Warren wealth tax may impact your small business or business planning

[FIPurpose]

And the number of people affected by all the above drama ^ is miniscule and they can afford the CPAs to help them navigate it.

Disagree.

The fundamental problem with all of this is that it's taxing money that doesn't really exist.

Let's take Amazon: $885 billion market cap. Let's say that 1% of shares change hands at a rate of double the current market value. The company is now "worth" 1.77 trillion. Very little of that extra $885 billion has actually changed hands. It only exists in the collective minds of investors. Jeff Bezos, who owns 12%, is going to need to sell A LOT of Amazon stock, especially when you consider the increased taxation on the gains compared to today.

There has to be a buyer for every transaction. The selling that would be required to pull something like this off (considering Bezos would probably need to sell liquid Amazon stock to cover the valuation of non-liquid assets which ARE included) would be astronomical and runs a serious risk of crashing markets.

I'm not saying we should be crying a river for Bezos. But, the idea that this won't affect the rest of us is ridiculous. It will affect anyone who owns stocks, has a pension, etc.

FWIW I'm pro-increasing taxation on the 1%, but when the gains are realized and the money actually exists.

There's already been an explanation that likely a 5-year waiver would be given so that taxes for this could be paid over a longer time period. If Bezos doubles his wealth on his investment and is required to pay 30% tax on it, he would need to sell ~15% of his ownership over 5 years. You said he owns 12% of Amazon so about .36% each year which is about half of Amazon's daily trading volume. No this wouldn't put any drastic downward pressure on stocks.

Everyone worried about all these small rules and boundary cases. That's not the point of a policy proposal. Details get sorted out during committee and reconciliation during an actual legislative session. And while it may be worth discussing some of these problems right now, I haven't seen anyone mention anything that can't be solved by a general rule of thumb that the IRS would put a note out on. For instance, illiquid assets could be measured at 80% of assessed value or stock capital gains could be counted at 90% to account for what the actual sale price would be.

There are plenty of ways to make sure that the bases are covered and that it is as painless as possible. But saying that because it would take a little bit of work to figure out how to tax billionaires and there for it's impossible? I just don't see it. We have computers that can handle most of this work. A little elbow grease and we can make this economy a lot more equitable.

[maizefolk]

There are plenty of ways to make sure that the bases are covered and that it is as painless as possible. But saying that because it would take a little bit of work to figure out how to tax billionaires and there for it's impossible? I just don't see it. We have computers that can handle most of this work. A little elbow grease and we can make this economy a lot more equitable.

If it only takes a little bit of work to figure out how to create and deploy an effective wealth tax why have so many European countries that tried wealth taxes in the past several decades given up on them?

One of the big parts of my job is triaging problems based on which ones I think we can solve given the resources/people in the group and which ones I think we'll throw lots and lots of time and effort at with little to show for it in the end. There are very few hard and fast rules, but one of the useful rules of thumb is that it is much more likely a problem will prove to be solvable if it's either something no one has tried before, or something where others have tried and failed, but we have a brand new technology/approach that none of the people who tried in the past have.

Problems people have been trying to solve for decades with essentially the same set of tools we'd be able to bring to the problem are the ones most likely to turn into time/resource sinks with very little to show for our efforts in the end.

Edit: And just to add, one of the things that makes the job so messy is that it's very hard to prove a thing is impossible or even very difficult, so one often confronts people saying "clearly you just haven't tried hard enough yet."

[FIPurpose]

There are plenty of ways to make sure that the bases are covered and that it is as painless as possible. But saying that because it would take a little bit of work to figure out how to tax billionaires and there for it's impossible? I just don't see it. We have computers that can handle most of this work. A little elbow grease and we can make this economy a lot more equitable.

If it only takes a little bit of work to figure out how to create and deploy an effective wealth tax why have so many European countries that tried wealth taxes in the past several decades given up on them?

One of the big parts of my job is triaging problems based on which ones I think we can solve given the resources/people in the group and which ones I think we'll throw lots and lots of time and effort at with little to show for it in the end. There are very few hard and fast rules, but one of the useful rules of thumb is that it is much more likely a problem will prove to be solvable if it's either something no one has tried before, or something where others have tried and failed, but we have a brand new technology/approach that none of the people who tried in the past have.

Problems people have been trying to solve for decades with essentially the same set of tools we'd be able to bring to the problem are the ones most likely to turn into time/resource sinks with very little to show for our efforts in the end.

The problem with the European wealth taxes wasn't a problem of technology or having a standard way of valuing certain assets. Here's a short interview from Zucman: https://www.npr.org/2019/03/01/699261950/why-a-wealth-tax-didnt-work-in-europe

The main points though are
1. Americans cannot move to a different state to avoid a federal wealth tax.
2. It comes with a 40% exit tax when renouncing citizenship. (US currently taxes Americans abroad, so this isn't really a change)
3. It only applies on wealth above 50MM
4. No asset exemptions. (this was a major problem over time in European implementations)

However, even if no wealth tax is implemented this is good fire power during an actual presidency to raise estate taxes, stock trading tax, and a capital gains sale ( which I think should also be limited to >50MM instead of 1% as discussed).

[Another Reader]

I don't understand why all you people want to raise taxes.  The people in Washington will freely spend whatever they can squeeze out of you on increasingly stupid programs full of waste and fraud.  As frugal people trying to create and preserve wealth, we should instead be insisting that our government be equally if not more frugal.  Medicare as it is today is poorly managed and full of waste and fraud.  Extending it to everyone is just stupid.  Medicare will effectively become another mechanism for the transfer of more of your tax dollars to the pockets of large corporations.

Instead we should be focusing on cutting costs for medical care and drugs.  If we can get the drug companies to sell their drugs here for what they sell them for in other countries, think of how much savings there would be.  The three way war between hospitals, doctors and insurance companies can and should be stopped.  Change the existing regulations and flow of money to accomplish that.  Try this approach first before you agree to more taxes and government control of your life and your money.

[SeattleCPA]

I can't even remember the last time a politician campaigned on the idea of higher taxes.

I don't know about campaigning, but  George H.W. Bush and Bill Clinton raised income taxes... mostly on high income taxpayer since that's the who pays most of the income taxes... Barack Obama raised income taxes on the high income twice... once by repealing the  Bush tax cuts for the wealthy and once for the Obamacare tax.

[SeattleCPA]

No this wouldn't put any drastic downward pressure on stocks.

FYI, Larry Summers isn't so sure about the assertion above. See his op-ed in last week's Washington Post article.

Also remember to do the gross up. If Bezos owes 6% in wealth tax, he'll need to sell 12%... after he pays 50% income taxes, that'll leave him with 6% to pay the wealth taxes.

[FIPurpose]

I don't understand why all you people want to raise taxes.  The people in Washington will freely spend whatever they can squeeze out of you on increasingly stupid programs full of waste and fraud.  As frugal people trying to create and preserve wealth, we should instead be insisting that our government be equally if not more frugal.  Medicare as it is today is poorly managed and full of waste and fraud.  Extending it to everyone is just stupid.  Medicare will effectively become another mechanism for the transfer of more of your tax dollars to the pockets of large corporations.

Instead we should be focusing on cutting costs for medical care and drugs.  If we can get the drug companies to sell their drugs here for what they sell them for in other countries, think of how much savings there would be.  The three way war between hospitals, doctors and insurance companies can and should be stopped.  Change the existing regulations and flow of money to accomplish that.  Try this approach first before you agree to more taxes and government control of your life and your money.

We're talking about raising taxes on the extremely wealthy: the people who own those corporations. If you can somehow think of a way that taxing the .1% to pay for medicare somehow makes them richer, by all means share what that plan would look like.

Medicare is cheaper and has better satisfaction scores than private industry. So I don't know how that is failure.

A great way of controlling drug and medical costs would be to turn our health industry into a government run monopsony. Glad you seem to agree here.

[SeattleCPA]

I welcome the changes proposed by Senator Warren and if my net worth outside of my retirement account is greater than $4m, then I'm happy to pay more taxes because this means that those that are above me in terms of net worth are also paying higher taxes.

Your retirement accounts will be included in your net worth. Also assets your minor kids own.

Retirement accounts are excluded from the mark-to-market accounting.

[Another Reader]

"A great way of controlling drug and medical costs would be to turn our health industry into a government run monopsony. Glad you seem to agree here."

Government programs do not innovate.  The profit motive is what drives innovation. 

Fortunately for us, socialism is not acceptable to the majority of the voters.  Perhaps you can come up with a more appealing alternative.

[FIPurpose]

"A great way of controlling drug and medical costs would be to turn our health industry into a government run monopsony. Glad you seem to agree here."

Government programs do not innovate.  The profit motive is what drives innovation. 

Fortunately for us, socialism is not acceptable to the majority of the voters.  Perhaps you can come up with a more appealing alternative.

You don't seem to have a working knowledge with how the majority of medications are developed. The US government is the one paying for the majority of new drug development. The US government is providing research grants to develop drugs that then are freely handed to private industry. Only paying the cost of manufacture + a little profit for the company that makes it does not remove any profit motive.
Socialism for me not for thee.

[maizefolk]

The problem with the European wealth taxes wasn't a problem of technology or having a standard way of valuing certain assets. Here's a short interview from Zucman: https://www.npr.org/2019/03/01/699261950/why-a-wealth-tax-didnt-work-in-europe

The main points though are
1. Americans cannot move to a different state to avoid a federal wealth tax.
2. It comes with a 40% exit tax when renouncing citizenship. (US currently taxes Americans abroad, so this isn't really a change)
3. It only applies on wealth above 50MM
4. No asset exemptions. (this was a major problem over time in European implementations)

However, even if no wealth tax is implemented this is good fire power during an actual presidency to raise estate taxes, stock trading tax, and a capital gains sale ( which I think should also be limited to >50MM instead of 1% as discussed).

Points #1 and #2 are basically the same point. Europeans could avoid the wealth tax by just establishing residence in a different country, Americans would have to change citizenship and pay a 40% exit tax. (Right now this tax is only 23.8%). I agree this is a significant difference between Warren's plan and previous experiments with wealth taxes. I think that given we're talking about a tax that is going to be on the order of 9.5-10%/year* it'd only take about five years for a billionaire who renounced their US citizenship to come out ahead from paying a 40% exit tax.** However I completely agree that this point is not something we have data one way or another on from previous experiments with wealth taxes.

Point #3 would seem the make the problem of both enforcement and people leaving worse than the european model, not better. At $50M a lot of strategies to dodge a tax are going to be more financially viable than for a person worth $2M, and it's also easier to relocate to another country and still arrange to have all the comforts of home for people with that much money. But it's quite possible I'm simply not following your reasoning. Could you expand a bit on why you think having a tax targeted at only those with more money would be more easily enforceable than on a broader portion of the population?

Point #4 I agree that exemptions tend to increase the economic distortions of a wealth tax, but at the same time the lack of exemptions radically increases the problems of valuing complex assets which you state was not a problem for the european wealth taxes. <-- I'm not sure I agree it wasn't a problem, as lower than expected valuations seem to explain part of why the taxes raised less money than expected.

*Starting with a 6%/year wealth tax, then taking into account the capital gains taxes on selling appreciated assets to pay the tax,  then taking into account taxing capital gains at income tax brackets, then taking into account the plan to raise the top income tax rates back to where in was prior to the Trump tax cuts.

**Assuming 9.1% annual return on investment while paying wealth and increased capital gains taxes or 9.1% return on 60% as much money without paying the new taxes.

[bwall]

I don't understand why all you people want to raise taxes.  The people in Washington will freely spend whatever they can squeeze out of you on increasingly stupid programs full of waste and fraud.  As frugal people trying to create and preserve wealth, we should instead be insisting that our government be equally if not more frugal.  Medicare as it is today is poorly managed and full of waste and fraud.  Extending it to everyone is just stupid.  Medicare will effectively become another mechanism for the transfer of more of your tax dollars to the pockets of large corporations.

Instead we should be focusing on cutting costs for medical care and drugs.  If we can get the drug companies to sell their drugs here for what they sell them for in other countries, think of how much savings there would be.  The three way war between hospitals, doctors and insurance companies can and should be stopped.  Change the existing regulations and flow of money to accomplish that.  Try this approach first before you agree to more taxes and government control of your life and your money.

I think that it is good to raise taxes because I have benefitted from government programs to help provide people a leg up.
Here's how:
1) I got 12 years of good sold education, for free, as did most (but not all) people in this country.
2) I got four years of free university education in Germany. As a foreigner. Free. Then I came back to the USA and engaged in trade with Germany that resulted in lots of taxes being paid in Germany--much more than the cost of my education.
3) I enjoy (mostly) honest police, lawyers and court system that the USA (mostly) provides to business via enforceable contracts. Try enforcing a contract in Italy, Mexico, or even worse, China. I also do business in these countries, so it's not a hypothetical for me.
4) Well educated employees. I learned the value of this by hiring someone who wasn't well educated. Never again.
5) Roads, ports, bridges, airports, etc. which I use every day are in good repair. I've tried to do business in countries without these. Not fun!

None of these things magically appear out of thin air. It takes tax money to make this happen. With more money available I believe that our nation can get better results than we do today. I also believe that the best place to raise money is from people who have money, and this means the rich. If one day I'm blessed enough to be in the 1%, then I am happy to do my part to help others prosper.

[Another Reader]

"A great way of controlling drug and medical costs would be to turn our health industry into a government run monopsony. Glad you seem to agree here."

Government programs do not innovate.  The profit motive is what drives innovation. 

Fortunately for us, socialism is not acceptable to the majority of the voters.  Perhaps you can come up with a more appealing alternative.

You don't seem to have a working knowledge with how the majority of medications are developed. The US government is the one paying for the majority of new drug development. The US government is providing research grants to develop drugs that then are freely handed to private industry. Only paying the cost of manufacture + a little profit for the company that makes it does not remove any profit motive.
Socialism for me not for thee.

And if you take away the profit motive for the pharmaceutical industry to develop the drugs, they will no longer develop them, independent of the source of the development funds. 

The conversation is a waste of time anyway, because it's unlikely what you suggest will ever be passed.  Socialism is just not very popular with voters, and too many people with too much influence in Washington will insure that it doesn't.

[bwall]

I think that given we're talking about a tax that is going to be on the order of 9.5-10%/year* it'd only take about five years for a billionaire who renounced their US citizenship to come out ahead from paying a 40% exit tax.** However I completely agree that this point is not something we have data one way or another on from previous experiments with wealth taxes.

*Starting with a 6%/year wealth tax, then taking into account the capital gains taxes on selling appreciated assets to pay the tax,  then taking into account taxing capital gains at income tax brackets, then taking into account the plan to raise the top income tax rates back to where in was prior to the Trump tax cuts.

**Assuming 9.1% annual return on investment while paying wealth and increased capital gains taxes or 9.1% return on 60% as much money without paying the new taxes.

This is a bluff by billionaires that I'd love to call.

If they renounce American citizenship, where are they going to go and live? Europe? Canada? Japan? Taxes there are hardly lower. Maybe post-Brexit Britain? It's not easy to emigrate, especially if you have no plans anyway to spend billions # 3 to 11, to take arbitrary numbers. Any idea how boring life is in the Caymans or Singapore? Hong Kong is an interesting place to live now, I'd have to admit.

[bwall]

I can't even remember the last time a politician campaigned on the idea of higher taxes.

I don't know about campaigning, but  George H.W. Bush and Bill Clinton raised income taxes... mostly on high income taxpayer since that's the who pays most of the income taxes... Barack Obama raised income taxes on the high income twice... once by repealing the  Bush tax cuts for the wealthy and once for the Obamacare tax.

That's what makes Warren so courageous, IMHO.

H.W. Bush campaigned on NOT raising taxes, did it anyway, and got skewered. And the others... I don't remember them campaigning on raising taxes. W. Bush and Reagan campaigned on lowering taxes (and did) and were loved for it. As far a raising taxes.... who was the last person to campaign on raising taxes?

[FIPurpose]

"A great way of controlling drug and medical costs would be to turn our health industry into a government run monopsony. Glad you seem to agree here."

Government programs do not innovate.  The profit motive is what drives innovation. 

Fortunately for us, socialism is not acceptable to the majority of the voters.  Perhaps you can come up with a more appealing alternative.

You don't seem to have a working knowledge with how the majority of medications are developed. The US government is the one paying for the majority of new drug development. The US government is providing research grants to develop drugs that then are freely handed to private industry. Only paying the cost of manufacture + a little profit for the company that makes it does not remove any profit motive.
Socialism for me not for thee.

And if you take away the profit motive for the pharmaceutical industry to develop the drugs, they will no longer develop them, independent of the source of the development funds. 

The conversation is a waste of time anyway, because it's unlikely what you suggest will ever be passed.  Socialism is just not very popular with voters, and too many people with too much influence in Washington will insure that it doesn't.

Yeah you didn't read what I wrote. Pharmaceutical industry is not the ones developing drugs except in a few rare cases. Saying that Big Pharma no longer gets to have a 1000% increase in prices for no reason isn't socialism. It's simply removing crony capitalism.

[Another Reader]

I think that given we're talking about a tax that is going to be on the order of 9.5-10%/year* it'd only take about five years for a billionaire who renounced their US citizenship to come out ahead from paying a 40% exit tax.** However I completely agree that this point is not something we have data one way or another on from previous experiments with wealth taxes.

*Starting with a 6%/year wealth tax, then taking into account the capital gains taxes on selling appreciated assets to pay the tax,  then taking into account taxing capital gains at income tax brackets, then taking into account the plan to raise the top income tax rates back to where in was prior to the Trump tax cuts.

**Assuming 9.1% annual return on investment while paying wealth and increased capital gains taxes or 9.1% return on 60% as much money without paying the new taxes.

This is a bluff by billionaires that I'd love to call.

If they renounce American citizenship, where are they going to go and live? Europe? Canada? Japan? Taxes there are hardly lower. Maybe post-Brexit Britain? It's not easy to emigrate, especially if you have no plans anyway to spend billions # 3 to 11, to take arbitrary numbers. Any idea how boring life is in the Caymans or Singapore? Hong Kong is an interesting place to live now, I'd have to admit.

These people aren't stupid and the brain trusts that support them will find ways to avoid the taxes.  They will likely just restructure so all of the corporations will be headquartered outside the US and they will minimize their personal assets and therefore the taxation. 

[Another Reader]

"A great way of controlling drug and medical costs would be to turn our health industry into a government run monopsony. Glad you seem to agree here."

Government programs do not innovate.  The profit motive is what drives innovation. 

Fortunately for us, socialism is not acceptable to the majority of the voters.  Perhaps you can come up with a more appealing alternative.

You don't seem to have a working knowledge with how the majority of medications are developed. The US government is the one paying for the majority of new drug development. The US government is providing research grants to develop drugs that then are freely handed to private industry. Only paying the cost of manufacture + a little profit for the company that makes it does not remove any profit motive.
Socialism for me not for thee.

And if you take away the profit motive for the pharmaceutical industry to develop the drugs, they will no longer develop them, independent of the source of the development funds. 

The conversation is a waste of time anyway, because it's unlikely what you suggest will ever be passed.  Socialism is just not very popular with voters, and too many people with too much influence in Washington will insure that it doesn't.

Yeah you didn't read what I wrote. Pharmaceutical industry is not the ones developing drugs except in a few rare cases. Saying that Big Pharma no longer gets to have a 1000% increase in prices for no reason isn't socialism. It's simply removing crony capitalism.

I most certainly did read it.  Money will be found somewhere, if what you state is correct.  Maybe they have to cut the Chinese government in on a share of the profits in exchange for funding.  Who knows?

It's a waste of time to respond to you, as none of what you suggest will ever happen.  If Warren keeps this up, she will be an easy target and all she will accomplish is to guarantee Trump is re-elected.

[maizefolk]

I think that given we're talking about a tax that is going to be on the order of 9.5-10%/year* it'd only take about five years for a billionaire who renounced their US citizenship to come out ahead from paying a 40% exit tax.** However I completely agree that this point is not something we have data one way or another on from previous experiments with wealth taxes.

*Starting with a 6%/year wealth tax, then taking into account the capital gains taxes on selling appreciated assets to pay the tax,  then taking into account taxing capital gains at income tax brackets, then taking into account the plan to raise the top income tax rates back to where in was prior to the Trump tax cuts.

**Assuming 9.1% annual return on investment while paying wealth and increased capital gains taxes or 9.1% return on 60% as much money without paying the new taxes.

This is a bluff by billionaires that I'd love to call.

If they renounce American citizenship, where are they going to go and live? Europe? Canada? Japan? Taxes there are hardly lower. Maybe post-Brexit Britain? It's not easy to emigrate, especially if you have no plans anyway to spend billions # 3 to 11, to take arbitrary numbers. Any idea how boring life is in the Caymans or Singapore? Hong Kong is an interesting place to live now, I'd have to admit.

I agree the bolded is true today, and clearly we don't see a huge exodus of billionaires to other countries. But given the proposed changes in tax law it would likely cease to be the case. Let's take the UK where income tax maxes out at 45% (hardly a low tax country). A billionaire worth 25 billion, largely in appreciated stock with little cost basis (the Bezoses and Gateses of the world) who is spending using the 4% rule (so a billion dollars a year in realized income), would pay $450M/year in taxes in the UK from realized income. Hardly trivial.

Under the Warren plan same billionaire in the USA would pay $1.5 billion in wealth taxes, $600M in in capital gains taxes on the appreciated stock sold to pay for the wealth tax, and ~$900M in "mark-to-market" capital gains taxes* and then another $400M in the $1B in stock sold or dividends received to support their actual ridiculous level of spending. Call it $3.1B in total annual taxes or about 7x the total tax burden they'd pay in a conventionally high tax country like the UK.

To be fair I want to note that over time that would decrease somewhat as more of our hypothetical billionaires remaining wealth will have already been taxed under the mark to market system, resulting in less unrealized capital gains when they sell stock to get money to pay taxes or support income, but the change is pretty gradual and even after all the capital gains have been previously taxed, our hypothetical billionaire would still be paying $2.4B/year or about 5x the taxes they'd owe in the UK.

Now I cannot predict what decisions a US billionaire would actually make in that situation. I know I'd be seriously tempted if I could live someplace like London and reduce my cost of living by 73%.** That said, the super wealthy clearly have different motivations and reasoning than you or me, so who can say.

*Again assuming 9.1% nominate return on investment per year

*(3.7 billion in taxes and spending in the USA - $1 billion in taxes and spending in the UK)/3.7 billion.

[bwall]

I think that given we're talking about a tax that is going to be on the order of 9.5-10%/year* it'd only take about five years for a billionaire who renounced their US citizenship to come out ahead from paying a 40% exit tax.** However I completely agree that this point is not something we have data one way or another on from previous experiments with wealth taxes.

*Starting with a 6%/year wealth tax, then taking into account the capital gains taxes on selling appreciated assets to pay the tax,  then taking into account taxing capital gains at income tax brackets, then taking into account the plan to raise the top income tax rates back to where in was prior to the Trump tax cuts.

**Assuming 9.1% annual return on investment while paying wealth and increased capital gains taxes or 9.1% return on 60% as much money without paying the new taxes.

This is a bluff by billionaires that I'd love to call.

If they renounce American citizenship, where are they going to go and live? Europe? Canada? Japan? Taxes there are hardly lower. Maybe post-Brexit Britain? It's not easy to emigrate, especially if you have no plans anyway to spend billions # 3 to 11, to take arbitrary numbers. Any idea how boring life is in the Caymans or Singapore? Hong Kong is an interesting place to live now, I'd have to admit.

These people aren't stupid and the brain trusts that support them will find ways to avoid the taxes.  They will likely just restructure so all of the corporations will be headquartered outside the US and they will minimize their personal assets and therefore the taxation.

You'd be surprised. I've met many wealthy people and they weren't smarter than I was. Better connected, yes. Richer parents, yes. Richer friends, yes. But, smarter? Not often.

Restructuring outside of the USA but still being the beneficial owner means that they are still subject to USA taxation. As an accountant  explained it to me once, 'you an American and at the end of the day, you're in charge. It's not a winning strategy or winning argument.' The only way to avoid USA taxation in a situation like you describe above would be to renounce US citizenship. 

[FIPurpose]

Points #1 and #2 are basically the same point. Europeans could avoid the wealth tax by just establishing residence in a different country, Americans would have to change citizenship and pay a 40% exit tax. (Right now this tax is only 23.8%). I agree this is a significant difference between Warren's plan and previous experiments with wealth taxes. I think that given we're talking about a tax that is going to be on the order of 9.5-10%/year* it'd only take about five years for a billionaire who renounced their US citizenship to come out ahead from paying a 40% exit tax.** However I completely agree that this point is not something we have data one way or another on from previous experiments with wealth taxes.

Point #3 would seem the make the problem of both enforcement and people leaving worse than the european model, not better. At $50M a lot of strategies to dodge a tax are going to be more financially viable than for a person worth $2M, and it's also easier to relocate to another country and still arrange to have all the comforts of home for people with that much money. But it's quite possible I'm simply not following your reasoning. Could you expand a bit on why you think having a tax targeted at only those with more money would be more easily enforceable than on a broader portion of the population?

Point #4 I agree that exemptions tend to increase the economic distortions of a wealth tax, but at the same time the lack of exemptions radically increases the problems of valuing complex assets which you state was not a problem for the european wealth taxes. <-- I'm not sure I agree it wasn't a problem, as lower than expected valuations seem to explain part of why the taxes raised less money than expected.

*Starting with a 6%/year wealth tax, then taking into account the capital gains taxes on selling appreciated assets to pay the tax,  then taking into account taxing capital gains at income tax brackets, then taking into account the plan to raise the top income tax rates back to where in was prior to the Trump tax cuts.

**Assuming 9.1% annual return on investment while paying wealth and increased capital gains taxes or 9.1% return on 60% as much money without paying the new taxes.

Hmm that's an interesting point. With point 3, I was thinking that the reduced coverage would mean that the IRS would get the bigger bang for the buck. There are only about 84,000 households with wealth above 50MM. This means that the IRS would be able to focus its efforts on fewer families for larger tax incentives than if they had to manage the valuation for a larger class for increasingly smaller tax revenue per household.

Many of the articles I read pointed to the example of France granting an art & antiques exemption. I would think that since we already gather data on CPI, that data collection could be expanded to include other items. Tough to price items value == price paid + or - inflation for that item's category. With the occasional valuation challenge for exceptional items. Then everything is made definite when actually sold.

I think it would take a bit more than 5 years. I don't know what the plan is for qualified dividends. If we keep different rates for qualified vs unqualified dividends, then we may see companies start eschewing stock buy backs and putting more money out as dividends. Still a tax increase on the whole, but not major. Also a billionaire giving up 40% all at once would likely be giving up their position as a majority shareholder (or at least a significant shareholder) That lose of power is half the reason they want to stay wealthy. They'd be losing far more than just money abandoning the country.

There's a 2% wealth tax and then we're adding the mark-to-market additions as well? An additional 15% charge on CG, at your 9% estimate would be an increase of about 1.4%. Let's call it a wealth tax of 4% to make it even.

Wealthy Billionaire leaves US (Starting at 1B) vs Stays and pays tax.
year:     0    1      2       3      4      5       6       7      8       9      10
leave:   .6  .654  .71    .77   .84   .92      1     1.09  1.19  1.3    1.42
stay:     1   1.05  1.1   1.16  1.21 1.27   1.34  1.41  1.48  1.55  1.63

To me, it looks like leaving the US would take closer to 12 years to come back to even. A lifetime in politics. I think any Billionaire that would leave the US over this would likely be making a very poor choice.

[bwall]

I think that given we're talking about a tax that is going to be on the order of 9.5-10%/year* it'd only take about five years for a billionaire who renounced their US citizenship to come out ahead from paying a 40% exit tax.** However I completely agree that this point is not something we have data one way or another on from previous experiments with wealth taxes.

*Starting with a 6%/year wealth tax, then taking into account the capital gains taxes on selling appreciated assets to pay the tax,  then taking into account taxing capital gains at income tax brackets, then taking into account the plan to raise the top income tax rates back to where in was prior to the Trump tax cuts.

**Assuming 9.1% annual return on investment while paying wealth and increased capital gains taxes or 9.1% return on 60% as much money without paying the new taxes.

This is a bluff by billionaires that I'd love to call.

If they renounce American citizenship, where are they going to go and live? Europe? Canada? Japan? Taxes there are hardly lower. Maybe post-Brexit Britain? It's not easy to emigrate, especially if you have no plans anyway to spend billions # 3 to 11, to take arbitrary numbers. Any idea how boring life is in the Caymans or Singapore? Hong Kong is an interesting place to live now, I'd have to admit.

I agree the bolded is true today, and clearly we don't see a huge exodus of billionaires to other countries. But given the proposed changes in tax law it would likely cease to be the case. Let's take the UK where income tax maxes out at 45% (hardly a low tax country). A billionaire worth 25 billion, largely in appreciated stock with little cost basis (the Bezoses and Gateses of the world) who is spending using the 4% rule (so a billion dollars a year in realized income), would pay $450M/year in taxes in the UK from realized income. Hardly trivial.

Under the Warren plan same billionaire in the USA would pay $1.5 billion in wealth taxes, $600M in in capital gains taxes on the appreciated stock sold to pay for the wealth tax, and ~$900M in "mark-to-market" capital gains taxes* and then another $400M in the $1B in stock sold or dividends received to support their actual ridiculous level of spending. Call it $3.1B in total annual taxes or about 7x the total tax burden they'd pay in a conventionally high tax country like the UK.

To be fair I want to note that over time that would decrease somewhat as more of our hypothetical billionaires remaining wealth will have already been taxed under the mark to market system, resulting in less unrealized capital gains when they sell stock to get money to pay taxes or support income, but the change is pretty gradual and even after all the capital gains have been previously taxed, our hypothetical billionaire would still be paying $2.4B/year or about 5x the taxes they'd owe in the UK.

Now I cannot predict what decisions a US billionaire would actually make in that situation. I know I'd be seriously tempted if I could live someplace like London and reduce my cost of living by 73%.** That said, the super wealthy clearly have different motivations and reasoning than you or me, so who can say.

*Again assuming 9.1% nominate return on investment per year

*(3.7 billion in taxes and spending in the USA - $1 billion in taxes and spending in the UK)/3.7 billion.

See bold: That's my whole point exactly! There's only two people in the world who this would apply to! Would they choose London over the USA? How do billionaires tick? As you mention at the end, they're not motivated by money and haven't been for a long time.

[maizefolk]

There's a 2% wealth tax and then we're adding the mark-to-market additions as well? An additional 15% charge on CG, at your 9% estimate would be an increase of about 1.4%. Let's call it a wealth tax of 4% to make it even.

Wealthy Billionaire leaves US (Starting at 1B) vs Stays and pays tax.
year:     0    1      2       3      4      5       6       7      8       9      10
leave:   .6  .654  .71    .77   .84   .92      1     1.09  1.19  1.3    1.42
stay:     1   1.05  1.1   1.16  1.21 1.27   1.34  1.41  1.48  1.55  1.63

To me, it looks like leaving the US would take closer to 12 years to come back to even. A lifetime in politics. I think any Billionaire that would leave the US over this would likely be making a very poor choice.

The math I was doing was for billionaires so they'd pay the 2% wealth tax that applies to anything over $50M, the 1% additional wealth tax over $1B, and then the additional 3% wealth tax to fund the M4H plan for a total of 6% per year.

Since billionaire would by definition be in the top 1%, capital gains would be taxed as income, and Warren would reset the top income tax bracket to 39.6%.* So our hypothetical billionaire would need to sell 9.9% of their assets to clear 6% of their net worth to pay the wealth tax.**

Leave pays 40% in year 0. Stay pays 9.9% of assets in years 1 onward. Both have a rate of return of 9.1%, but stay pays 39.9% of that 9.1% in mark to market capital gains taxes for a net return of 3.62%.

I agree if the change to capital gains rates does not apply to qualified dividends, that'd push the crossover point out a year or two. Also this is the math for wealth over $1B. For people where most of their wealth would fall into the $50M to $1B bucket, the 40% exit tax would be a more effective deterrent.
 

Code: [Select]

Year      Stay Leave
Year 0    100%     60%
Year 1    93.3%    71.4%
Year 2    87.0%    77.9%
Year 3    81.1%    77.9%
Year 4    75.6%    85.0%
Year 5    70.5%    92.7%
Year 6    65.8%   101.2%


*To be clear I don't actually disagree with either of those two changes to the tax code but need to consider their interaction with the proposed wealth tax.

** Gross sale needed to get 6% of net worth as cash to pay the wealth tax assuming a 39.6% tax on assets sold is 0.06/(1-.396)

[maizefolk]

See bold: That's my whole point exactly! There's only two people in the world who this would apply to! Would they choose London over the USA? How do billionaires tick? As you mention at the end, they're not motivated by money and haven't been for a long time.

I didn't say billionaires aren't motivated by money. I think some still are and some clearly aren't. We're in agreement that the results are unpredictable.

You said that there two people in the world this would apply to. I count 19 US-citizen billionaires with net worth's  ~>=$25 billion. Lots more in the $10-25B range. So if half of them are still sufficiently motivated by money to leave in order to pay 1/7th as much in taxes we'd be looking at a huge revenue shortfall relative to what Warren is projecting.

Now I've also heard the argument that the point of a wealth tax is to just get rid of billionaires because they are bad for democracy (more from Sanders supporters than Warren). From that perspective a wealth tax succeeds either if it reduces huge fortunes, or drives them overseas where they don't have an incentive to try to put their fingers on the scale of selections anymore.

But so far the way the Warren campaign has presented the wealth/capital gains/mark-to-market taxes is as a way to raise revenue and that's where I don't think the assumptions behind it don't hold up to scrutiny.

[FIPurpose]

The math I was doing was for billionaires so they'd pay the 2% wealth tax that applies to anything over $50M, the 1% additional wealth tax over $1B, and then the additional 3% wealth tax to fund the M4H plan for a total of 6% per year.

I'm not sure how I keep missing these pieces of the proposal. Somehow I missed that the m4a proposal was for an additional 3%. Ok yeah, I'm not sure I'm for going that far. 3% is reasonable in my personal estimation. Like I said before about strategy, if 6% is what you have to say to get 3, then I'm for it.

[bwall]

See bold: That's my whole point exactly! There's only two people in the world who this would apply to! Would they choose London over the USA? How do billionaires tick? As you mention at the end, they're not motivated by money and haven't been for a long time.

I didn't say billionaires aren't motivated by money. I think some still are and some clearly aren't. We're in agreement that the results are unpredictable.

You said that there two people in the world this would apply to. I count 19 US-citizen billionaires with net worth's  ~>=$25 billion. Lots more in the $10-25B range. So if half of them are still sufficiently motivated by money to leave in order to pay 1/7th as much in taxes we'd be looking at a huge revenue shortfall relative to what Warren is projecting.

Now I've also heard the argument that the point of a wealth tax is to just get rid of billionaires because they are bad for democracy (more from Sanders supporters than Warren). From that perspective a wealth tax succeeds either if it reduces huge fortunes, or drives them overseas where they don't have an incentive to try to put their fingers on the scale of selections anymore.

But so far the way the Warren campaign has presented the wealth/capital gains/mark-to-market taxes is as a way to raise revenue and that's where I don't think the assumptions behind it don't hold up to scrutiny.

Sorry about the mis-quote. You are correct. I should have written differently.

I'd interpreted the 'Bezos' and Gates' of this world' comment to mean $50 billion and above, but we can use the 19 individuals at $25+ billion as a thought experiment:

1) How many of them are over the age, of say, 70 and aren't in the prime consuming years? Presumably they wouldn't have plans for any billions above # 25 and might prefer to live in the USA.
2) How many of them have already signed the giving pledge and therefore, presumably, aren't planning on giving their wealth to their children?
3) How many of them are planning on spending the amount over $25 billion in their lifetime?

I'd bet that items # 1 & 2 would make up more than half of the 19. I haven't researched the numbers, just spitballing here. Oh, wait. The Walton family is pretty high on that list, IIRC, and they're relatively young still.
#3 is impossible to know.

I doubt that people with this level of wealth would be willing to accept a new passport in exchange for, say, the current level of taxation. New country, new continent (unless they move to Canada--but it's getting warmer there thanks to global warming!), new laws, new everything, to save....... money that they were never planning on spending to begin with.

[Proud Foot]

I am glad I found this thread. I have loosely followed the tax portions of her proposals and I feel like this thread has answered a lot of my questions but still left a few unanswered. Maybe I just missed them though.

For the mark to market taxes, how does this work once you cross the baseline for this? Adjusting from your basis to the market could result in a higher tax bill than actual income for the year. Like Cpa Cat said, becoming a valuation expert could be very lucrative.

And the 5 year plan for payments on the wealth tax for cases where individuals are invested in illiquid assets. This might be good for the first couple years but it still has problems as the assets are still illiquid every year. This could be interesting as this could lead to private businesses to either increase leverage or maintain the status quo and not expand and innovate as quickly.

[maizefolk]

The math I was doing was for billionaires so they'd pay the 2% wealth tax that applies to anything over $50M, the 1% additional wealth tax over $1B, and then the additional 3% wealth tax to fund the M4H plan for a total of 6% per year.

I'm not sure how I keep missing these pieces of the proposal. Somehow I missed that the m4a proposal was for an additional 3%. Ok yeah, I'm not sure I'm for going that far. 3% is reasonable in my personal estimation. Like I said before about strategy, if 6% is what you have to say to get 3, then I'm for it.

Okay, well it makes a lot more sense that we were talking past each other before. Glad we could clear it up, thanks!

Even with 3% I worry it would generate a lot less revenue than expected, but I don't think it'd trigger any exodus of billionaires the way 6% combined with the changes to capital gains at the same time would.

Will certainly be interested to see how this all develops.

Sorry about the mis-quote. You are correct. I should have written differently.

I'd interpreted the 'Bezos' and Gates' of this world' comment to mean $50 billion and above, but we can use the 19 individuals at $25+ billion as a thought experiment:

1) How many of them are over the age, of say, 70 and aren't in the prime consuming years? Presumably they wouldn't have plans for any billions above # 25 and might prefer to live in the USA.
2) How many of them have already signed the giving pledge and therefore, presumably, aren't planning on giving their wealth to their children?
3) How many of them are planning on spending the amount over $25 billion in their lifetime?

I'd bet that items # 1 & 2 would make up more than half of the 19. I haven't researched the numbers, just spitballing here. Oh, wait. The Walton family is pretty high on that list, IIRC, and they're relatively young still.
#3 is impossible to know.

I doubt that people with this level of wealth would be willing to accept a new passport in exchange for, say, the current level of taxation. New country, new continent (unless they move to Canada--but it's getting warmer there thanks to global warming!), new laws, new everything, to save....... money that they were never planning on spending to begin with.

Thanks for laying out your thinking like this. For #1, to me it looks like there are a lot of folks on the list in their 40s to 60s (people who made their money from tech in the 90s or 2000s). For #2, I agree a fair number of them will have signed the giving pledge, but as someone suggested in another thread, another potential response to high wealth taxes like this would be to accelerate their charitable giving during their lifetime. This would have some substantial benefits to society but is another outcome that ends with the wealth tax generates a lot less revenue than projected.

For #3 I agree it is impossible to know, but I'd count people like Buffet and Gates who plan to spend the bulk of their wealth on charitable works as people who already have plans for tens of billions of dollars in spending. They're just planning to spend that money for something other than personal gain. Bezos is another odd duck in that he said publicly he wants to convert his economic "winnings" from Amazon into human habitation in space, and is putting about $1B a year into Blue Origin to accomplish that. He's 55 now so if he lives to 80 that'd be $25B in spending on his pet project for the world alone.

Anyway, it sounds like we've gotten down to the crux of our disagreement: how attached are multi-billionaires to their plans for how to use their fortunes (whether for personal gain, multi-MULTI-generational wealth, or achieving some specific change they want to achieve in the world) relative to the benefits of living somewhere like San Francisco or NYC vs Toronto or London.

And I agree with you that, while one can argue back and forth on suggestive evidence there is really no way to know the answer for sure until and unless we actually try it.

[FIPurpose]

I am glad I found this thread. I have loosely followed the tax portions of her proposals and I feel like this thread has answered a lot of my questions but still left a few unanswered. Maybe I just missed them though.

For the mark to market taxes, how does this work once you cross the baseline for this? Adjusting from your basis to the market could result in a higher tax bill than actual income for the year. Like Cpa Cat said, becoming a valuation expert could be very lucrative.

And the 5 year plan for payments on the wealth tax for cases where individuals are invested in illiquid assets. This might be good for the first couple years but it still has problems as the assets are still illiquid every year. This could be interesting as this could lead to private businesses to either increase leverage or maintain the status quo and not expand and innovate as quickly.

My guess is that private businesses of this size would likely be able to move enough of their funds from capital gains to dividends to cover any expected taxes needed. So any company that had a 20% CG increase could instead divert 4-5% as a dividend in order for the owners to cover needed taxes.

I would challenge the notion that somehow company profits are directly tied to innovation. Big companies buy innovation, they don't make it.

[SeattleCPA]

My guess is that private businesses of this size would likely be able to move enough of their funds from capital gains to dividends to cover any expected taxes needed. So any company that had a 20% CG increase could instead divert 4-5% as a dividend in order for the owners to cover needed taxes.

@FIPurpose The above statement is incorrect.

Here's an example that shows how the mark to market ("MTM") accounting works.

Some top one percent person owns a $1M house, holds $2M in retirement accounts, and owns a business worth $1M.

Because taxpayer and spouse are in the top percent, MTM applies.

Applying the MTM math, if the business increases in value by $1M (say because its profits grow from $150K a year to $300K a year), the taxpayers owe $400K in income taxes due to the MTM. (Assuming 40% tax rate.)

Note that taxpayer's actual cash income increased by $150K but the taxes equal $400K. That's why Warren has to let them pay the taxes (with interest of course) over five years.

BTW, if the retirement accounts increase in value by $1M, no MTM triggered taxes. Retirement accounts excluded from MTM accounting.

Also, if the house increases in value by $1M and that increase would be treated as capital gains, the MTM adjustment is also $400K.

P.S. The capitalization factor, essentially a price earnings multiple, that Saez and Zucman used in their research for small businesses was 6.7.

P.P.S. Income on house appreciation that can't be sheltered by Section 121 should be subject to MTM too.

P.P.P.S. That link below to my blog lets you get to the most recent post. It discusses this stuff in detail and provides a bunch of examples.

[MaaS]

My guess is that private businesses of this size would likely be able to move enough of their funds from capital gains to dividends to cover any expected taxes needed. So any company that had a 20% CG increase could instead divert 4-5% as a dividend in order for the owners to cover needed taxes.

@FIPurpose The above statement is incorrect.

Here's an example that shows how the mark to market ("MTM") accounting works.

Some top one percent person owns a $1M house, holds $2M in retirement accounts, and owns a business worth $1M.

Because taxpayer and spouse are in the top percent, MTM applies.

Applying the MTM math, if the business increases in value by $1M (say because its profits grow from $150K a year to $300K a year), the taxpayers owe $400K in income taxes due to the MTM. (Assuming 40% tax rate.)

Note that taxpayer's actual cash income increased by $150K but the taxes equal $400K. That's why Warren has to let them pay the taxes (with interest of course) over five years.

BTW, if the retirement accounts increase in value by $1M, no MTM triggered taxes. Retirement accounts excluded from MTM accounting.

Also, if the house increases in value by $1M and that increase would be treated as capital gains, the MTM adjustment is also $400K.

P.S. The capitalization factor, essentially a price earnings multiple, that Saez and Zucman used in their research for small businesses was 6.7.

P.P.S. Income on house appreciation that can't be sheltered by Section 121 should be subject to MTM too.

P.P.P.S. That link below to my blog lets you get to the most recent post. It discusses this stuff in detail and provides a bunch of examples.

Yikes.

How would a business that's losing money be valued?

[FIPurpose]

I appreciate being corrected, but you're saying that because of the business valuation multiple, the value of a small business would be roughly 7x profit. So every increase in a dollar dividend would be met with about $2.5 in CG taxes. I have a hard time imagining that 1. A small business could sell for 7x (most people that I know that buy local businesses say the multiples run closer to 4x) and 2. that there wouldn't be some formula to create a rolling 5-year average valuation or some way of smoothing a highly volatile business. A business that runs double profits one year doesn't necessarily double in value.

[BicycleB]

I appreciate being corrected, but you're saying that because of the business valuation multiple, the value of a small business would be roughly 7x profit. So every increase in a dollar dividend would be met with about $2.5 in CG taxes. I have a hard time imagining that 1. A small business could sell for 7x (most people that I know that buy local businesses say the multiples run closer to 4x) and 2. that there wouldn't be some formula to create a rolling 5-year average valuation or some way of smoothing a highly volatile business. A business that runs double profits one year doesn't necessarily double in value.

^Exactly! But the Warren plan acts as if the value of a small business IS roughly 7x profit, and taxes you accordingly. Or at least, based on the articles published by the economists behind it, it appears that it will - the exact multiple hasn't been specified.

Re the "5 year average valuation" piece, it's really worth reading the article in SeattleCPA's blog. If I'm reading correctly, part of the problem is that Warren's plan won't use an average valuation - it will tax you on the value from the high year, then not reduce the tax even if your business income (and presumably valuation) fall the next year.

[bwall]

Also, if the house increases in value by $1M and that increase would be treated as capital gains, the MTM adjustment is also $400K.

This might be the key to getting more housing built in HCOL areas. Right now, powerful 'not in my back yard' groups form quickly to stifle any sort of massive building projects needed to provide cheap housing at, say, $500,000 price point. With taxation on this unearned wealth making it unpalatable, maybe we could unleash lots of building (and jobs!) in HCOL areas.

[SeattleCPA]

How would a business that's losing money be valued?

Well, presumably, it'd be valued as being worth nothing in terms of an operating company... and so worth what the owners could liquidate it for...

But some back ground here: One of the strongest arguments against forcing mark to market accounting (MTM) on taxpayers is because of how hard and expensive it is to value all the weird stuff one percent taxpayers invest in.

But what Saez and Zucman have said, basically, is "you guys are worrying too much... we can just use simple formulas... therefore your argument that the expensive annual valuations are required by MTM accounting is wrong."

BTW, a personal note: I don't know the exact details, but my wife is a partner in a small farm where I think roughly they spent $2K to value something that generates annual profit of less than $10K. That's expensive. The compliance cost is basically 20 percent of income.

[SeattleCPA]

I appreciate being corrected, but you're saying that because of the business valuation multiple, the value of a small business would be roughly 7x profit. So every increase in a dollar dividend would be met with about $2.5 in CG taxes. I have a hard time imagining that 1. A small business could sell for 7x (most people that I know that buy local businesses say the multiples run closer to 4x) and 2. that there wouldn't be some formula to create a rolling 5-year average valuation or some way of smoothing a highly volatile business. A business that runs double profits one year doesn't necessarily double in value.

I totally agree that 6.7 times earnings is high. I could even get a little paranoid that the economists (Saez,, Zucman, et. al.) promoting the wealth tax policies use these high valuations to (a) bump the wealth numbers and so the wealth taxes collected and (b) to exaggerate wealth inequality which is what happens when you use standard one-size-fits-all multiples.

But a couple of things to note: First, they do point to later research from Zwick that talks about getting more granular. I have not read Zwick as thoroughly. But he seems to make sense. He might value a small business using a 2.5 multiple for example. (Which I would think is right number number in situations that we're talking about in these examples.)

Also two understandings you come away from when reading Zwick... his approach shows one percent have less wealth. Obviously, that happens if you use a 2.5 times multiple instead of a nearly 7 times multiple to value a small business... and his approach shows less inequality.

BTW, a final point: Even if the multiple is 2.5, the taxpayer still owes more tax from the MTM adjustment that he or she has cash income.

E.g., income increases by $100K... that bumps value by $250K... on the $100K taxpayer owes $40K of income tax... on the $250K taxpayer owes $100K of wealth tax.

You may not agree this is a problem at a macro level for policy reasons. You can probably understand how the local small business owners see it differently.

[maizefolk]

I wonder if the valuation used during a new round of investment would also trigger the mark to market capital gains tax, even for an investment that isn't making any money yet?

Some broke startup founder in his or her twenties is pitching a startup. Convinces some investors it has a few percent change of being a $1B company someday. They agree to invest $500k at a $5M pre-money valuation. Would this immediately make the founder part of the one percent, with $5M is unrealized capital gains, and owe $2M in capital gains taxes on a business with no cashflow at all?

At least once I've been a multi-millionaire "on paper" (if you believed the valuation of a fundraising round). But there was no one I could have sold my shares to, and at this point that particular business looks like its final value is more likely to be $0 than any higher number.

[NorCal]

I appreciate being corrected, but you're saying that because of the business valuation multiple, the value of a small business would be roughly 7x profit. So every increase in a dollar dividend would be met with about $2.5 in CG taxes. I have a hard time imagining that 1. A small business could sell for 7x (most people that I know that buy local businesses say the multiples run closer to 4x) and 2. that there wouldn't be some formula to create a rolling 5-year average valuation or some way of smoothing a highly volatile business. A business that runs double profits one year doesn't necessarily double in value.

I totally agree that 6.7 times earnings is high. I could even get a little paranoid that the economists (Saez,, Zucman, et. al.) promoting the wealth tax policies use these high valuations to (a) bump the wealth numbers and so the wealth taxes collected and (b) to exaggerate wealth inequality which is what happens when you use standard one-size-fits-all multiples.

But a couple of things to note: First, they do point to later research from Zwick that talks about getting more granular. I have not read Zwick as thoroughly. But he seems to make sense. He might value a small business using a 2.5 multiple for example. (Which I would think is right number number in situations that we're talking about in these examples.)

Also two understandings you come away from when reading Zwick... his approach shows one percent have less wealth. Obviously, that happens if you use a 2.5 times multiple instead of a nearly 7 times multiple to value a small business... and his approach shows less inequality.

BTW, a final point: Even if the multiple is 2.5, the taxpayer still owes more tax from the MTM adjustment that he or she has cash income.

E.g., income increases by $100K... that bumps value by $250K... on the $100K taxpayer owes $40K of income tax... on the $250K taxpayer owes $100K of wealth tax.

You may not agree this is a problem at a macro level for policy reasons. You can probably understand how the local small business owners see it differently.

You've exposed the fatal flaw in this entire idea.  The value of a business goes up by a larger amount than income increases.

If I own a business and I increase income by $1,000, I've increased the value of the business by >$1,000.  In the examples above, increasing my pre-tax profits by $1,000 would cost me anywhere from $2,500 to $6,700 in incremental taxes.

There are zero scenarios where it makes sense for me to increase profits, and lots of scenarios where it makes sense for me to reduce profits.

Seems like it would take an economist to understand the impact of incentives?

[maizefolk]

If I own a business and I increase income by $1,000, I've increased the value of the business by >$1,000.  In the examples above, increasing my pre-tax profits by $1,000 would cost me anywhere from $2,500 to $6,700 in incremental taxes.

There are zero scenarios where it makes sense for me to increase profits, and lots of scenarios where it makes sense for me to reduce profits.

Seems like it would take an economist to understand the impact of incentives?

$1,000 of profit would increase valuation by $2,500 to $6,700 but the mark to market capital gains taxes would "only" be approximately 40% (39.6%) of those numbers. So $1,000 of additional profit would cost between $1,000 and $2,680 in capital gains taxes in the first year depending on the multiple used.

I could envision scenarios where it'd still make sense to increase profits. If you were really confident you could sustain the higher level of profit for a significant number of years, you'd still come out ahead over the long term, since if you can increase profit $1,000/year and then hold that profit constant for a decade so you don't keep incurring more tax, you'd make significantly more in new profit ($10,000 gross, ~$6,000 net of income tax) than you'd owe in mark to market capital gains taxes ($1,000-$2,680).

Which is not to say it wouldn't still be a significant disincentive to grow companies in lots of scenarios. Just that there are still at least a few where it'd make sense to grow a company. Absolute statements are always tricky.

[BicycleB]

^Taxing only realized gains would avoid this problem, thereby providing consistent incentives for small entrepreneurs to be productive. A wealth tax that provides consistent incentives for productivity is therefore possible. The problem isn't that Warren wants a wealth tax, it's that the mark to market aspect produces many disincentives.

ETA: Sorry for the policy sidetrack. Agreed, for purposes of business planning, the wise focus is to monitor for now, and devise more precise tactics of risk minimization in the unlikely event this passes in the form being discussed.

However, an additional action for individuals could be to communicate objections to Warren's campaign or Senatorial offices directly. Obviously the odds of impacting the outcome are small, but the value of succeeding would be high. As someone who had previously for nearly a year been planning to vote for Warren, I notified her campaign that I am tentatively withdrawing that vote in the primary due to the mark to market issue for small business.

[Proud Foot]

I am glad I found this thread. I have loosely followed the tax portions of her proposals and I feel like this thread has answered a lot of my questions but still left a few unanswered. Maybe I just missed them though.

For the mark to market taxes, how does this work once you cross the baseline for this? Adjusting from your basis to the market could result in a higher tax bill than actual income for the year. Like Cpa Cat said, becoming a valuation expert could be very lucrative.

And the 5 year plan for payments on the wealth tax for cases where individuals are invested in illiquid assets. This might be good for the first couple years but it still has problems as the assets are still illiquid every year. This could be interesting as this could lead to private businesses to either increase leverage or maintain the status quo and not expand and innovate as quickly.

My guess is that private businesses of this size would likely be able to move enough of their funds from capital gains to dividends to cover any expected taxes needed. So any company that had a 20% CG increase could instead divert 4-5% as a dividend in order for the owners to cover needed taxes.

I would challenge the notion that somehow company profits are directly tied to innovation. Big companies buy innovation, they don't make it.

I never said company profits were directly tied to innovation. If the company is making larger distributions to help the owners cover their wealth tax it lowers the available cash. Having less cash available then either requires leverage to grow or slower growth as cash is available.

[NorCal]

If I own a business and I increase income by $1,000, I've increased the value of the business by >$1,000.  In the examples above, increasing my pre-tax profits by $1,000 would cost me anywhere from $2,500 to $6,700 in incremental taxes.

There are zero scenarios where it makes sense for me to increase profits, and lots of scenarios where it makes sense for me to reduce profits.

Seems like it would take an economist to understand the impact of incentives?

$1,000 of profit would increase valuation by $2,500 to $6,700 but the mark to market capital gains taxes would "only" be approximately 40% (39.6%) of those numbers. So $1,000 of additional profit would cost between $1,000 and $2,680 in capital gains taxes in the first year depending on the multiple used.

I could envision scenarios where it'd still make sense to increase profits. If you were really confident you could sustain the higher level of profit for a significant number of years, you'd still come out ahead over the long term, since if you can increase profit $1,000/year and then hold that profit constant for a decade so you don't keep incurring more tax, you'd make significantly more in new profit ($10,000 gross, ~$6,000 net of income tax) than you'd owe in mark to market capital gains taxes ($1,000-$2,680).

Which is not to say it wouldn't still be a significant disincentive to grow companies in lots of scenarios. Just that there are still at least a few where it'd make sense to grow a company. Absolute statements are always tricky.

You're exactly right.  I should know better than trying to do tax math before my morning coffee.

I would also assume any new policy would keep valuation methodologies pretty consistent with today. 

The biggest variable in corporate valuation is the assumed growth rate.  Silicon Valley is full of companies managed (and partially owned) by people that would be hit by this tax.  These companies are valued in the hundreds of millions of dollars with negative profits, and the "mark-to-market" taxes would be larger than many managers incomes.  You'd end up with people owning illiquid stock that owe more than 100% of their income in taxes.

[FIPurpose]

This may not be anything for most people here to worry about. I found Sen. Wyden's paper on this. He's the ranking Dem. member of the Finance Committee:

https://www.finance.senate.gov/imo/media/doc/Treat%20Wealth%20Like%20Wages%20RM%20Wyden.pdf?mod=article_inline

The middle class would not be affected by these new accounting rules and
would not pay more in tax under this proposal than they do under current law.
Anti-deferral accounting rules would only apply to individuals with more than
$1 million in annual income or more than $10 million in assets, recognizing that
wealthy taxpayers employ sophisticated accountants and are best equipped to
comply with the system. This proposal would simply change the role of these
tax professionals from helping their clients avoid paying tax to helping them pay
their fair share.

A taxpayer would be an applicable taxpayer subject to anti-deferral accounting
rules if she has met the income or asset threshold for each of the preceding three
tax years.15 The income threshold would be $1 million16 and the asset threshold
would be $10 million of applicable assets.17 The thresholds would be the same for
single and joint filers and would be indexed for inflation.18

He also leaves exemptions for $2MM in personal residence, $5MM in family farms, and 3MM in retirement accounts.

To me I think people are off here thinking that this kind of proposal would affect people with 4MM. With the amount of exceptions, this looks more like people who would have >15MM.

[FIPurpose]

This paper describes the disparate treatment of ordinary and capital income
under current law and proposes a policy that would correct this massive tax
inequity. The proposed policy would tax all income at the same progressive
tax rates and tax wealthy taxpayers’ investment income using anti-deferral
accounting. Under anti-deferral accounting, tradable assets like stocks would
be marked-to-market. Mark-to-market rules would require taxpayers to annually
pay tax on any unrealized gain or take a deduction for any unrealized loss from
tradable assets. To calculate the tax due on gains from nontradable assets like
investment real estate, closely-held businesses, and valuable collectibles, antideferral accounting would use a lookback rule upon realization. The resulting lookback charge would tax the gain in a way that diminishes the benefit of
deferring tax until sale.

^A rule like he suggests would then solve the issue of owing more taxes than income.

[Wolfpack Mustachian]

This whole thought process leads me to really, really hope that Warren doesn't get the Democratic nod, whereas I had been at least a little on the fence about this before. I don't think it can be emphasized enough - she wants to charge a tax on money that you don't have yet - that you haven't realized yet in liquid form. This is extreme on so many levels from valuations to general principle. I could see it maybe in the most extreme situations, because Bezos and a handful of extreme billionaires have so much in stocks that something might have to be done. That and estate taxing it. This very conversation is interesting because, no offense intended, but on one side you have people in the know - cpas and the like saying this would be a huge nightmare and on the other side you have people who seem to be approving of it more simply because it's something that leverages more taxes against rich people. As has been discussed, it would be hard enough with just a basic wealth tax on the uber uber rich. There would be issues even with it on a select few people. The fact that this extreme concept seems to be so casually thrown out by Warren is ridiculous. I haven't studied her much, but isn't she supposed to be this financial wonk with a huge focus in her campaign on all things related to money - tax the rich, lower healthcare costs, etc. From the outside looking in, that was how I saw her. She was unwilling to admit that her plans would raise taxes, assumedly because people would latch onto that, but she doesn't come out with it in the debate and holds back and when she finally comes out with how to pay for healthcare, she comes out with this garbage....yea, I think anyone that wants Dems to win the presidency should probably hope she doesn't get the nod.

[maizefolk]

She was unwilling to admit that her plans would raise taxes, assumedly because people would latch onto that, but she doesn't come out with it in the debate and holds back and when she finally comes out with how to pay for healthcare, she comes out with this garbage....

In fairness to Warren, she said her plan wouldn't raise taxes on the middle class not that it wouldn't raise taxes at all. This was presented as a contrast with the Sanders campaign which said taxes would go up for the middle class, but that they would go up less than people would save from not having to pay for health insurance out of their paychecks.

I think a lot of the choices made in her plan to pay for M4H without a private option or any premiums that seem questionable or worrying to me* were driven by the fact that the math just doesn't add up to pay for healthcare without either some amount of tax increase on the middle class or asking people who can afford to do so to still pay some amount toward their health insurance premiums.

*Things like the $9,500 per worker per year head tax on employers that increase the incentive to automate jobs, the perverse effects of mark-to-market capital gains tax, doubling the proposed wealth tax to the point where it only takes a few years for billionaires to come out ahead by leaving the USA even with a 40% exit tax.

[BicycleB]

@FIPurpose, thanks for posting the link to Senator Wyden's paper. His proposal is far more reasonable.

That said, I would hesitate to say "there's nothing to worry about." Senator Wyden's plan is not Senator Warren's. It remains to be seen which plan, if any, will ever be enacted.

As finance chair, and proponent of a plan with fewer obvious flaws, it may be that Wyden's plan is more likely to pass in real life. But he's not the one running for President. Personally I think both plans are worth monitoring.

[SeattleCPA]

I wonder if the valuation used during a new round of investment would also trigger the mark to market capital gains tax, even for an investment that isn't making any money yet?

Some broke startup founder in his or her twenties is pitching a startup. Convinces some investors it has a few percent change of being a $1B company someday. They agree to invest $500k at a $5M pre-money valuation. Would this immediately make the founder part of the one percent, with $5M is unrealized capital gains, and owe $2M in capital gains taxes on a business with no cashflow at all?

At least once I've been a multi-millionaire "on paper" (if you believed the valuation of a fundraising round). But there was no one I could have sold my shares to, and at this point that particular business looks like its final value is more likely to be $0 than any higher number.

I think this is exactly how it works. Which is part of the craziness. Ugh.

And you could owe MTM taxes on income you never actually realize. Especially with large values.

[SeattleCPA]

This may not be anything for most people here to worry about. I found Sen. Wyden's paper on this. He's the ranking Dem. member of the Finance Committee:

Well, okay, but saying Warren's policy proposal isn't that bad because it could be made more like Wyden's seems, hmmm, sort of weak as an argument.

Isn't it really fairest to look at the policy mechanics as she describes them? Not before editing them? And using the economist's research that feeds her thinking?

[FIPurpose]

This may not be anything for most people here to worry about. I found Sen. Wyden's paper on this. He's the ranking Dem. member of the Finance Committee:

Well, okay, but saying Warren's policy proposal isn't that bad because it could be made more like Wyden's seems, hmmm, sort of weak as an argument.

Isn't it really fairest to look at the policy mechanics as she describes them? Not before editing them? And using the economist's research that feeds her thinking?

I see Warren as proposing something at a higher level than Wyden. Warren's proposal doesn't have a lot of these tinier details for a reason: this isn't well-crafted legislation, this is a higher level policy proposal. Wyden's paper on the other hand is a first step to figuring out the minutia of how to actually implement a version of this kind of proposal.

In this discussion we're saying "yeah, but the details matter. How will those details get implemented?" And that's what Wyden's paper I think is closer to answering.

Warren's goal is more to convince others that "wealthier people have this huge tax break around capital gains that not only give them an unfair advantage at acquiring wealth, but could also pay for a huge part a medicare-for-all plan". She uses these papers to show people what these taxes would likely bring in to give the overall idea some amount of coherency. I don't think Warren is married to any single tax in the plan beyond not raising income taxes for the middle class. (But even then, I think as president she would sign a modest increase to pass m4a)

I think the way this thread is thinking about this politically is backwards. It's not that "we need something like Wyden's paper to spell out all the details before we can back Warren", it should be that "Until Warren can sell the idea of fixing CG taxes on the wealthy, Wyden's details don't matter."