" include entrepreneurs with equity in startups
No it doesn’t, you’re arguing using a straw man here. They need to be publicly traded securities to be taxed as I understand it. Also paying taxes is a public good, even if you’re exceptionally wealthy.
> Also paying taxes is a public good, even if you’re exceptionally wealthy.
That's not in dispute*, and the point is people can experience paper gains without being exceptionally wealthy, or even ramen profitable.
* To be fair, the notion of "tax" being just supposed public good versus requiring transactional value ("no taxation without representation") was a founding issue for the U.S.
These days, instead of citing nebulous public good, perhaps it could be thought of as NOA and SOA fees: Nation Owners' Association fees, and State Owners' Association fees. You can look for a different neighborhood, or contribute to improve this one.
Who are these non-wealthy individuals who can't afford ramen but hold over $100 million in assets of _publicly traded companies_?
> the notion of "tax" being just supposed public good versus requiring transactional value ("no taxation without representation") was a founding issue for the U.S.
This was a representational issue, not non-transactional taxation. Property taxes existed in many colonies 100 years before the revolution.
It is accurate that the latest incarnation*, the supposed Harris version, within that $100 million club, you'd only pay taxes on unrealized capital gains if at least 80% of your wealth is in tradeable assets (i.e., not shares of private startups or real estate).
Not usually mentioned: even for this illiquid group there would still be an additional deferred tax of up to 10% on the unrealized capital gains upon exit.
* Once passed, anything like this is unlikely to escape tinkering until it matches most other versions, that are not limited to "tradable". Look at how worried farms are, for example, another relatively cash neutral but cap gain increasing growth (ahem) business.
> without being exceptionally wealthy, or even ramen profitable
Correction: without SEEMING exceptionally wealthy or even ramen profitable. By, say, kneecapping your own profit. So that you don't pay as much taxes. Which is the entire problem we're trying to solve.
In practice, these people ARE wealthy. Just perhaps not on paper (depending the paper you look at). Of course when you observe their life, they are obviously filthy rich.
So we have an accounting problem. The papers don't accurately reflect the reality.
It’s hard to put into pithy terms but check out Citibank’s former top trader on wealth inequality and why we need to find a way to tax back some of the wealth from the rich: https://youtu.be/TflnQb9E6lw
> They need to be publicly traded securities to be taxed as I understand it.
On the contrary, many variations of proposals (they keep popping up) cover partnerships or other forms of company holders as well.
Even in the Harris plan, though not usually talked about, even for the illiquid not-tradable group there would be a new deferred tax of up to 10% on unrealized capital gains upon exit. To be fair, "exit" implies an ability to pay that.
"Also paying taxes is a public good, even if you’re exceptionally wealthy."
Can be a public good if it's spent well. The US has spent how many trillions killing innocents the last 25 years? How many trillion were spent building ridiculous layers of redundancy on our nuclear deterrent (that we then smashed)?
This all seems very easy to deal with. Pay employees cash not equity. Founders can negotiate with investors to take enough cash compensation at each round to cover their tax bill. Investors can use financial instruments to hedge their risk.
That’s an awful idea. Startups need cash that cash, now. Wasting it on tax bills for evaluations that don’t become reality would just make everything worse and reduce runways.
Taxing entrepreneurs will lead to worse outcomes for entrepreneurs. That is obvious. Every tax has a cost. But we need to fund the government and it is not fair for workers to pay for everything while much wealthier investors and entrepreneurs do not.
I don't think you have a grasp on how businesses work or how the markets work.
This line of thinking is so far away from reality that while I believe in your heart you think it's right, it's clearly an emotional action and not one based on factual data.
The market volatility, job volatility, international competitiveness, and impact on innovation and entrepreneurship, that this will cause will be absolutely chaotic.
Assuming it works out exactly as you believe, do you believe this will solve the US's financial issues and burdens? Everything i've read say they expect $300-$500 billion over ten years. Let's just go wild and say we get 1 Trillion a Year, currently the deficit for just 2023 is estimated at 1.5 trillion. Again wouldn't solve this issue, and that's assuming we spent 0 on any more social programs or other welfare programs.
Instead, why not focus on specific tax laws you feel are lax and more importantly hold your representatives accountable for the run-away spending? I assume based on your position you would be encourage to spend more on social programs than we currently do? It's noble.. where's the money coming from though? It's all a bit too communistic to me.
We have seen time and time again that laws passed end up impacting the middle class. Congrats, currency inflation continues to run rampant, your house value is through the roof now.... And because you don't have the capital we're going to seize it for non-payment of unrealized gains.
I have yet to see a well thought out logical response to the impacts this sort of emotional lawmaking will bring.
Can you counter the above genuinely? I truly want to understand.
How should the founders and equity investors in a bootstrapped high growth unicorn that is neither public nor profit-making handle this proposed capital gains tax? Does this mean VC funds would need to set aside arbitrary amounts of cash to cover impossible-to-predict taxes on cap gains during, say, a 7 year window?
It could also make it harder to attract and keep talent, since the earliest stage employees often rely on equity grants as part of their compensation. Does this mean every early stage employee has to have deep enough pockets to cover cap gains tax pre-revenue? And what happens when the company implodes past the look-back for recouping tax overpayment?
It might make sense to focus on closing existing loopholes without creating new burdens and cash flow barriers that could disrupt the innovation and growth ecosystem with unintended second and third order consequences.
---
Edit to add:
It's true that a peeved Wall St donated a fraction to Biden this season relative to the past, and — surely entirely unrelatedly — partnerships and private equity were taken out of the latest incarnation, leaving in publicly traded and the $100M holdings.
If passed, this will be tinkered with, encircling ever more to offset the loopholes inevitably used.