Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Taxation of Carried Interest

avc.com

Post reply on HN
Print view View original

81–90 of 306 posts

Re: Taxation of Carried Interest

#81

Post by millstone »

harryh wrote: post #33
millstone wrote: post #31

What is the modern argument for preferential tax treatment of capital gains? Arguments against it seem compelling to me: 1. The American dream is achievement through hard work. But taxation of capital gains privileges ownership over labor. That's just un-American. 2. This preferential taxation creates an anti-productive industry dedicated to re-casting ordinary income as capital gains, leading to misallocation of res…

https://en.wikipedia.org/wiki/Optimal_capital_income_taxatio... is a good place to start. Right up top is a nice summary: "Starting from the conceptualization of capital income as future consumption, the taxation of capital income corresponds to a differentiated consumption tax on present and future consumption. Consequently, a capital income tax results in the distortion of individuals' saving and consumption behavi…

These arguments use a simplified model where capital income occurs as the consequence of investing wage income. They don't address the modern reality that capital income replaces wage income, through accelerated depreciation, inheritance, carried interest, etc.

And yes, of course taxing capital is distorionary; but so is taxing labor, and exponentially so when capital income may be substituted for labor.

Re: Taxation of Carried Interest

#82

Post by harryh »

millstone wrote: post #81
harryh wrote: post #33

Earlier quoted context omitted.

https://en.wikipedia.org/wiki/Optimal_capital_income_taxatio... is a good place to start. Right up top is a nice summary: "Starting from the conceptualization of capital income as future consumption, the taxation of capital income corresponds to a differentiated consumption tax on present and future consumption. Consequently, a capital income tax results in the distortion of individuals' saving and consumption behavi…

These arguments use a simplified model where capital income occurs as the consequence of investing wage income. They don't address the modern reality that capital income replaces wage income, through accelerated depreciation, inheritance, carried interest, etc. And yes, of course taxing capital is distorionary; but so is taxing labor, and exponentially so when capital income may be substituted for labor.

You asked a question. I gave you an answer. I agree that it is a complex question with many competing arguments on both sides.

Re: Taxation of Carried Interest

#83

Post by millstone »

WalterBright wrote: post #53
millstone wrote: post #31

What is the modern argument for preferential tax treatment of capital gains? Arguments against it seem compelling to me: 1. The American dream is achievement through hard work. But taxation of capital gains privileges ownership over labor. That's just un-American. 2. This preferential taxation creates an anti-productive industry dedicated to re-casting ordinary income as capital gains, leading to misallocation of res…

1. The higher the capital gains tax rate, the less money will be invested. 2. Higher rates make for less efficient economics, because people will hold on to poorly performing investments longer. 3. A big chunk of capital gains are actually inflation.

Every point you make applies equally well to labor:

1. The higher the labor tax rate, the fewer people will work.

2. Higher labor tax rate makes for less efficient economics because workers will prefer lower-paying (less stressful) jobs.

3. Wage tax brackets are not indexed for inflation.

Given these, why should the tax code prefer capital ownership to labor?

Re: Taxation of Carried Interest

#84

Post by WalterBright »

millstone wrote: post #83
WalterBright wrote: post #53

Earlier quoted context omitted.

1. The higher the capital gains tax rate, the less money will be invested. 2. Higher rates make for less efficient economics, because people will hold on to poorly performing investments longer. 3. A big chunk of capital gains are actually inflation.

Every point you make applies equally well to labor: 1. The higher the labor tax rate, the fewer people will work. 2. Higher labor tax rate makes for less efficient economics because workers will prefer lower-paying (less stressful) jobs. 3. Wage tax brackets are not indexed for inflation. Given these, why should the tax code prefer capital ownership to labor?

1. only if they have alternatives to work.

2. are you sure about that? Lower paying jobs tend to be more stressful.

3. they are last time I looked, though those things change over time

Re: Taxation of Carried Interest

#85

Post by millstone »

harryh wrote: post #82
millstone wrote: post #81

Earlier quoted context omitted.

These arguments use a simplified model where capital income occurs as the consequence of investing wage income. They don't address the modern reality that capital income replaces wage income, through accelerated depreciation, inheritance, carried interest, etc. And yes, of course taxing capital is distorionary; but so is taxing labor, and exponentially so when capital income may be substituted for labor.

You asked a question. I gave you an answer. I agree that it is a complex question with many competing arguments on both sides.

Agreed; not attacking you, I just feel like the pro-differential-taxation arguments are too theoretical and ignore political and economic realities.

Re: Taxation of Carried Interest

#86

Post by noobermin »

hippich wrote: post #72
forapurpose wrote: post #67

Earlier quoted context omitted.

> people who paid for it the most If we are talking about equal sacrifice, they did not pay the most, they paid as much as anyone else. > hen someone pays a lot of money into federal treasury - nil Why should they get any praise for doing their share? Or everyone should get praise (which I support). The premise that someone is somehow superior for doing their fair share is fallacious. They are not aristocrats condesc…

> If we are talking about equal sacrifice, they did not pay the most, they paid as much as anyone else. I am talking in absolute numbers. There is plenty of research on who is paying the most taxes. A just random result from google - http://www.pewresearch.org/fact-tank/2017/10/06/a-closer-loo... " A Pew Research Center analysis of IRS data from 2015, the most recent available, shows that taxpayers with incomes of $2…

That's income taxes, the poor pay other taxes too. Also, the poor comprise the people who cut your hair, clean your yards, make your food, essentially provide for those making over 200K. Just because we don't provide the means to live to them like we do for other people doesn't mean they aren't important and don't equally sacrifice.

Re: Taxation of Carried Interest

#87

Post by harryh »

millstone wrote: post #85
harryh wrote: post #82

Earlier quoted context omitted.

You asked a question. I gave you an answer. I agree that it is a complex question with many competing arguments on both sides.

Agreed; not attacking you, I just feel like the pro-differential-taxation arguments are too theoretical and ignore political and economic realities.

My personal view is that the pro-differential-taxation theory mostly argues for zero taxes on cap gains. But you're right that this ignores political and economic realities. In particular, I find the discussion about the difficulty of distinguishing between capital and wage income (the topic of Fred's blog post!) particularly compelling. So a compromise is in order: lower taxes on cap gains but not all the way to zero.

This is, not coincidentally, the status quo in the US and most other western/developed nations.

Re: Taxation of Carried Interest

#88

Post by harryh »

imbur wrote: post #78
valuearb wrote: post #71

Earlier quoted context omitted.

Problem is that capital gains aren’t all gains, they include inflation. I’m all for a transition to ordinary income if you index the basis of investments to the inflation rate.

Isn't this accounted for with the standard deduction and marginal tax brackets?

No.

The standard deduction essentially establishes a 0% rate on a "minimum $ necessary to live" salary. Marginal tax brackets establish a progressive tax system which is consistent with diminishing marginal utility of money.

The problem that valuearb refers to is completely different. Because of inflation I could buy an asset in 1 year, sell it 5 years later and show a nominal gain (sale price > purchase price) but have actually made any real money. By most standards it would be unfair to tax me on this sale.

Re: Taxation of Carried Interest

#89

Post by gnicholas »

imbur wrote: post #78
valuearb wrote: post #71

Earlier quoted context omitted.

Problem is that capital gains aren’t all gains, they include inflation. I’m all for a transition to ordinary income if you index the basis of investments to the inflation rate.

Isn't this accounted for with the standard deduction and marginal tax brackets?

Not at all. Neither of these account for how long you've held something, which is what implicates inflation.

For example, Person A buys stock in Company A and holds it for just over 1 year. Person A's gain on this stock is $1,000.

Person B has held stock in Company B for the last 50 years. He sells at exactly the same time as Person A and has the same $1,000 taxable gain.

If we accounted for inflation, Person B would pay much less tax than Person A, because Person B's gain is mostly (if not completely) inflation. Person A's gain, on the other hand, is mostly real gain, not inflation.

Re: Taxation of Carried Interest

#90

Post by hippich »

harryh wrote: post #77
hippich wrote: post #76

Earlier quoted context omitted.

Aren't employees get a same long-term capital taxation treatment on profits from their shares for their risk of taking part of the company in exchange for their time?

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 cost of that option (i.e. different between full salary and limited salary when getting options) is something that can be very incorrectly priced (which I assume is the case in the majority of startups)

So it is not tax code discriminating against these employees. It is actually employers taking advantage of these clueless employees.

Post reply on HN