Biden's Tax Change: Accidentally Smart
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2021-04-27 07:00 by Karl Denninger
in Federal Government , 305 references Ignore this thread
Biden's Tax Change: Accidentally Smart
[Comments enabled]

People are going bananas over Biden's proposal on taxes (to pay for his "infrastructure" program) that would raise long-term capital gains to as much as 42% and change for people who make over a million.

Let's get down to brass tacks on what this proposal really is: It is the elimination of the "capital gains" rate for high-earning people entirely; Obamacare already added the Medicare tax back on capital gains (unearned income) at a relatively-higher income level, so that's not a new tax.

Reality is that nobody who will get hit "as proposed" (on incomes over $1m) is "middle class" and certainly not "poor", no matter where you live.  $1m, even in the highest cost areas, is a very nice income indeed and only a couple percent of people get there.

This would essentially treat all such income as ordinary income, thus be subject to the same tax rate as ordinary income.  Note that for ordinary income there is no cap for Medicare either; you pay both halves, whether you do so directly if self-employed or via the split if on a W2, so it's not a higher rate than ordinary income -- it is the same rate.

Why do I call this "accidentally smart"?

Because I'm sure that Biden did not do this intentionally.  But by doing it he is removing one of the perversities that has been abused for the last 20 years; specifically, "executive compensation" (which is pay for a job, folks) that has been avoided from W2 income.

This should have never been possible but of course when lobbyists write the tax code...

So let's say you're a director or officer of some company.  You've been progressively ripping off the shareholders for years, with the company buying back stock and giving it to you either via restricted stock or options.  This used to be illegal before the SEC changed the rules around 1990 and it never should have been made legal, as I've pointed out, because it is inevitably robbery from the shareholders of their ownership for the benefit of the officers and directors.

What's worse is that these people then turn around and exploit the tax code since they had the stock for more than a year and only pay 20% tax on the gains instead of their full marginal tax rate (which is usually the highest, as most or all of them are in the top bracket.)  But the grant was in fact payment in exchange for services rendered.

Yeah, I get the argument about "well, it appreciated after the grant date."  So what?  It was still payment for services rendered and if I got an escalating pay-out for wages that were delivered to me at some future date since as a person I am on cash basis accounting with the IRS I would get that on a W2 on the date it was delivered in cash to me and have to pay my full marginal tax rate on it.

This proposal in fact levels the playing field with the guy who gets a big fat bonus but isn't an officer or director, and the bonus is in cash.  He gets the nasty bracket hit from that (if it's enough to move his bracket) and he gets the FICA hit (if under the cap) and he gets hit with the Medicare tax too.

All this proposal does is put those who are in that group in the same situation as the common dude who gets a big fat bonus.  Presumably the bonus is performance-based, whether individually or collectively for the company as a whole.  Why should the executive, the officer or director, not have to pay income tax on the same basis?

If Biden had a damned clue what he'd also do is change the tax code for corporations so dividends are above the line deductible on an 1120 for "C" Corporations.  This would eliminate the penalty on dividends through double-taxation; they would be taxed once, as ordinary income to the recipient.  That's appropriate and would further remove the incentive to******the common shareholder that has existed for the last 30 years.

I can think Biden is a slug and jackass (and I do) but irrespective of what I think of him as a politician or person when you're right you're right, and on this proposal he's right.

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Aquapura
Posts: 1884
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I agree that on its face this is a good move. The executive should never have a tax advantage over the rank and file within the same company. That's why I'm generally not a fan of stock options in the first place. While this may fix that what worries me about Biden & Co. is I don't trust they'll maintain that $1M income threshold. After all, how much money will the gov't really pull in at that level? I'm sure the elite like Bezos and Zuckerberg will have their loopholes. They will need a good pool of upper-middle-class to strip mine. Could easily see it getting adjusted down to something much lower. What were the thresholds on getting the Covid stimulus cash? Seems to me that's the new gov't dividing line between rich & poor. Is it not?
Uwe
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Let's say you own a small business that you started from nothing 20-some years ago, and is now worth a few million. You'd like to sell it and retire.

Correct me if I'm wrong, but under Biden's plan you'd pay ~40% rather than ~20% on the proceeds of that sale?




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"Corona Virus will come and go, but government will NEVER forget how easy it was to take control of everyone's life; to control every sporting event, classroom, restaurant table, church pew, and even whether you are allowed to leave your house.
Sandor
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Chainsaw Al would not approve....
Winesorbet
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Hold on a second, I need to check if Hell just froze over...smiley
Tickerguy
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@Uwe - Yep.

Oh I'm well-aware that this is plenty of reason for you to oppose it. But you're the wild outlier in this regard; most of the people -- by far -- on whom this will fall, not once but every single year are the executives, officers and directors of large corporations who are "paid" in stock which is pay for work done, not capital gain and which they avoid paying tax on at ordinary income rates.

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Aztrader
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Biden also have an tax increase for small businesses with REVENUES that exceed $400,000. Revenues don't mean profit and again, this liberal moron can't do math. The democrats want to destroy small business because they despise people that can think for themselves.
First it was Obamacare, then this BS virus and now that they run Congress, a new way to basically kill small business with higher taxes by removing deductions that the business incurs.
$400k in revenues will barely pay the overhead for a lot of businesses. If you are in the food business, this will destroy you.
Scottj175
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*sigh* once again makes me melancholy the Fair Tax never happened.
Tickerguy
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@Aztrader - Wait until the actual proposal is in legislative language.

There's a lot of BS that gets thrown around and I'll bet against that one.

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Flyingillini
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So some engineer busts his ass for years for a company, accumulates stock that is eventually worth a couple megabucks and could fund his retirement, and that idiot Biden stealing half of it to give to illegal aliens from Guatemala is smart. Ok, I have to disagree on this one.

Yeah, I raise the issue because this will happen to me under this plan.
Greenacr
Posts: 250
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Northern Ohio
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I too support this tax increase even though I loathe Biden/Harris and the Dems in general. Income inequality related Executive compensation is way out of whack and needs to be reigned in.

The CEO of my company drove us into Bankruptcy but due to a stacked board made millions in Stock even though his bad M&A decisions were a significant factor behind our bad debt that we could not ultimately service. During that time most of the employees took it in the shorts with 1% or no pay raises and declining health and 401K.

He was not an outlier. Would love to see Bezos/Zuckerberg/etc. get hammered but they probably will skate out.
Tickerguy
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@Flyingillini - That was COMPENSATION. You were PAID for busting your ass and it should have been reported on your W2 and you would have paid taxes.

Take it all at once and yeah, the rate is higher. Who made that choice? You did, when you negotiated for it and attempted to avoid paying tax on what is income, not capital gains. Why not instead negotiate for an annual bonus based on corporate performance? You know ******ned well why you didn't do that.

You placed the bet and lost. Tough balls.

I have ZERO sympathy.

Now a situation like Uwe's is different and that's likely fixable; perhaps with a 5-year lookback where if you never took anything in additional issued stock or options but rather paid all performance-based compensation as bonuses (and thus paid taxes) the gain-on-sale is capital gains for a closely-held firm. That doesn't bother me provided you never legally evaded paying tax on what was income during the firm's operating life through trying to shift compensation into the capital gain bucket.

If you did then **** you and pay up.

I will note that as a former "C" Corporation CEO I got paid a nice salary but instead of ****ing the minority shareholders, which I could have legally done via exactly this same path and evaded paying the tax that way when we had a great year I instead bonused out the money. On which I paid taxes, as ordinary income. I got writer's cramp writing the ****ing check to the IRS too, and I didn't like it very much. But it was the right thing to do.

You know why?

The alternative was to screw the other people who were shareholders. That was LEGAL for me to do. I'm quite sure when I sold the company they were rather happy that I didn't do it, despite it being perfectly legal to do so and in fact all the corporate banker sorts that I used to run with advised me told me to do it, and the legal folks said I was on perfectly-sound legal ground doing it and while the other shareholders might get pissed off and sue they'd lose.

So yeah, sorry, no tears here; I paid the taxes because to not do so meant I'd be ****ing other people out of what was rightly THEIR appreciation on their investment.

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Flappingeagle
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There are roughly two groups of people who will get hit by this. Executives who are transforming earned income into capital gains and thus should get it. The other are those who either built something up over time and/or, had a asset appreciate greatly thanks to inflation. That group will be ****ed by this.

Flap

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S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
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Whitehat
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a tax on your labor is essentially slavery. While the executive stock angle is wrong, it should be dealt with via regulation and recognizing breach of the fiduciary.

The problem is that there should be no income tax, and govt borrowing severely restricted.

Snowball's chance in hell of this ever changing.

This is an imperfect fix on top of a problem. Only question is why now?

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smiley

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Tickerguy
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@Flappingeagle -- Those who had an asset appreciate greatly due to inflation voted for and tolerated the policies that led to it and deserve to get it up the *******.

I have ZERO sympathy for the person who turned $50,000 of house into $5m in California due to this bull****. ZERO. For the couple who did so on a modest basis (remember, the capital gains exemption on a house is $500k if you're married) they're exempt from it in the first place. If you "benefited" from the screwing that the executives did to people via buybacks and such or other gaming of the system then pay up -- you tried to game it and it got you. Too ****ing bad.

You don't like that? Fine. Don't take more than a million a year out and there's no problem. You don't get hit by it.

Cash out $10 million? Pay up.

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Tickerguy
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@Whitehat - No argument but the 16th Amendment is what it is. Live with what you got, not what you'd like.

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Whitehat
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yep Karl, agree totally. My firm never had a situation where this would have been possible such as shareholders. Like you i would have never done this to people anyway.

One thing that people used to mock me for was not engaging in the fine art of tax avoidance like Flyingillini and other methods of deferring the inevitable. My MO and advice to others was to get the taxation over with clean as then the actual money was secure.

People seem to have this mental block regarding nice liquid cash just sitting in a bank account with nothing due upon it. It gives so much peace of mind. Everyone who wanted to be an investor and asked my advice would get the same. Have a cash reserve for one year (preferably more), get out of all debts (yea, even low interest things), then, and only then invest. After making money, pay the taxes owed immediately and do everything legally possible to get back the principal in liquid form. After this a multiple year cash reserve becomes golden. People are so concerned about rate of return on a sum that they risk that sum, and avoiding taxes plays right into this.

Oh, the bull**** that i had to talk people out of with like kind exchanges for defering taxes. Very few could grok that after they paid taxes, the money was now free and clear. Yes, occasionally it makes sense. Want to know how many serious real property developers and other related investors lost in terms of actual cash and asset value due to this avoid the tax trap? It is much greater than fifty percent. They hide the reality by complicating their arrangements and getting into worse and riskier things. And, of course, they all talk about how they are up in some economic cycle and neglect that the previous two more than negate the gains of the good one. The delusion is further reinforced by the cash flow taken out of it.

Inflation does damage sitting cash no doubt. However, does any man have nightmares or spend the entire night eyes bugged out of his head because he has ten or more years of bills in cash and no debts? Most men of any age can find something to earn in a few years, enough to ride out any depression, many can in a matter of months. And it is really nice to be able to just up and leave a place with one's own family to reduce overhead and explore other options with no concerns for the long term.

This tax change is a lesson to people.

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smiley

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Fumei
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We have a second amendment which is a welcome mat for both Rinos and DemocRats. And we have a country overrun with Ameri****s and illegal aliens. And plenty of other ****e for us to feast on.
Aztrader
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If you read the news and see that corporate executives made bank during covid because a lot of them simply stopped taking paychecks and increased their stock options at insanely cheap prices. Those stock options reaped many of them millions because they knew the bailouts would happen.
Covid enriched them while destroying millions of Americans and they should pay taxes on this as income and not capital gains.
A real capital gain is if you actually built something or owned something for a long time that accrued wealth. They shouldn't be taxed the same. Stock options are income and should be treated as such. This would stick it to the Covid millionaires and billionaires but doubt it would happen simply because most of them support the democrats.
Abelardlindsey
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I agree this change is good. Hopefully, this will reduce the rampant "financialization" of the economy that has destroyed companies such as Intel and Boeing. I hate these finance people and looter senior managers almost as much as I hate leftist.
Shermanbroder
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"Live with what you got, not what you'd like."

I agree. Apparently Biden doesn't.

If Biden wants equity in the tax code, there are two ways for him to do it. Tax the executive at the higher rate of the employee, or tax the employee at the lower rate of the executive.

A statist like Biden always prefers the former. So why encourage the bastard?


Kcwhatband?
Posts: 3
Incept: 2009-04-03


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For Executive compensation in the form of options and RSUs, the basis is taxed at ordinary income rates as it vests.
To say that they enjoy capital gains treatment on all of that income is simply incorrect.
Kcwhatband?
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And, the tax is based on the market value at time of vesting. So if you get 1000 RSUs with 4yr vesting when the stock is at 50 and then is at 100 a year later, you pay ordinary income on 250x$100. A year after, if the stock is at 150, you pay another 250x$150, etc.
the only cap gain treatment youd enjoy is if the RSUs vest and you hold the shares for >1yr.
Upon vesting, youve paid the tax on the comp and your after-tax capital is now at risk, same as if youd bot the shares in the secondary market.
Share buybacks dont screw the shareholders over since the shares that are bought are from the open market, purchased from willing sellers. Quite the opposite, really.
Redjack
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Iowa
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Hate to say it, I agree.

For the engineer that got "screwed", well you were paid for services rendered and now have to pay taxes on it.

I get a bonus on occasion, a good chunk of it goes to Uncle Sugar. Do I like it? No, but I like the boss getting nice stock options which he can cash out and pay less tax on even less.

Aztrader
Posts: 8629
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Scottsdale, AZ
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Just posted on ZH. Insanity selling tax credits that shouldn't even exist

https://www.zerohedge.com/markets/tesla-....
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