calbear93 said:

---

OaktownBear said:

---

calbear93 said:

---

Sebastabear said:

---

And the deferred comp changes were just reinserted into the Senate version so stock options are dead again (if that view prevails). Hell of a way to run a process here.

---

Everyone is against special interest until it's their special interest. Everyone is OK with tax increase as long as it supports their causes, and don't want tax increases to support any other causes. After all of the push and pull from each interested party, a simple postcard return will become a book.

---

What is the difference in your equation between "special interests" and having an opinion? Yes, you are correct. I have an opinion about what I want tax increases to support. Which is exactly a valid debate about the wisdom of a particular tax policy. But this is not a case where I want my taxes to go to renewable energy and not the military and another person wants his taxes to go to the military and not renewable energy. Taxes are not being raised on some people to pay for some program they may or may not like. They are being raised on some people so they can be lowered on other people. Personally, I think raising taxes on a substantial portion of the middle class to give tax breaks that almost entirely benefit the wealthiest is awful policy. I further think that designing those tax increases to predominantly hit the other political party's constituents is repugnant and unethical.

By the way, MANY economists dispute the concept that lower capital gains tax rates lead to more growth and in fact there is really no historical data that supports that proposition. Some of our biggest booms have come in times of high capital gains tax rates and some of our biggest busts have come in times of low capital gains tax rates. That concept is mostly just theory with little empirical data that supports it.

---

Two different concepts. Special interest is trying to legislate to address a very targeted, special interest. Nothing wrong with it, and not the same as having an opinion. It just means that there is lobbying effort to address a specific issue or topic. My point was that no one is against special interest. They are just for their own special interest.

Also, I never said that spending component is not a valid discussion. It is just not a relevant discussion on whether income tax obligation is rightfully allocated among the different tax payers. Just as a point of reference, income tax is for general funds. It is not a special levy or excise tax meant to address specific spending. For example, excise tax on medical devices was a special use tax to help fund Obamacare. Not disagreeing with it since one could argue that incremental coverage increases demand for medical devices, but that excise tax wasn't intended to fund military. Arguing that I am OK with income tax increases only if it is tied to special use is missing the point. Debating how the budgeting should be is a different discussion than who should contribute what percentage to the general fund. I think people can conflate and confuse the two. If you want to have discussion on certain special use excise tax, then have that discussion, but it is irrelevant from the discussion on allocation of income tax obligations, when income tax revenue is meant to address general and not specific funding for the government.

And I don't know whether the current capital gain tax rates are good or bad. You did, however, make a statement that contradicts actual facts. You do realize that we are in the middle of one of the biggest and longest bull run in history, right? But forgive me if I don't take your word for it that lowering or increasing is good or bad for the economy. Let's not mask this discussion as an economic discussion when neither you nor I seem to be qualified. This discussion is a moral discussion and who you think are the evil rich people versus the good rich people. Someone who make $10 million in income as an executive is good versus someone who makes $10 million from owning the stock and selling after long-term investing and capitalizing the company. That's all it is.

---

Um...I'm not the one making the value judgment between the two. I'm the one saying they should be treated the SAME, that their income should be taxed in the same way regardless of how they earn it. So you are saying I'm classifying one as good and one is evil and that is total bullshyte. Your policy is the one that picks winners and losers based on what kind of rich people they are.

Longest bull run doesn't mean biggest, but I didn't say high capital gains correlates to high growth. I said low tax doesn't correlate. Neither correlates. Booms and busts have occurred under both policies. There is no historical evidence that low capital gains leads to growth. It has done both.

By the way, the top capital gains rate was cut under Bush. We had the biggest recession since the depression. The top rate was increased by a third under Obama and we started that long bull run you mentioned. Personally, I don't think the recession was caused by the cut or the recovery caused be the increase, but your point about this run doesn't make sense with that context

OaktownBear said:

---

calbear93 said:

---

OaktownBear said:

---

calbear93 said:

---

Sebastabear said:

---

And the deferred comp changes were just reinserted into the Senate version so stock options are dead again (if that view prevails). Hell of a way to run a process here.

---

Everyone is against special interest until it's their special interest. Everyone is OK with tax increase as long as it supports their causes, and don't want tax increases to support any other causes. After all of the push and pull from each interested party, a simple postcard return will become a book.

---

What is the difference in your equation between "special interests" and having an opinion? Yes, you are correct. I have an opinion about what I want tax increases to support. Which is exactly a valid debate about the wisdom of a particular tax policy. But this is not a case where I want my taxes to go to renewable energy and not the military and another person wants his taxes to go to the military and not renewable energy. Taxes are not being raised on some people to pay for some program they may or may not like. They are being raised on some people so they can be lowered on other people. Personally, I think raising taxes on a substantial portion of the middle class to give tax breaks that almost entirely benefit the wealthiest is awful policy. I further think that designing those tax increases to predominantly hit the other political party's constituents is repugnant and unethical.

By the way, MANY economists dispute the concept that lower capital gains tax rates lead to more growth and in fact there is really no historical data that supports that proposition. Some of our biggest booms have come in times of high capital gains tax rates and some of our biggest busts have come in times of low capital gains tax rates. That concept is mostly just theory with little empirical data that supports it.

---

Two different concepts. Special interest is trying to legislate to address a very targeted, special interest. Nothing wrong with it, and not the same as having an opinion. It just means that there is lobbying effort to address a specific issue or topic. My point was that no one is against special interest. They are just for their own special interest.

Also, I never said that spending component is not a valid discussion. It is just not a relevant discussion on whether income tax obligation is rightfully allocated among the different tax payers. Just as a point of reference, income tax is for general funds. It is not a special levy or excise tax meant to address specific spending. For example, excise tax on medical devices was a special use tax to help fund Obamacare. Not disagreeing with it since one could argue that incremental coverage increases demand for medical devices, but that excise tax wasn't intended to fund military. Arguing that I am OK with income tax increases only if it is tied to special use is missing the point. Debating how the budgeting should be is a different discussion than who should contribute what percentage to the general fund. I think people can conflate and confuse the two. If you want to have discussion on certain special use excise tax, then have that discussion, but it is irrelevant from the discussion on allocation of income tax obligations, when income tax revenue is meant to address general and not specific funding for the government.

And I don't know whether the current capital gain tax rates are good or bad. You did, however, make a statement that contradicts actual facts. You do realize that we are in the middle of one of the biggest and longest bull run in history, right? But forgive me if I don't take your word for it that lowering or increasing is good or bad for the economy. Let's not mask this discussion as an economic discussion when neither you nor I seem to be qualified. This discussion is a moral discussion and who you think are the evil rich people versus the good rich people. Someone who make $10 million in income as an executive is good versus someone who makes $10 million from owning the stock and selling after long-term investing and capitalizing the company. That's all it is.

---

Um...I'm not the one making the value judgment between the two. I'm the one saying they should be treated the SAME, that their income should be taxed in the same way regardless of how they earn it. So you are saying I'm classifying one as good and one is evil and that is total bullshyte. Your policy is the one that picks winners and losers based on what kind of rich people they are.

Longest bull run doesn't mean biggest, but I didn't say high capital gains correlates to high growth. I said low tax doesn't correlate. Neither correlates. Booms and busts have occurred under both policies. There is no historical evidence that low capital gains leads to growth. It has done both.

By the way, the top capital gains rate was cut under Bush. We had the biggest recession since the depression. The top rate was increased by a third under Obama and we started that long bull run you mentioned. Personally, I don't think the recession was caused by the cut or the recovery caused be the increase, but your point about this run doesn't make sense with that context

---

Listen, I know you are intelligent, so I will chalk this up to my theory that politics color our vision.

My policy? Why, thanks for the credit, but I honestly had no role in our current tax reform. My point was that I don't know whether capital gains should be treated differently. The argument many people here have made is that capital gain treatment is meant to benefit the rich and hurt the income earning folks. Please correct me if that hasn't been the theme. And to say that everyone should be treated the same is bullshyte too. Parents are treated differently. Homeowners are treated differently. Educated folks are treated differently. Different income brackets are treated differently. I am all for simplicity and equal treatment. Maybe there is a reason for treating capital gains differently other than benefiting the rich people? And I have heard no tax proposal in congress to reduce capital gains. Not even when the Democrats had the White House and the Congress and pushed down Obamacare. So, if you want equality, let's have a flat tax with no deduction. And if we're honest, this debate is not an economic discussion, but a moral discussion, because you don't seem like the expert who can tell me that increasing capital gains will improve the economy. So, your proposal is based on morals and belief that the $10 million executive is getting the short stick relative to the $10 million stock investor. If you are interested in same and simplicity, I can be convinced on a flat rate and same treatment for everyone without any single deduction or any social engineering.

By the way, this is the biggest bull run since the great depression. And this is what you wrote: "Some of our biggest booms have come in times of high capital gains tax rates and some of our biggest busts have come in times of low capital gains tax rates.". Since this is the the longest and BIGGEST boom since the depression, what do you mean by biggest boom have come in times of high capital gains? And educate me on the period you were referencing when capital gains were treated like ordinary income (I suppose that is what you mean by high capital gain) and we had one of the "biggest boom." I honestly don't know what period you are referencing.

And you do realize the cause of the financial crisis, right? It wasn't capital gains or Bush's tax cuts. It was easy mortgage, derivatives and securitization of mortgages, etc. and removal of the barrier between investment banks and lending banks. (all under Democratic party) You can't be arguing that increasing capital gains would have eliminated mortgages, are you? Maybe you are proposing that we should eliminate mortgage interest deduction? Seems like a lazy correlation to me.

calbear93 said:

---

Sebastabear said:

---

calbear93 said:

---

Sebastabear said:

---

And the deferred comp changes were just reinserted into the Senate version so stock options are dead again (if that view prevails). Hell of a way to run a process here.

---

Everyone is against special interest until it's their special interest. Everyone is OK with tax increase as long as it supports their causes, and don't want tax increases to support any other causes. After all of the push and pull from each interested party, a simple postcard return will become a book.

---

True dat, but personally I've never received a stock option in my life and I'm sure I never will. What I do know as an observer of the tech ecosystem is that without them the creation/destruction cycle of the Valley doesn't work. Workers need to be owners and the best and brightest need to be lured out here with the chance to strike gold. So call me crazy, but I'm not pumped about Congress doing something that would crater one of the principal growth engines for the US economy (and the growth engine for California). Oh and managing to blow a massive hole in the deficit to boot. Really didn't expect to see that combination. Well played Washington, well played.

---

I agree with you that it is a stupid change. What is to stop a company from having the options immediately vested so that there is no tax that is payable as a result of the grant (FMV is the strike price - so no gain; of course the proxy advisory firms and institutional investors would hate that). Then, upon exercise, it will be capital gains. Of course, people here want long-term capital gain to be taxed at the same rate as ordinary income.

---

I'm having a hard time seeing how eliminating the benefits of stock options or other compensation vehicles - when applied across the board to all companies - affect the labor markets. Companies competing to hire the "best and brightest" will find other forms of deferred compensation and, as a practical matter, the "best and the brightest" will still need to work somewhere (with none of those companies offering options). Companies will find other means of sharing the upside with employees - like a good old fashioned taxable bonus.

OaktownBear said:

---

By the way, the top capital gains rate was cut under Bush. We had the biggest recession since the depression. The top rate was increased by a third under Obama and we started that long bull run you mentioned. Personally, I don't think the recession was caused by the cut or the recovery caused be the increase, but your point about this run doesn't make sense with that context

---

Minor nit - the top cap gains rate went from 15% under Bush to 23.8% currently (with ACA net investment tax), so it's actually a 60%+ increase. The numbers are even worse when you include state tax in places like CA and NY where many wealthy investors live.

If you listen to Paul Ryan and company, you'd think that level of taxation would destroy the economy.

As for the change in taxation of options, this still strikes me as fundamentally counter to the longstanding income tax code principal that you only pay taxes on realized gains. Having a stock option vest is not a realization of gain and should not be a taxable event. I would be comfortable with elimination of ISO treatment, particularly as many companies are extending exercise periods post-termination, but treating vesting as a realization event is inconsistent with how we generally treat gains.

And I should note, I'm mainly talking about private companies since that's where this matters most. There are plenty of ways that public companies and other companies with liquid stock can adequately compensate valued employees. It's much more difficult for most private companies which is why you see the prevalence of options.

BearGoggles said:

---

calbear93 said:

---

Sebastabear said:

---

calbear93 said:

---

Sebastabear said:

---

And the deferred comp changes were just reinserted into the Senate version so stock options are dead again (if that view prevails). Hell of a way to run a process here.

---

Everyone is against special interest until it's their special interest. Everyone is OK with tax increase as long as it supports their causes, and don't want tax increases to support any other causes. After all of the push and pull from each interested party, a simple postcard return will become a book.

---

True dat, but personally I've never received a stock option in my life and I'm sure I never will. What I do know as an observer of the tech ecosystem is that without them the creation/destruction cycle of the Valley doesn't work. Workers need to be owners and the best and brightest need to be lured out here with the chance to strike gold. So call me crazy, but I'm not pumped about Congress doing something that would crater one of the principal growth engines for the US economy (and the growth engine for California). Oh and managing to blow a massive hole in the deficit to boot. Really didn't expect to see that combination. Well played Washington, well played.

---

I agree with you that it is a stupid change. What is to stop a company from having the options immediately vested so that there is no tax that is payable as a result of the grant (FMV is the strike price - so no gain; of course the proxy advisory firms and institutional investors would hate that). Then, upon exercise, it will be capital gains. Of course, people here want long-term capital gain to be taxed at the same rate as ordinary income.

---

I'm having a hard time seeing how eliminating the benefits of stock options or other compensation vehicles - when applied across the board to all companies - affect the labor markets. Companies competing to hire the "best and brightest" will find other forms of deferred compensation and, as a practical matter, the "best and the brightest" will still need to work somewhere (with none of those companies offering options). Companies will find other means of sharing the upside with employees - like a good old fashioned taxable bonus.

---

I have an objection to it because it will not add revenue (companies will either immediately vest or provide other means) but it unnecessarily disrupts retention strategy, aligning employees with shareholders, etc. It may also make it more difficult for cash burning companies like most start-up tech companies to attract and retain. I understand why most people here (who are associated with tech) are so protective of it. They think they are special to the US economy and they want tax increase for the other rich folks, but not for them. Just like I understand why those in the fossil fuel industry are so protective of deregulation.

Unit2Sucks said:

---

OaktownBear said:

---

By the way, the top capital gains rate was cut under Bush. We had the biggest recession since the depression. The top rate was increased by a third under Obama and we started that long bull run you mentioned. Personally, I don't think the recession was caused by the cut or the recovery caused be the increase, but your point about this run doesn't make sense with that context

---

Minor nit - the top cap gains rate went from 15% under Bush to 23.8% currently (with ACA net investment tax), so it's actually a 60%+ increase. The numbers are even worse when you include state tax in places like CA and NY where many wealthy investors live.

If you listen to Paul Ryan and company, you'd think that level of taxation would destroy the economy.

As for the change in taxation of options, this still strikes me as fundamentally counter to the longstanding income tax code principal that you only pay taxes on realized gains. Having a stock option vest is not a realization of gain and should not be a taxable event. I would be comfortable with elimination of ISO treatment, particularly as many companies are extending exercise periods post-termination, but treating vesting as a realization event is inconsistent with how we generally treat gains.

And I should note, I'm mainly talking about private companies since that's where this matters most. There are plenty of ways that public companies and other companies with liquid stock can adequately compensate valued employees. It's much more difficult for most private companies which is why you see the prevalence of options.

---

While I agree with your conclusion, I disagree with your reasoning. Deferred compensation exemption was a loophole created by the government and not the general rule. Normally, you would get taxed, whether cash or property, when you received a non-forfeitable interest. If I gave you a call option, that would have value right now, just like if I gave you a car. Just because you don't receive cash to pay the taxes doesn't mean there isn't a taxable interest.

calbear93 said:

---

While I agree with your conclusion, I disagree with your reasoning. Deferred compensation exemption was a loophole created by the government and not the general rule. Normally, you would get taxed, whether cash or property, when you received a non-forfeitable interest. If I gave you a call option, that would have value right now, just like if I gave you a car. Just because you don't receive cash to pay the taxes doesn't mean there isn't a taxable interest.

---

With private companies, the price is difficult to ascertain (I would argue 409A appraisals are a joke), the options are not transferable and in many cases the value is never recognized.

Do you think that people will be taxed on the black-scholes value of the vested option or the spread at the time of vesting?

Unit2Sucks said:

---

calbear93 said:

---

While I agree with your conclusion, I disagree with your reasoning. Deferred compensation exemption was a loophole created by the government and not the general rule. Normally, you would get taxed, whether cash or property, when you received a non-forfeitable interest. If I gave you a call option, that would have value right now, just like if I gave you a car. Just because you don't receive cash to pay the taxes doesn't mean there isn't a taxable interest.

---

With private companies, the price is difficult to ascertain (I would argue 409A appraisals are a joke), the options are not transferable and in many cases the value is never recognized.

Do you think that people will be taxed on the black-scholes value of the vested option or the spread at the time of vesting?

---

Black-scholes is for accounting treatment and proxy statement disclosure. No way individual tax liability will depend on such complex and variable calculation. It will be a spread. As such, unless there is a mandatory minimum vesting period (which is more a public company restriction driven by investor policies and proxy advisory firms), most start-up tech companies will make them immediately vested. Since there is no market, who would exercise even if vested.

Even with everything you described, vested options do have value. Otherwise, why even grant them. Since they have value, the typical treatment would be assess tax on the value provided as compensation.

While I agree with you that 409A appraisals are a joke, once they are identified and FMV determined for the strike price, making the options immediately vested would mean no tax liability until exercise for the employee. Easy work-around, it would seem, for private tech companies.

There is no way they will make them immediately vested under the current compensation structure - eg I'm not getting a 4 year vested grant from my employer. What might happen is people receiving vested options in arrears or perhaps someone will figure out a phantom stock arrangement that approximates the current option system but of course would never permit LTCG treatment.

calbear93 said:

---

BearGoggles said:

---

calbear93 said:

---

Sebastabear said:

---

calbear93 said:

---

Sebastabear said:

---

And the deferred comp changes were just reinserted into the Senate version so stock options are dead again (if that view prevails). Hell of a way to run a process here.

---

Everyone is against special interest until it's their special interest. Everyone is OK with tax increase as long as it supports their causes, and don't want tax increases to support any other causes. After all of the push and pull from each interested party, a simple postcard return will become a book.

---

True dat, but personally I've never received a stock option in my life and I'm sure I never will. What I do know as an observer of the tech ecosystem is that without them the creation/destruction cycle of the Valley doesn't work. Workers need to be owners and the best and brightest need to be lured out here with the chance to strike gold. So call me crazy, but I'm not pumped about Congress doing something that would crater one of the principal growth engines for the US economy (and the growth engine for California). Oh and managing to blow a massive hole in the deficit to boot. Really didn't expect to see that combination. Well played Washington, well played.

---

I agree with you that it is a stupid change. What is to stop a company from having the options immediately vested so that there is no tax that is payable as a result of the grant (FMV is the strike price - so no gain; of course the proxy advisory firms and institutional investors would hate that). Then, upon exercise, it will be capital gains. Of course, people here want long-term capital gain to be taxed at the same rate as ordinary income.

---

I'm having a hard time seeing how eliminating the benefits of stock options or other compensation vehicles - when applied across the board to all companies - affect the labor markets. Companies competing to hire the "best and brightest" will find other forms of deferred compensation and, as a practical matter, the "best and the brightest" will still need to work somewhere (with none of those companies offering options). Companies will find other means of sharing the upside with employees - like a good old fashioned taxable bonus.

---

I have an objection to it because it will not add revenue (companies will either immediately vest or provide other means) but it unnecessarily disrupts retention strategy, aligning employees with shareholders, etc. It may also make it more difficult for cash burning companies like most start-up tech companies to attract and retain. I understand why most people here (who are associated with tech) are so protective of it. They think they are special to the US economy and they want tax increase for the other rich folks, but not for them. Just like I understand why those in the fossil fuel industry are so protective of deregulation.

---

I in no way am in the camp of those looking to tax "other rich folks" (although personally I do think the removal of the Estate Tax allowing ever growing amounts of wealth to be transferred to the coupon-clipping winners of the lucky sperm club is ridiculous. Let's check in with Medieval Europe to see how that will work out for us, shall we?). But in terms of tech thinking it's "special" and "important" the facts speak for themselves. If you asked any country in the world whether they'd prefer to have Silicon Valley or the Texas oil fields it wouldn't be a close call. Tech creates more jobs, more wealth and more opportunities. Oh and Saudi Arabia doesn't produce better tech at a fraction of our costs either. If the U.S. doesn't want tech then other countries would love to take it off its hands. Again, I'm not a technology worker but I have lived in California all my life and have benefited from what they've done out here - as have all of us. Maybe I'm alone, but I think these proposals are nuts.

Unit2Sucks said:

---

There is no way they will make them immediately vested under the current compensation structure - eg I'm not getting a 4 year vested grant from my employer. What might happen is people receiving vested options in arrears or perhaps someone will figure out a phantom stock arrangement that approximates the current option system but of course would never permit LTCG treatment.

---

What you described sounds like option back dating which would be very expensive from an accounting standpoint and very controversial. The reason you grant options is that you want the value to come from increase in stock price following grant made at FMV.

Sebastabear said:

---

calbear93 said:

---

BearGoggles said:

---

calbear93 said:

---

Sebastabear said:

---

calbear93 said:

---

Sebastabear said:

---

And the deferred comp changes were just reinserted into the Senate version so stock options are dead again (if that view prevails). Hell of a way to run a process here.

---

Everyone is against special interest until it's their special interest. Everyone is OK with tax increase as long as it supports their causes, and don't want tax increases to support any other causes. After all of the push and pull from each interested party, a simple postcard return will become a book.

---

True dat, but personally I've never received a stock option in my life and I'm sure I never will. What I do know as an observer of the tech ecosystem is that without them the creation/destruction cycle of the Valley doesn't work. Workers need to be owners and the best and brightest need to be lured out here with the chance to strike gold. So call me crazy, but I'm not pumped about Congress doing something that would crater one of the principal growth engines for the US economy (and the growth engine for California). Oh and managing to blow a massive hole in the deficit to boot. Really didn't expect to see that combination. Well played Washington, well played.

---

I agree with you that it is a stupid change. What is to stop a company from having the options immediately vested so that there is no tax that is payable as a result of the grant (FMV is the strike price - so no gain; of course the proxy advisory firms and institutional investors would hate that). Then, upon exercise, it will be capital gains. Of course, people here want long-term capital gain to be taxed at the same rate as ordinary income.

---

I'm having a hard time seeing how eliminating the benefits of stock options or other compensation vehicles - when applied across the board to all companies - affect the labor markets. Companies competing to hire the "best and brightest" will find other forms of deferred compensation and, as a practical matter, the "best and the brightest" will still need to work somewhere (with none of those companies offering options). Companies will find other means of sharing the upside with employees - like a good old fashioned taxable bonus.

---

I have an objection to it because it will not add revenue (companies will either immediately vest or provide other means) but it unnecessarily disrupts retention strategy, aligning employees with shareholders, etc. It may also make it more difficult for cash burning companies like most start-up tech companies to attract and retain. I understand why most people here (who are associated with tech) are so protective of it. They think they are special to the US economy and they want tax increase for the other rich folks, but not for them. Just like I understand why those in the fossil fuel industry are so protective of deregulation.

---

I in no way am in the camp of those looking to tax "other rich folks" (although personally I do think the removal of the Estate Tax allowing ever growing amounts of wealth to be transferred to the coupon-clipping winners of the lucky sperm club is ridiculous. Let's check in with Medieval Europe to see how that will work out for us, shall we?). But in terms of tech thinking it's "special" and "important" the facts speak for themselves. If you asked any country in the world whether they'd prefer to have Silicon Valley or the Texas oil fields it wouldn't be a close call. Tech creates more jobs, more wealth and more opportunities. Oh and Saudi Arabia doesn't produce better tech at a fraction of our costs either. If the U.S. doesn't want tech then other countries would love to take it off its hands. Again, I'm not a technology worker but I have lived in California all my life and have benefited from what they've done out here - as have all of us. Maybe I'm alone, but I think these proposals are nuts.

---

OK, if that industry is so profitable and growing so much, and those workers are getting so much in compensation, maybe they should pay more. They didn't build it themselves. Look, everyone has an argument on why someone else should get taxed more and why they shouldn't be taxed more. Gee...where do these tech companies get the funding to "change the world for the better"? Ahhh...the capital gains folks. Without funding from those investors, there would be no tech startups. Oh no...it would be crazy to discourage investments in these special tech companies. No one has a better argument other than potential economists who can argue which would stimulate growth. I just don't think the people on this board (including me) have the mental bandwidth, facts or expertise to debate this meaningfully.

Sebastabear said:

---

calbear93 said:

---

BearGoggles said:

---

calbear93 said:

---

Sebastabear said:

---

calbear93 said:

---

Sebastabear said:

---

And the deferred comp changes were just reinserted into the Senate version so stock options are dead again (if that view prevails). Hell of a way to run a process here.

---

Everyone is against special interest until it's their special interest. Everyone is OK with tax increase as long as it supports their causes, and don't want tax increases to support any other causes. After all of the push and pull from each interested party, a simple postcard return will become a book.

---

True dat, but personally I've never received a stock option in my life and I'm sure I never will. What I do know as an observer of the tech ecosystem is that without them the creation/destruction cycle of the Valley doesn't work. Workers need to be owners and the best and brightest need to be lured out here with the chance to strike gold. So call me crazy, but I'm not pumped about Congress doing something that would crater one of the principal growth engines for the US economy (and the growth engine for California). Oh and managing to blow a massive hole in the deficit to boot. Really didn't expect to see that combination. Well played Washington, well played.

---

I agree with you that it is a stupid change. What is to stop a company from having the options immediately vested so that there is no tax that is payable as a result of the grant (FMV is the strike price - so no gain; of course the proxy advisory firms and institutional investors would hate that). Then, upon exercise, it will be capital gains. Of course, people here want long-term capital gain to be taxed at the same rate as ordinary income.

---

I'm having a hard time seeing how eliminating the benefits of stock options or other compensation vehicles - when applied across the board to all companies - affect the labor markets. Companies competing to hire the "best and brightest" will find other forms of deferred compensation and, as a practical matter, the "best and the brightest" will still need to work somewhere (with none of those companies offering options). Companies will find other means of sharing the upside with employees - like a good old fashioned taxable bonus.

---

I have an objection to it because it will not add revenue (companies will either immediately vest or provide other means) but it unnecessarily disrupts retention strategy, aligning employees with shareholders, etc. It may also make it more difficult for cash burning companies like most start-up tech companies to attract and retain. I understand why most people here (who are associated with tech) are so protective of it. They think they are special to the US economy and they want tax increase for the other rich folks, but not for them. Just like I understand why those in the fossil fuel industry are so protective of deregulation.

---

I in no way am in the camp of those looking to tax "other rich folks" (although personally I do think the removal of the Estate Tax allowing ever growing amounts of wealth to be transferred to the coupon-clipping winners of the lucky sperm club is ridiculous. Let's check in with Medieval Europe to see how that will work out for us, shall we?). But in terms of tech thinking it's "special" and "important" the facts speak for themselves. If you asked any country in the world whether they'd prefer to have Silicon Valley or the Texas oil fields it wouldn't be a close call. Tech creates more jobs, more wealth and more opportunities. Oh and Saudi Arabia doesn't produce better tech at a fraction of our costs either. If the U.S. doesn't want tech then other countries would love to take it off its hands. Again, I'm not a technology worker but I have lived in California all my life and have benefited from what they've done out here - as have all of us. Maybe I'm alone, but I think these proposals are nuts.

---

Seems odd you advocate for an estate tax to avoid the accumulation of wealth yet you want to create a tax structure that helps tech people accumulate extra wealth. If profit motive is good - as you seem to suggest when it comes to tech industry folks - then why do you want to confiscate their "excess" wealth when they die?

At some point, won't those wealthy "best and brightest" people realize their is no reason to continue to work/innovate, since their wealth will revert to the government? Elon Musk and the rest of the paypal mafia are good examples. They all were wealthy enough to live comfortably for the rest of their years yet went on to found/fund many additional companies that led to more innovation. Why do that - risk your wealth - if most if not all of the upside is going to be paid to the government?

The tech industry is no "better or "worse" than other industry- food, pharma, energy. It provides products or services for money. As a local industry it is good for the Bay Area but it is not this self-proclaimed, egalitarian entity it pretends to be. And in truth what it has delivered after the first iterations is paltry ***** Also , as fake media and acquirers and sellers of information -it threatens our privacy and our institutions in new and unique ways, e.g. see election of 2016.

Nope. Backdating has to do with price. I'm suggesting granting options based on past performance but with the current price.

Maybe I'm misunderstanding what you mean by granting vested options. Right now employees typically receive grants that vest over 4 years, with a 1 year cliff and monthly vesting thereafter, all with a strike price equal to the 409a "value" as of the date of grant. What do you think will happen?

calbear93 said:

---

Unit2Sucks said:

---

There is no way they will make them immediately vested under the current compensation structure - eg I'm not getting a 4 year vested grant from my employer. What might happen is people receiving vested options in arrears or perhaps someone will figure out a phantom stock arrangement that approximates the current option system but of course would never permit LTCG treatment.

---

What you described sounds like option back dating which would be very expensive from an accounting standpoint and very controversial. The reason you grant options is that you want the value to come from increase in stock price following grant made at FMV.

---

BearGoggles said:

---

Sebastabear said:

---

calbear93 said:

---

BearGoggles said:

---

calbear93 said:

---

Sebastabear said:

---

calbear93 said:

---

Sebastabear said:

---

And the deferred comp changes were just reinserted into the Senate version so stock options are dead again (if that view prevails). Hell of a way to run a process here.

---

Everyone is against special interest until it's their special interest. Everyone is OK with tax increase as long as it supports their causes, and don't want tax increases to support any other causes. After all of the push and pull from each interested party, a simple postcard return will become a book.

---

True dat, but personally I've never received a stock option in my life and I'm sure I never will. What I do know as an observer of the tech ecosystem is that without them the creation/destruction cycle of the Valley doesn't work. Workers need to be owners and the best and brightest need to be lured out here with the chance to strike gold. So call me crazy, but I'm not pumped about Congress doing something that would crater one of the principal growth engines for the US economy (and the growth engine for California). Oh and managing to blow a massive hole in the deficit to boot. Really didn't expect to see that combination. Well played Washington, well played.

---

I agree with you that it is a stupid change. What is to stop a company from having the options immediately vested so that there is no tax that is payable as a result of the grant (FMV is the strike price - so no gain; of course the proxy advisory firms and institutional investors would hate that). Then, upon exercise, it will be capital gains. Of course, people here want long-term capital gain to be taxed at the same rate as ordinary income.

---

I'm having a hard time seeing how eliminating the benefits of stock options or other compensation vehicles - when applied across the board to all companies - affect the labor markets. Companies competing to hire the "best and brightest" will find other forms of deferred compensation and, as a practical matter, the "best and the brightest" will still need to work somewhere (with none of those companies offering options). Companies will find other means of sharing the upside with employees - like a good old fashioned taxable bonus.

---

I have an objection to it because it will not add revenue (companies will either immediately vest or provide other means) but it unnecessarily disrupts retention strategy, aligning employees with shareholders, etc. It may also make it more difficult for cash burning companies like most start-up tech companies to attract and retain. I understand why most people here (who are associated with tech) are so protective of it. They think they are special to the US economy and they want tax increase for the other rich folks, but not for them. Just like I understand why those in the fossil fuel industry are so protective of deregulation.

---

I in no way am in the camp of those looking to tax "other rich folks" (although personally I do think the removal of the Estate Tax allowing ever growing amounts of wealth to be transferred to the coupon-clipping winners of the lucky sperm club is ridiculous. Let's check in with Medieval Europe to see how that will work out for us, shall we?). But in terms of tech thinking it's "special" and "important" the facts speak for themselves. If you asked any country in the world whether they'd prefer to have Silicon Valley or the Texas oil fields it wouldn't be a close call. Tech creates more jobs, more wealth and more opportunities. Oh and Saudi Arabia doesn't produce better tech at a fraction of our costs either. If the U.S. doesn't want tech then other countries would love to take it off its hands. Again, I'm not a technology worker but I have lived in California all my life and have benefited from what they've done out here - as have all of us. Maybe I'm alone, but I think these proposals are nuts.

---

Seems odd you advocate for an estate tax to avoid the accumulation of wealth yet you want to create a tax structure that helps tech people accumulate extra wealth. If profit motive is good - as you seem to suggest when it comes to tech industry folks - then why do you want to confiscate their "excess" wealth when they die?

At some point, won't those wealthy "best and brightest" people realize their is no reason to continue to work/innovate, since their wealth will revert to the government? Elon Musk and the rest of the paypal mafia are good examples. They all were wealthy enough to live comfortably for the rest of their years yet went on to found/fund many additional companies that led to more innovation. Why do that - risk your wealth - if most if not all of the upside is going to be paid to the government?

---

I suppose the difference being I'm just some guy who likes college football. I'm not a lawmaker nor am I trying to revise the tax code to "incentive" the "right people." My fundamental point is that a lot of this works fine and these changes are being made by people who really don't understand the consequences of their actions.

And yeah, I really don't think Zuckerberg or Gates or Musk are interested in amassing wealth only so they can pass it along to their progeny. I don't think the Estate Tax in any way changes their incentives, but again that's just a personal not a policy feeling.

"My fundamental point is that a lot of this works fine and these changes are being made by people who really don't understand the consequences of their actions."

This can be said about every tax law ever enacted. The simpler the better. But that horse has not only left the barn, it's been dead for decades.

The way options currently work is that they are treated as qualified deferred compensation and as such, the tax isn't triggered upon vesting but upon delivery.

Let's take 4,000 options vesting over four years with 25% every year. Let's assume the strike price is $10, but that the price goes up to $20 on year one, $30 on year two, $40 on year three and $50 on year four. Right now, you wouldn't be taxed until delivery of the shares and would be taxed at the difference between strike price and market price at the time of exercise. As such, if you exercised on year 4, you would pay $160k income. The way the proposed rules would work is that, even if you exercised on year 4, you would pay tax in year one on $10k in income (1000 x $10), $20k in year 2, $30k in year 3, and $40k in year four plus capital gain on the 3000 shares you sold in year 4. If you received 4000 options that were immediately exercisable and vested, you would not pay any ordinary income tax since the spread upon vesting (day one grant date) is zero but you would pay capital gain on all 4000 options in year four when you exercised and sold.

Okay so what's to stop me from quitting the day after my vested options are granted?

Nothing if your intention for accepting a job was to exercise options to buy shares at the market value. But why would anyone do that?

calbear93 said:

---

My policy? Why, thanks for the credit, but I honestly had no role in our current tax reform. My point was that I don't know whether capital gains should be treated differently. The argument many people here have made is that capital gain treatment is meant to benefit the rich and hurt the income earning folks. Please correct me if that hasn't been the theme. And to say that everyone should be treated the same is bullshyte too. Parents are treated differently. Homeowners are treated differently. Educated folks are treated differently. Different income brackets are treated differently. I am all for simplicity and equal treatment. Maybe there is a reason for treating capital gains differently other than benefiting the rich people? And I have heard no tax proposal in congress to reduce capital gains. Not even when the Democrats had the White House and the Congress and pushed down Obamacare. So, if you want equality, let's have a flat tax with no deduction. And if we're honest, this debate is not an economic discussion, but a moral discussion, because you don't seem like the expert who can tell me that increasing capital gains will improve the economy. So, your proposal is based on morals and belief that the $10 million executive is getting the short stick relative to the $10 million stock investor. If you are interested in same and simplicity, I can be convinced on a flat rate and same treatment for everyone without any single deduction or any social engineering.

---

You keep talking about this being a moral question and not an economic question but it is both.

First, your example of comparing $10 million ordinary income vs. $10 million capital gains income is a strawman. The wealthy heir that gets capital gains from selling stocks for a $200k gain and sits on their duff all year is taxed at an 8% average rate (keep in mind that $200k of capital gains at a 5% gain means selling $4 million of assets, so we are truly talking about a wealthy heir). The hard worker up every weekday and putting in hours of work to earn $200k ordinary income is taxed at an average rate of 25%. This is morally wrong and the makings of a ruling oligopoly. That is our current tax policy.

Now economically, a progressive tax rate is good for the economy simply as a buffer against the natural forces of capitalism. Capitalism strives to create efficiency which includes consolidation of business leading to consolidation of wealth. This generates innovation and economic growth but at some point it creates stagnation when wealth is consolidated to the point that demand suffers. That is our current situation. How do we know? Interest rates are at record lows telling us that the wealthy have plenty of capital to invest and consumer inflation is very low telling us money is not sufficiently getting into the hands of consumers. Therefore, for economic growth reasons we absolutely want to raise taxes on the wealthy right now and enhance social services at the low end.

I never said it wasn't an economic consideration. My point was that no one on this board who has tried to comment from an economic standpoint displayed any meaningful knowledge to make a cogent argument. I would rather rely on objective economist (if one exist) then the amateurish analysis (including mine) on this board. I am also not saying we should not increase personal income tax. I think we do need more revenues and need to cut spending. Where the moral question comes into play is when people think their wealth is somehow more sacred (e.g., millions from options) than other form of wealth. Or they rationalize how being in the top 10% or even top1% does not make them wealthy. I just think it is funny how people will twist themselves into thinking that they are not wealthy (it's the other guys) or, when the tax increases targets them particularly, they start talking about how their group (us folks in CA) pay more than they receive (which is a similar argument rich folks make). So, not disagreeing with you other than people's perspective on who is rich and who should bear the burden. CA and NY are the richest states. They should pay more and tax increases should affect us more, no? Seems progressive to me. Tech is one of the richest industries. Maybe the tax burden should impact them the most, no? Just extending the standard argument and that there is no necessarily rght moral stand when it comes to allocating tax obligations among the privileged. But to be clear, I am not for tax cut (other than reducing corporate rates) that reduces revenue for the government alread working under a deficit.

calbear93 said:

---

Nothing if your intention for accepting a job was to exercise options to buy shares at the market value. But why would anyone do that?

---

Think private companies. I know you are largely focused on public companies, but this is largely a private company issue since it's easy enough for public companies to grant RSUs.

There is a reason companies have vesting and it's not going to go away just because tax law changes.

Like I said above, possibly we see a move to granting what some call equity bonuses but could be seen as an option granted in arrears. Basically instead of a 4 year option grant for 40k shares on the day you start, on each anniversary of your start date you receive a vested option for 10k shares at the then current price. Worse than current system for employees but better than tax consequences of current system under new regime. Zero chance private companies grant 4 years worth of vested options on start date.

OK, if it's a private company, why would you exercise when there is no market for the shares? You take a job just to acquire common stock at the highly inprecise FMV that you can't resell and then quit? That would seem even less likely. Does that seem likely to you?

calbear93 said:

---

OK, if it's a private company, why would you exercise when there is no market for the shares? You take a job just to acquire common stock at the highly inprecise FMV that you can't resell and then quit? That would seem even less likely. Does that seem likely to you?

---

Yes, it happens all the time. 409A is typically 1/4 to 1/3 of last preferred price. Pretty good discount for some risk.

That form of immediately vested options seem reasonable and not opposed to what I was proposing to avoid the tax impact.

OK. Then I guess that would impact recruitment grant. I don't have much experience with private tech companies and as such am biased toward executive compensation deliberation at comp committees at public companies.

calbear93 said:

---

That form of immediately vested options seem reasonable and not opposed to what I was proposing to avoid the tax impact.

---

It's what I would be recommending to my board if they asked me today. Will be interesting to see what the ExecComp community comes up with.

calbear93 said:

---

I never said it wasn't an economic consideration. My point was that no one on this board who has tried to comment from an economic standpoint displayed any meaningful knowledge to make a cogent argument. I would rather rely on objective economist (if one exist) then the amateurish analysis (including mine) on this board. I am also not saying we should not increase personal income tax. I think we do need more revenues and need to cut spending. Where the moral question comes into play is when people think their wealth is somehow more sacred (e.g., millions from options) than other form of wealth. Or they rationalize how being in the top 10% or even top1% does not make them wealthy. I just think it is funny how people will twist themselves into thinking that they are not wealthy (it's the other guys) or, when the tax increases targets them particularly, they start talking about how their group (us folks in CA) pay more than they receive (which is a similar argument rich folks make). So, not disagreeing with you other than people's perspective on who is rich and who should bear the burden. CA and NY are the richest states. They should pay more and tax increases should affect us more, no? Seems progressive to me. Tech is one of the richest industries. Maybe the tax burden should impact them the most, no? Just extending the standard argument and that there is no necessarily rght moral stand when it comes to allocating tax obligations among the privileged. But to be clear, I am not for tax cut (other than reducing corporate rates) that reduces revenue for the government alread working under a deficit.

---

My view is, if you have to work for a standard living in your area you are not rich. That doesn't mean you aren't very fortunate and living a good life, monetarily speaking.

OaktownBear and myself are arguing for the same treatment of ordinary income and capital gains income. Capital gains proponents (and proponents of the status quo) are claiming sacred status for capital gains.

dajo9 said:

---

calbear93 said:

---

I never said it wasn't an economic consideration. My point was that no one on this board who has tried to comment from an economic standpoint displayed any meaningful knowledge to make a cogent argument. I would rather rely on objective economist (if one exist) then the amateurish analysis (including mine) on this board. I am also not saying we should not increase personal income tax. I think we do need more revenues and need to cut spending. Where the moral question comes into play is when people think their wealth is somehow more sacred (e.g., millions from options) than other form of wealth. Or they rationalize how being in the top 10% or even top1% does not make them wealthy. I just think it is funny how people will twist themselves into thinking that they are not wealthy (it's the other guys) or, when the tax increases targets them particularly, they start talking about how their group (us folks in CA) pay more than they receive (which is a similar argument rich folks make). So, not disagreeing with you other than people's perspective on who is rich and who should bear the burden. CA and NY are the richest states. They should pay more and tax increases should affect us more, no? Seems progressive to me. Tech is one of the richest industries. Maybe the tax burden should impact them the most, no? Just extending the standard argument and that there is no necessarily rght moral stand when it comes to allocating tax obligations among the privileged. But to be clear, I am not for tax cut (other than reducing corporate rates) that reduces revenue for the government alread working under a deficit.

---

My view is, if you have to work for a standard living in your area you are not rich. That doesn't mean you aren't very fortunate and living a good life, monetarily speaking.

OaktownBear and myself are arguing for the same treatment of ordinary income and capital gains income. Capital gains proponents (and proponents of the status quo) are claiming sacred status for capital gains.

---

You and I disagree. Someone having to work to make $1million to live in Noe Valley is wealthy. Someone retired and living in San Fernando Valley off retirement capital gain investments and living off $30k is not wealthy. Seems like some convenient view. We will never agree. Also, saying you want equal treatment for capital gains seems odd. Capital gain isn't even part of the reform and there are quite a bit of inequality in tax treatment. Options are one but the argument is that it spurs economy (why not capital gains). Mortgage is another - why not poor renters who can't afford to buy? I can be convinced into full equal treatment but not picking and choosing who benefits based on your own preference and then preaching about equality. Don't buy the argument. But we knew you and I had different values and views of the world. No surprise and no hostility.

I should have added my rule of thumb for who is rich applies to working age people only, not senior citizen retirees.

Otherwise what I here from you is that other things are unequal so it doesn't make any sense to call for ordinary income and capital gain income to be treated equally. That argument is weak, imo.

Ordinary income earners and capital gains recipients can be allowed to make use of the same set of deductions, whatever people decide those deductions are. Honestly, I'm ok with getting rid of all deductions except child and student loan deductions if the middle class is given equivalent rate reductions.

dajo9 said:

---

I should have added my rule of thumb for who is rich applies to working age people only, not senior citizen retirees.

Otherwise what I here from you is that other things are unequal so it doesn't make any sense to call for ordinary income and capital gain income to be treated equally. That argument is weak, imo.

Ordinary income earners and capital gains recipients can be allowed to make use of the same set of deductions, whatever people decide those deductions are. Honestly, I'm ok with getting rid of all deductions except child and student loan deductions if the middle class is given equivalent rate reductions.

---

This is a really good, well though out comment

I have a tax background and therefore often get lost in the details. But capital gains really adds an enormous complexity and is a bad way to try and compensate for the prejudice in our tax code against equity in favor of debt. See the Joint Committee on Taxation Report dated May 20, 2016. Instead of making up for bad policy in the tax code, the capital gains rate should be eliminated.

I'm going to take two things off the table.

(1)Real Estate is Different. If you hold real estate you want don't want to be taxed on inflation as when you sell you are being paid in today's dollars, which have less value, and then you are paying a tax on the lost value. Fair enough, but most people in real estate avoid taxes through deferral mechanisms or in the case of non-business property, there is tax exclusion on sale of residences.

(2)Treat Retirees differently. Reasons are enunciated in other posts and taxes on retiree investment earnings effectively double-tax that income. Labor income is taxed when it is earned, and investments are generally made out of after-tax earningsso capital-gains levies represent another bite out of an investor's money. In effect, the system punishes those who put their money to work. But why not simplify things and give seniors a credit for stock and bond income to avoid the complexity of capital gains, and you can limit the size of the credit for those that live for wealth redistribution? (There is a whole discussion regarding retirement accounts which I am admittedly avoiding, due to complication).

If you take out real estate and retirees, most capital gains deal with equity investments. Capital gains supposedly differ from regular income because they can be much harder hit by inflation, so they need a lower tax rate to reflect that fact since they don't have the current tax beaks for real estate. This is less of a factor the several years, but I'm willing to concede it is a legit argument. The simple fix is to index capital (if not all) income to inflation, just as we index Social Security and all sorts of other benefits via "cost-of-living" adjustments that account for inflation. We even inflation adjust our Social Security taxes. This would actually insure a more just result, than picking some arbitrary reduced tax rate to benefit everyone.

One major argument for capital gains rates, those who have them will keep more of their money and save it, which will inevitably find its way into investments in the US that, on the margin, will spur domestic economic growth. Since those with capital gains are more wealthy, they save more of any extra income and spur the economy. But what if the tax break went to simply reduce all income? Is domestic spending by the less wealthy of a tax break (since they don't save as much they spend rather than save) any worse an investment than the capital investment made by wealthy? I have not seen one study that proves this. In theory the tax break misdirects scarce resources into less productive activities that produce income that is taxed as capital gains instead of ordinary income. It also ignores there is some question of correlation between savings from capital gains and business investment. The major source of domestic capital for much investment in the U.S. is not affected by the taxation of capital gains. This capital comes from foreign investors, institutional investors such as pensions, life insurance and 401(k)-type retirement accounts and IRAs, and nonprofits. Nor has there been shown a correlation between overall capital investment and changes in capital gain rates. Again, I have seen no study that proves that capital gains is a net positive for the economy versus a simple drop in ordinary tax rates for everyone.


Complexity and Consequences:

Lower rates provide perverse incentives, spurring people to go into certain jobs that are driven by capital gains. Further, some economists argue a low capital-gains rate, defeats the idea of progressive taxation, since mostly wealthy individuals take advantage of the lower rate. I appreciate that there are counter arguments, but let us assume this is at least a concern.

All that said, I know of no other item that adds more complexity to tax returns and planning. Capital gains are the cause for tax shelters or other strategies to re-characterize income so it is taxed at the lower capital-gains rate, rather than as regular income. Most tax planning is aimed at capital gains treatment in big accounting shops. This is an amazing distortion and I would propose is behind a substantial portion of Treasury Regulations (which are amazing complex and long) and many court cases, all which go away if you eliminate the dual tax rate system.

The problem is that the arguments for lower tax rates on capital gains is they are necessary to fix other defects in the income tax. Corporate income, for instance, is double-taxed because it's subject to both corporate and individual income tax. Instead, it provides a deduction for debt capital and one level of income to debt investor who can structure its debt instrument to have many of the same rights as equity holders (e.g., voting rights). Allowing this structure probably is bad policy because it results in businesses taking on too much debt, rather than financing spending by selling shares in the business and diversifying ownership. Deducting interest expenses is a tax benefit, conferring the preference to debt and avoids double taxation. Moreover, debt held by consumers is an itemized deduction with similar distortions.

These may be good arguments for tax reform such as for inflation adjustments, but they are not reasons to favor capital gains. A better approach to the overall question of capital gains would be to tax them and dividends as ordinary income, eliminate or reduce other tax breaks, and use the revenue gained to cut ordinary income-tax rates. This approach would reduce distortions that arise from attempts to convert ordinary income to capital gains and the lower ordinary income-tax rate would reduce the incentives for tax avoidance and complexity generally.

wifeisafurd said:

---

dajo9 said:

---

I should have added my rule of thumb for who is rich applies to working age people only, not senior citizen retirees.

Otherwise what I here from you is that other things are unequal so it doesn't make any sense to call for ordinary income and capital gain income to be treated equally. That argument is weak, imo.

Ordinary income earners and capital gains recipients can be allowed to make use of the same set of deductions, whatever people decide those deductions are. Honestly, I'm ok with getting rid of all deductions except child and student loan deductions if the middle class is given equivalent rate reductions.

---

This is a really good, well though out comment

I have a tax background and therefore often get lost in the details. But capital gains really adds an enormous complexity and is a bad way to try and compensate for the prejudice in our tax code against equity in favor of debt. See the Joint Committee on Taxation Report dated May 20, 2016. Instead of making up for bad policy in the tax code, the capital gains rate should be eliminated.

I'm going to take two things off the table.

(1)Real Estate is Different. If you hold real estate you want don't want to be taxed on inflation as when you sell you are being paid in today's dollars, which have less value, and then you are paying a tax on the lost value. Fair enough, but most people in real estate avoid taxes through deferral mechanisms or in the case of non-business property, there is tax exclusion on sale of residences.

(2)Treat Retirees differently. Reasons are enunciated in other posts and taxes on retiree investment earnings effectively double-tax that income. Labor income is taxed when it is earned, and investments are generally made out of after-tax earningsso capital-gains levies represent another bite out of an investor's money. In effect, the system punishes those who put their money to work. But why not simplify things and give seniors a credit for stock and bond income to avoid the complexity of capital gains, and you can limit the size of the credit for those that live for wealth redistribution? (There is a whole discussion regarding retirement accounts which I am admittedly avoiding, due to complication).

If you take out real estate and retirees, most capital gains deal with equity investments. Capital gains supposedly differ from regular income because they can be much harder hit by inflation, so they need a lower tax rate to reflect that fact since they don't have the current tax beaks for real estate. This is less of a factor the several years, but I'm willing to concede it is a legit argument. The simple fix is to index capital (if not all) income to inflation, just as we index Social Security and all sorts of other benefits via "cost-of-living" adjustments that account for inflation. We even inflation adjust our Social Security taxes. This would actually insure a more just result, than picking some arbitrary reduced tax rate to benefit everyone.

One major argument for capital gains rates, those who have them will keep more of their money and save it, which will inevitably find its way into investments in the US that, on the margin, will spur domestic economic growth. Since those with capital gains are more wealthy, they save more of any extra income and spur the economy. But what if the tax break went to simply reduce all income? Is domestic spending by the less wealthy of a tax break (since they don't save as much they spend rather than save) any worse an investment than the capital investment made by wealthy? I have not seen one study that proves this. In theory the tax break misdirects scarce resources into less productive activities that produce income that is taxed as capital gains instead of ordinary income. It also ignores there is some question of correlation between savings from capital gains and business investment. The major source of domestic capital for much investment in the U.S. is not affected by the taxation of capital gains. This capital comes from foreign investors, institutional investors such as pensions, life insurance and 401(k)-type retirement accounts and IRAs, and nonprofits. Nor has there been shown a correlation between overall capital investment and changes in capital gain rates. Again, I have seen no study that proves that capital gains is a net positive for the economy versus a simple drop in ordinary tax rates for everyone.


Complexity and Consequences:

Lower rates provide perverse incentives, spurring people to go into certain jobs that are driven by capital gains. Further, some economists argue a low capital-gains rate, defeats the idea of progressive taxation, since mostly wealthy individuals take advantage of the lower rate. I appreciate that there are counter arguments, but let us assume this is at least a concern.

All that said, I know of no other item that adds more complexity to tax returns and planning. Capital gains are the cause for tax shelters or other strategies to re-characterize income so it is taxed at the lower capital-gains rate, rather than as regular income. Most tax planning is aimed at capital gains treatment in big accounting shops. This is an amazing distortion and I would propose is behind a substantial portion of Treasury Regulations (which are amazing complex and long) and many court cases, all which go away if you eliminate the dual tax rate system.

The problem is that the arguments for lower tax rates on capital gains is they are necessary to fix other defects in the income tax. Corporate income, for instance, is double-taxed because it's subject to both corporate and individual income tax. Instead, it provides a deduction for debt capital and one level of income to debt investor who can structure its debt instrument to have many of the same rights as equity holders (e.g., voting rights). Allowing this structure probably is bad policy because it results in businesses taking on too much debt, rather than financing spending by selling shares in the business and diversifying ownership. Deducting interest expenses is a tax benefit, conferring the preference to debt and avoids double taxation. Moreover, debt held by consumers is an itemized deduction with similar distortions.

These may be good arguments for tax reform such as for inflation adjustments, but they are not reasons to favor capital gains. A better approach to the overall question of capital gains would be to tax them and dividends as ordinary income, eliminate or reduce other tax breaks, and use the revenue gained to cut ordinary income-tax rates. This approach would reduce distortions that arise from attempts to convert ordinary income to capital gains and the lower ordinary income-tax rate would reduce the incentives for tax avoidance and complexity generally.

---

How does inflation affect real estate assets differently than stock or other capital assets? If I buy IBM shares and hold them for 20 years how is that different than doing so with a real estate asset (ignoring depreciation, which potentially is responsible for much of the gain)?

Personally I wish to thank the vast majority of posters on this thread for an informative and entertaining discussion with an absolute minimum of ad hominem attacks.
To bad we don't see this type of discussion in WDC or on TV.

Given it is Big Game week, I am going to minimize the amount of time I spend thinking about the tax code and maximize the amount of time I spend trying to figure out what kind of voodoo magic Stanford is applying to Love's ankle and how to counteract that (seriously, what is happening down on the Farm? The guy hobbles off the field in the first half and then runs for a 10,000 yards against one of the top defenses in the country in the second half? Something is just not right.)

But anyway, on the subject of the ridiculous idea to tax illiquid options and RSUs on vesting as opposed to sale, I thought I'd drop this quote in here I saw earlier today. I think it's a pretty good analogy:

"For startup employees, this is equivalent to the government taxing a lottery ticket because the first two ping pong balls match your ticket. Employees will owe taxes on 'potential' value on the vesting date of their options before they know whether the option will ever really be worth anything and before there is any cash available to pay taxes. Maybe next, Congress will tax us when Zillow says our home value has increased."