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Taxation of Carried Interest

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Re: Taxation of Carried Interest

#101

Post by thaumasiotes »

harryh wrote: post #99
thaumasiotes wrote: post #98

Earlier quoted context omitted.

> abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate. That's not the double taxation argument. After abolishing the corporate income tax, you still have to pay the personal income tax. The double taxation argument is that money now is better than the same amount of money later ( https://en.wikipedia.org/wiki/Time_value_of_money ). But the concept of th…

You are incorrect about what is often referred to as a "double taxation argument." https://www.investopedia.com/terms/d/double_taxation.asp Double taxation often occurs because corporations are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just like individuals. When corporations pay out dividends to shareholders, those dividend payments incur in…

That is a double taxation argument against the corporate income tax.

I described the double taxation argument against the capital gains tax.

Unsurprisingly, different taxes are relevant. But I feel safe in saying that "the double taxation argument that justifies the capital gains rate [being different from the labor income rate]" is the double taxation argument against taxing capital gains, not the double taxation argument against taxing corporate income.

From your link:

> Double taxation is a taxation principle referring to income taxes paid twice on the same source of earned income.

The model I described matches this definition perfectly. Where do you think I was incorrect?

Re: Taxation of Carried Interest

#102

Post by harryh »

Declanomous wrote: post #100
harryh wrote: post #80

Earlier quoted context omitted.

Economic theories do take into account what is produced and why. No one thinks that we should devote 90% of our economy to paperclip production even if that meant we would be producing more total stuff than otherwise. When people talk about economic efficiency they actually are talking about utility. Economic theory can also address questions of equality. There are efficient ways to redistribute income and there are…

My topic statement was thus: > Economic theories that only looks to maximize economic productivity while ignoring philosophical or ethical concerns are idiotic. I did not claim that economic theories cannot address philosophical or ethical concerns, I claimed that economic theories which do not take these in to account are idiotic. I am not an economist, but I took quite a few economics classes in college. I am confi…

> I am confident that I know enough to say that eliminating the capital gains tax is not a policy that would be pursued by someone looking to address concerns of regarding equality or the environment.

Your confidence is misplaced. On equality one might convincingly argue that by lowering cap gains rate we could increase the overall growth rate of the economy. By doing so we could increase other taxes on the rich without leaving them in a worse state than they would have been in the lower growth economy. We can then use this additional tax revenue to fund social services or otherwise redistribute income to reduce inequality.

On environmentalism, one might argue that we should cut cap gains taxes and, in order to make up the lost revenue, institute a carbon tax or other tax on environmentally damaging activities. This could have a profound positive impact on our environmental footprint.

Now, I'm not necessarily saying these are good ideas. But they are also not, prima facie, idiotic (to use your word). They are complex questions uncertain impacts. Reasonable people can disagree.

Your assertion about "macro 101 textbook and you forgot other people exist" is also quite strange when you consider the fact that I'm not talking about college freshman's stoner thoughts on optimal taxation of capital. I'm referring to the ideas of professional PhD economists who are well respected in their fields.

Re: Taxation of Carried Interest

#103

Post by kmonsen »

harryh wrote: post #7

FWIW, here is the simple counter argument: Alice & Bob form a partnership to invest some money. Between the two of them they invest $100. After 5 years they sell their investment for $200. As far as the government is concerned, that's a long term gain of $100 and should be taxed as such. How Alice & Bob decide to split the gains is between them and not a tax question. I don't necessarily buy this argument, but it's a…

Sure, but this is equally true for any form of labor. So you are really arguing for equal rates for everyone.

The interesting point is why do hedge fund manager labor income get taxed at a different rate then all other labor which you have not addressed.

Re: Taxation of Carried Interest

#104

Post by harryh »

thaumasiotes wrote: post #101
harryh wrote: post #99

Earlier quoted context omitted.

You are incorrect about what is often referred to as a "double taxation argument." https://www.investopedia.com/terms/d/double_taxation.asp Double taxation often occurs because corporations are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just like individuals. When corporations pay out dividends to shareholders, those dividend payments incur in…

That is a double taxation argument against the corporate income tax. I described the double taxation argument against the capital gains tax. Unsurprisingly, different taxes are relevant. But I feel safe in saying that "the double taxation argument that justifies the capital gains rate [being different from the labor income rate]" is the double taxation argument against taxing capital gains, not the double taxation ar…

I'm not disagreeing with any of your ideas. I'm just saying that it is very very common for people to say, for example, "capital gains taxes should be less than wage taxes because of double taxation: the income is already taxed at the corporate level and then it gets taxed again at the individual level."

It is very uncommon for people to say that double taxation has occurred when a nominal (but not real) gain due to inflation is taxed.

I'm not saying any of the concepts you have described are in any way wrong. I'm just saying that the way you use the phrase "double taxation" is unusual and is extremely unlikely to be the same as other people you might talk to.

Re: Taxation of Carried Interest

#105

Post by harryh »

hippich wrote: post #90
harryh wrote: post #77

Earlier quoted context omitted.

It depends. But, in general, no. Startup employees generally get equity in the form of stock options. In order for employees to get preferential tax treatment on these options they have to exercise these options at the time they are granted (which can require a large outlay of cash) and then hold them for at least one year. Due to the cost and risk of this exercise, most employees do not do this. Instead they wait to…

sounds like a pretty bad deal... I am glad I never accepted stock options in lieu of compensation. EDIT: after reading more about it, it actually makes sense. What really employee is getting is an "option" similar to one can buy for publicly traded companies. And whatever option price is already reflected in employees tax situation - it is an actual expense which lowers tax base by the cost of this option. Now - the…

From a strictly "expected value" calculation you are probably right that in many cases startups are getting a pretty good deal when they get employees to trade salary for stock options. It's hard to say if this qualifies as "taking advantage of these clueless employees" though.

Certainly it is in some cases, but in others the employees could have a high enough risk tolerance that it is a good deal for them.

In addition employees also often make career decisions on factors that are not purely financial. This is also a perfectly reasonable thing for people to do.

Re: Taxation of Carried Interest

#106

Post by hippich »

harryh wrote: post #105
hippich wrote: post #90

Earlier quoted context omitted.

sounds like a pretty bad deal... I am glad I never accepted stock options in lieu of compensation. EDIT: after reading more about it, it actually makes sense. What really employee is getting is an "option" similar to one can buy for publicly traded companies. And whatever option price is already reflected in employees tax situation - it is an actual expense which lowers tax base by the cost of this option. Now - the…

From a strictly "expected value" calculation you are probably right that in many cases startups are getting a pretty good deal when they get employees to trade salary for stock options. It's hard to say if this qualifies as "taking advantage of these clueless employees" though. Certainly it is in some cases, but in others the employees could have a high enough risk tolerance that it is a good deal for them. In additi…

From what I read typical stock option results in about 50k per year extra if company succeed. Chances of hitting that are really really small. So risk/reward doesn't seems to be right.

As for non-financial reasons - this is 100% valid point. But then why we are talking about non-fair taxation? Stocks come into picture only when employee exercise (at a nominal price on the moment employee was hired) The same would apply if you use regular options for the publicly traded company on RobingHood for example.

Re: Taxation of Carried Interest

#107

Post by Declanomous »

harryh wrote: post #102
Declanomous wrote: post #100

Earlier quoted context omitted.

My topic statement was thus: > Economic theories that only looks to maximize economic productivity while ignoring philosophical or ethical concerns are idiotic. I did not claim that economic theories cannot address philosophical or ethical concerns, I claimed that economic theories which do not take these in to account are idiotic. I am not an economist, but I took quite a few economics classes in college. I am confi…

> I am confident that I know enough to say that eliminating the capital gains tax is not a policy that would be pursued by someone looking to address concerns of regarding equality or the environment. Your confidence is misplaced. On equality one might convincingly argue that by lowering cap gains rate we could increase the overall growth rate of the economy. By doing so we could increase other taxes on the rich with…

In context, I believe that OP was arguing for eliminating capital gains from our current system, not totally rewriting the way our taxes work such that capital gains was eliminated but we recovered those taxes in another manner.

My argument accounts for this:

> Of course you could argue that you can account for all of this using negative externalities. In that case you might as well tax capital gains to account for the negative externalities. I suppose you could tax something else, like lifetime earnings, but the point is I feel comfortable making the claim that not taxing capital gains is idiotic.

I mean, ideally we would have a system where negative externalities were taxed appropriately, however that is a monumentally complicated task, and I somewhat doubt it could be done efficiently. This is especially true when you start dealing with externalities that arise from situations like "the reason why eliminating capital gains tax is productive is because people will continue to reinvest their money because it's the most productive use for their money," where reinvest effectively means you end up buying more and more of the economy.

What regulations do you enact to prevent this from devolving into feudalism? How do you ensure that system you have put in place isn't destroyed by regulatory capture? What if having a ton of money is a negative externality in and of itself, even though it means you contribute more efficiently to the economy?

I know that capital gains tax is inefficient, but it's an easy tax to levy, it's hard to evade, and politicians can understand it.

Removing capital gains tax and accounting for the externalities is not idiotic. However, removing capital gains tax in our current system would almost definitely be an idiotic move.

Re: Taxation of Carried Interest

#108

Post by thaumasiotes »

harryh wrote: post #104
thaumasiotes wrote: post #101

Earlier quoted context omitted.

That is a double taxation argument against the corporate income tax. I described the double taxation argument against the capital gains tax. Unsurprisingly, different taxes are relevant. But I feel safe in saying that "the double taxation argument that justifies the capital gains rate [being different from the labor income rate]" is the double taxation argument against taxing capital gains, not the double taxation ar…

I'm not disagreeing with any of your ideas. I'm just saying that it is very very common for people to say, for example, "capital gains taxes should be less than wage taxes because of double taxation: the income is already taxed at the corporate level and then it gets taxed again at the individual level." It is very uncommon for people to say that double taxation has occurred when a nominal (but not real) gain due to…

> It is very uncommon for people to say that double taxation has occurred when a nominal (but not real) gain due to inflation is taxed.

Note that this was not any part of the model I described; assuming inflation of 0%, capital gains taxes are still double taxation because the value of $100,000 (real, inflation-adjusted, or your favorite equivalent term) today is greater than the value of $100,000 inflation-adjusted dollars 20 years from now.

Believing that "the double taxation argument that justifies the capital gains rate" has to do with the corporate income tax is a significant mistake that will cause you disappointment should you manage to eliminate the corporate income tax -- the arguments for a lower capital gains rate will not go away, because eliminating the corporate income tax will not address them.

Here's a professional economist making the same point in far-off 2017: ( http://econlog.econlib.org/archives/2017/07/do_you_really_w.... )

> I always find that some people are confused by the claim that investment income should not be included with wage income. I like to explain this with a thought experiment of two equally well off twin brothers. Assume that both earn identical lifetime wage incomes, and neither inherits money from their parents. Then both are equally well off. If one chose to buy two Hondas and the other chooses to but one BMW, you would not say the guy with two cars is better off. If one chooses to buy a BMW at age 25 and the other saves and buys two BMWs at age 55, you would not say the more patient brother is better off. (Unless you were the US government). Future goods have less value than present goods.

Re: Taxation of Carried Interest

#109

Post by freeone3000 »

harryh wrote: post #44
freeone3000 wrote: post #36

Earlier quoted context omitted.

No. You shouldn't. The person doing the actual work should be paying it as tax on labor, and the person who put up the funds should be paying it as capital gains. And obviously, capital gains should be taxed at a rate greater than labor.

That is a fine point of view, but perhaps outside the scope of the topic under discussion.

The parent poster is saying that carried interest should be capital gains taxable to avoid having it in the higher bracket, as it would be if it were taxed as wages. Thus, the idea that it is wages but that should be cheaper than capital gains answers the issue.

Re: Taxation of Carried Interest

#110

Post by freeone3000 »

MR4D wrote: post #48
freeone3000 wrote: post #36

Earlier quoted context omitted.

No. You shouldn't. The person doing the actual work should be paying it as tax on labor, and the person who put up the funds should be paying it as capital gains. And obviously, capital gains should be taxed at a rate greater than labor.

Uh, what? You want to make it more expensive to increase productivity? (Because that’s what capital does - it gets invested to increase profits). The logical path you’re going down would replace road builders with people with spoons to move dirt around and file down rocks with spoons to put them in the ground to walk on. Seriously, if you consider the logical conclusion of your argument, we end up in madness.

That's nonsense. The gains of investing in a work crew still make money for capital. They still get their income. The increase in productivity is its own reward - the road gets built faster or with less labor, you're able to out-bid your competition. It makes more sense to extract money from the people who contributed money than from people who contributed labor.
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