Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation(fenwick.com)
fenwick.com
Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation
https://www.fenwick.com/publications/pages/proposed-tax-reform-bill-stands-to-significantly-impact-equity-and-performance-based-compensation.aspx
115 comments
Why do you assume average employees won't hit the cap? $100k isn't exactly a massive sum in tech.
ISOs are priced at the 409a value, which can be 1/10th of the preferred share price. Generally speaking, the 409a value converges with the preferred price as the company is de-risked and moves closer to IPO.
The caps are based on the value of the ISO when it vests, not when it is granted. If you exceed the $100K limit, then the options revert to NQs (and would presumably be subject to retroactive withholding, under the new rules).
This will hit companies that are within a few years of IPO particularly hard, since right now, they can use stock incentives as a significant recruitment tool, and large, unknown, multipliers between grant price and vesting prices are the norm.
Put another way, this will cripple the hiring ability of companies attempting to grow from $100M to $1B valuations, and make it much more likely for them to exit via acquisition instead of via IPO.
This significantly reduces the incentives established companies will have to innovate, and is a classic example of regulatory capture.
(Also, other parts of this tax plan will significantly increase taxes for students; especially graduate students, and also people that live in tech hubs like CA and NY. It is an overt attack against startups and other portions of the economy that have created most of the economic growth in the US over the last two decades.)
This will hit companies that are within a few years of IPO particularly hard, since right now, they can use stock incentives as a significant recruitment tool, and large, unknown, multipliers between grant price and vesting prices are the norm.
Put another way, this will cripple the hiring ability of companies attempting to grow from $100M to $1B valuations, and make it much more likely for them to exit via acquisition instead of via IPO.
This significantly reduces the incentives established companies will have to innovate, and is a classic example of regulatory capture.
(Also, other parts of this tax plan will significantly increase taxes for students; especially graduate students, and also people that live in tech hubs like CA and NY. It is an overt attack against startups and other portions of the economy that have created most of the economic growth in the US over the last two decades.)
This is nothing even close to regulatory capture. It may not be a good thing, but you can't just throw random terms at it and expect them to work...
This policy has a) nothing to do with regulators or a regulatory agency, and b) is not a result of a regulated industry subverting the agent of it's regulation.
Also, the 100k cap you're complaining about already exists. I'm not sure what your rant even means at this point.
This policy has a) nothing to do with regulators or a regulatory agency, and b) is not a result of a regulated industry subverting the agent of it's regulation.
Also, the 100k cap you're complaining about already exists. I'm not sure what your rant even means at this point.
If I vote for a state government that maintains higher state taxes, why should that decrease what I owe to the nation? Am I getting less benefit from the federal government? Also, those states can always lower their taxes in the future.
Right, but for later-stage startups I can certainly imagine average employees hitting the exercise cap.
Most companies move to RSUs by the time typical employees would hit the exercise cap.
It's as if dpiers read my mind! :)
My arguments exactly mirror what he/she has said.
My arguments exactly mirror what he/she has said.
That cap already exists now and is untouched along with the rest of section 422.
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> AMT will be gone
Trump is doing this to help himself. I read somewhere that he got hit pretty bad on AMT recently.
Trump is doing this to help himself. I read somewhere that he got hit pretty bad on AMT recently.
Let's avoid making the same mistakes the right always makes, namely assuming the worst of people, and always assuming financial motives for peoples' actions.
Trump reducing the AMT for himself seems somewhat unlikely, because:
= The plan(s) are written by the House and Senate, not the administration.
- he doesn't seem to have given any relevant input to these tax plans except asking for lower corporate tax rate (which he hot only partially)
- AMT has so many opponents among Republican donors, Trump just doesn't need to get involved.
- Trump was hit by AMT because he had large losses that are deductible over a certain number of years. Don't remember the number, but I seem to remember they have run out by now. He'd need a new bankruptcy to keep going. And no, morally doesn't count.
- I'm not sure if he is still motivated by money as much as he used to be. It seems to always have been a plot to get recognition by Manhattan's elites, and therefore would have been eclipsed by his other failed attempt, namely politics.
Trump reducing the AMT for himself seems somewhat unlikely, because:
= The plan(s) are written by the House and Senate, not the administration.
- he doesn't seem to have given any relevant input to these tax plans except asking for lower corporate tax rate (which he hot only partially)
- AMT has so many opponents among Republican donors, Trump just doesn't need to get involved.
- Trump was hit by AMT because he had large losses that are deductible over a certain number of years. Don't remember the number, but I seem to remember they have run out by now. He'd need a new bankruptcy to keep going. And no, morally doesn't count.
- I'm not sure if he is still motivated by money as much as he used to be. It seems to always have been a plot to get recognition by Manhattan's elites, and therefore would have been eclipsed by his other failed attempt, namely politics.
Let's avoid making the same mistakes the right always makes, namely assuming the worst of people
This made me chuckle. You're basically telling people to not do what you just did.
This made me chuckle. You're basically telling people to not do what you just did.
Even if he is, the AMT is a pretty spectacularly unfair tax that hits a lot of people it wasn’t meant to.
At least at my employer, the deferred compensation plan is only offered to high-level management employees ("Director" and above). So this doesn't seem to be a great loss for the average engineer.
If other people who are individual contributors, or even low level managers, have access to an employer deferred compensation plan (different from my experience), I would love to hear about it.
(As a highly paid engineer, I would totally make use of this deferred compensation scheme to lower my tax burden by smoothing out my income, if I could. But I've never been able to.)
If other people who are individual contributors, or even low level managers, have access to an employer deferred compensation plan (different from my experience), I would love to hear about it.
(As a highly paid engineer, I would totally make use of this deferred compensation scheme to lower my tax burden by smoothing out my income, if I could. But I've never been able to.)
I've literally never heard of a tech company not offering deferred compensation (either stock options or RSUs).
RSUs aren't elective deferred compensation. They're just income at the time of vest. ISOs are a little weirder. Nevertheless, neither is what I'm talking about.
Traditional 401(k)s are a type of qualified deferred compensation plan and are slightly closer to what I have in mind.
The type of plan I am referring to is a non-qualified deferred compensation plan. Unlike 401(k)s, they are not protected from the sponsoring organization (or the sponsoring organization's creditors) accessing the funds, for example, in bankruptcy. On the other hand, they can smooth out income taxes, and are not subject to the same contribution caps as 401(k) plans. Like in a 401(k), these non-qualified plans allow you to control how funds are invested while they are deferred. Unlike 401(k)s, you choose when they will pay distributions in advance.
Here's a little bit more about this kind of plan, from Fidelity: https://www.fidelity.com/viewpoints/retirement/nqdc
> Most companies provide NQDC plans as an executive retirement benefit, because 401(k) plans often are inadequate for high earners
Traditional 401(k)s are a type of qualified deferred compensation plan and are slightly closer to what I have in mind.
The type of plan I am referring to is a non-qualified deferred compensation plan. Unlike 401(k)s, they are not protected from the sponsoring organization (or the sponsoring organization's creditors) accessing the funds, for example, in bankruptcy. On the other hand, they can smooth out income taxes, and are not subject to the same contribution caps as 401(k) plans. Like in a 401(k), these non-qualified plans allow you to control how funds are invested while they are deferred. Unlike 401(k)s, you choose when they will pay distributions in advance.
Here's a little bit more about this kind of plan, from Fidelity: https://www.fidelity.com/viewpoints/retirement/nqdc
> Most companies provide NQDC plans as an executive retirement benefit, because 401(k) plans often are inadequate for high earners
Its not _that_ uncommon for an engineer not to receive options/RSUs. Sure it happens a lot in this industry, but it's not a hard and fast rule, especially once you leave Silicon Valley. I've certainly seen the "Director and above" approach mentioned earlier several times as well.
> Similarly, awards with vesting triggers based on exit events such as an initial public offering or change-in-control would be taxable on grant unless they require the recipient to be employed through the liquidity date
Double trigger RSUs are popular in late stage unicorns where the exercise price for ISOs have already hit a high level but the stock isn't liquid enough to sell to cover the tax as they vest.
A lot of people might be affected, I wonder if existing grants are grandfathered in?
Double trigger RSUs are popular in late stage unicorns where the exercise price for ISOs have already hit a high level but the stock isn't liquid enough to sell to cover the tax as they vest.
A lot of people might be affected, I wonder if existing grants are grandfathered in?
there is a section in the document called "Grandfathering of Compensation Earned Prior to 2018" =)
These grandfather clauses irk me... if the policy is not good enough to stand on its own then it should not be policy.
Not at all. It's a recognition that the people who made long-term arrangements under the old law shouldn't be punished for that. The safer people feel making commitments, the more we can pursue things that take time to pay off, which has broad societal benefits. And in practice, laws are much harder to change if you piss off a lot of people who didn't do anything wrong but now suddenly stand to lose big.
As an example, take the mortgage interest tax credit. Personally, I strongly believe it should go away; if the government is going to subsidize housing, it shouldn't spend most of that money on the already well off. But I think it would be wrong to screw all the homeowners who bought a house expecting the credit. We'd see a wave of disruption (short sales, foreclosures, people suddenly barely scraping by) that benefits nobody. So I'm fine with grandfathering existing mortgages and gradually phasing out the credit.
As an example, take the mortgage interest tax credit. Personally, I strongly believe it should go away; if the government is going to subsidize housing, it shouldn't spend most of that money on the already well off. But I think it would be wrong to screw all the homeowners who bought a house expecting the credit. We'd see a wave of disruption (short sales, foreclosures, people suddenly barely scraping by) that benefits nobody. So I'm fine with grandfathering existing mortgages and gradually phasing out the credit.
It would be totally reasonable to phase out the mortgage interest deduction over ~10 years, giving people time to plan and decide how they wanted to handle it. The cap is currently $1M, let's reduce it by $100k/yr. (or $50k/yr over 20 years)
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There is an expectation of predictability in our legislation. Grandfather clauses preserve predictability for those who made decisions based on the old tax code. Sometimes binary grandfather status is not financially or politically possible and it's phased out instead. I think this kind of approach to legislation and regulation is fair and isn't commentary on the quality of the change.
Without speaking to this particular grandfather clause, I think in general these kinds of clauses deal with the fact that a new policy, good or bad, might cause people to design their incentive structures differently, and they want to avoid screwing over people who in good faith designed their structures to work best under the old system, and instead give them time to make adjustments.
What irks me is that tax policy is such that complicated incentive programs used to defer compensation and tax obligation are a thing in the first place.
Deferred compensation plans are not solely to manage or modify tax treatment of compensation.
As a long-term shareholder, I want the CEO, board, and senior executive compensation to be tied to long term shareholder value creation. By far the easiest way to do that is to create a deferred compensation plan that ties their financial outcome to that of a long-term shareholder.
If I win big holding their shares, I want them to win big.
If they just match the market, they should get paid something for their time, but not anything exceptional.
As a long-term shareholder, I want the CEO, board, and senior executive compensation to be tied to long term shareholder value creation. By far the easiest way to do that is to create a deferred compensation plan that ties their financial outcome to that of a long-term shareholder.
If I win big holding their shares, I want them to win big.
If they just match the market, they should get paid something for their time, but not anything exceptional.
ISOs aren't really a tax dodge. They're designed to encourage employees and management to put extra work and thought in to the company they're building. I can tell you if I received the value of my ISOs in cash I would not come in to work early and leave late in the hope of a payoff sometime in the future. Unless you're working at a company doing something truly interesting, I think most employees would fall in to my camp.
Should taxpayers be forced to amend prior years' returns based on a new tax policy? (I believe no.)
If this policy were passed and applied to retroactively vested (but not yet received due to a time, performance, or other double trigger), that's what would seem to need to happen.
Other people have made plans for retirement or other meaningful milestones based on the current tax law. There is value in having stability and being able to plan around tax and other long-term financial realities.
Further, due to performance-dependent multipliers, it's often not even possible to know what the amount should be (which I admit applies to both grandfathered and not grandfathered comp).
If this policy were passed and applied to retroactively vested (but not yet received due to a time, performance, or other double trigger), that's what would seem to need to happen.
Other people have made plans for retirement or other meaningful milestones based on the current tax law. There is value in having stability and being able to plan around tax and other long-term financial realities.
Further, due to performance-dependent multipliers, it's often not even possible to know what the amount should be (which I admit applies to both grandfathered and not grandfathered comp).
New laws shouldn't, in general, be retroactive. The fact that a grandfather clause is necessary to specify that a law isn't intended to be retroactive is bothersome.
You need to have clauses to specify retroactivity, otherwise you get into a world where the government has to wait for everyone alive to die before they're allowed to implement a new taxation plan. There have to be limits somewhere, and that's exactly what these clauses need to implement.
"...has to wait for everyone alive to die..."
Certainly not. It's all based on the purchase/exercise/offering date. Let's take it to the extreme: if homicide had been legal, and society decided we needed to outlaw it, it stands to reason that homicide committed before the law was enacted would not be prosecuted, but only those cases happening one or after that date.
Certainly not. It's all based on the purchase/exercise/offering date. Let's take it to the extreme: if homicide had been legal, and society decided we needed to outlaw it, it stands to reason that homicide committed before the law was enacted would not be prosecuted, but only those cases happening one or after that date.
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A homicide law isn't ambiguous. Either you killed the dude before it was enacted or after. You know, to the second, whether or not you're a murderer.
Tax law isn't so clear. There's when you were granted the shares, when you acquired them (which may or may not be a taxable event, depending, among other things, on whether there's a spread between strike price and FMV), when you sold them (which is a taxable event), and when the law was enacted. There are probably yet other subtleties beyond those.
The grandfather clause covers the case when the enactment date falls amongst the others. ISOs purchased before the enactment but sold after. ISOs granted before the enactment, but purchased after. Double-triggers. Are you sure you know how the law applies, and what your tax liability is, without explicit statute to that effect, in all of those cases — or others I haven't listed, or even imagined? Is your accountant? Are you willing to bet an audit on that?
EDIT: phrasing
Tax law isn't so clear. There's when you were granted the shares, when you acquired them (which may or may not be a taxable event, depending, among other things, on whether there's a spread between strike price and FMV), when you sold them (which is a taxable event), and when the law was enacted. There are probably yet other subtleties beyond those.
The grandfather clause covers the case when the enactment date falls amongst the others. ISOs purchased before the enactment but sold after. ISOs granted before the enactment, but purchased after. Double-triggers. Are you sure you know how the law applies, and what your tax liability is, without explicit statute to that effect, in all of those cases — or others I haven't listed, or even imagined? Is your accountant? Are you willing to bet an audit on that?
EDIT: phrasing
Homicide is a little more ambiguous than that, because it's quite possible to fatally injure someone who lingers in hospital for a month.
No, it's really not. The action that put the person in the hospital where they lingered for a month before dying either happened when it was legal to homicide, or not. Without that specific action, the victim would not be dead — or, more specifically, would not be in a situation that led to their death.
Criminal law absolutely recognizes that causal chains have a "first link", without which the rest of the chain wouldn't even have happened. It also specifically subjects the party causal to that first link to special scrutiny.
Criminal law absolutely recognizes that causal chains have a "first link", without which the rest of the chain wouldn't even have happened. It also specifically subjects the party causal to that first link to special scrutiny.
A grandfather clause like this doesn't make a law "retroactive". It exempts people who would be subject to the law because of things that happened before its passage from its effects, when the specific behavior in question (say, e.g., filing your taxes after the law's passage, on income earned before that passage) is newly affected. It prevents "punishing" people for behavior that wasn't contrary to the law, when they engaged in it.
It is, therefore, the exact opposite of retroactive.
EDIT: phrasing.
It is, therefore, the exact opposite of retroactive.
EDIT: phrasing.
I think you've misunderstood me. I've reworded to help. I did not intend to imply that I thought such a clause made the law retroactive. I'm saying that by default, laws should not be retroactive and that needing a clause to specifically prevent retroactivity is annoying as it specifies what should already be the default.
Ex post facto laws are anathema.
criminal law != civil law. And the law in fact doesn't apply retroactively, but it would apply to events in the future, that were determined in the past, based on certain assumptions.
Yes, the only reason the government is hiding time machines from us is their inability to finish the tax laws that would apply :)
Analogy: If congress raises gas taxes (nobody said analogies have to be realistic), everyone would have to pay more at the pump. But that doesn't mean the tax is applied retroactively.
Yes, the only reason the government is hiding time machines from us is their inability to finish the tax laws that would apply :)
Analogy: If congress raises gas taxes (nobody said analogies have to be realistic), everyone would have to pay more at the pump. But that doesn't mean the tax is applied retroactively.
Ex post facto laws are also unconstitutional. And this isn't one, anyway.
Since most ISOs permit early-exercise, isn't this a moot point? (if a given ISO permits exercise upon issue, since the value of a newly issued ISO must be zero, then this $100K cap is not an issue?)
> In particular, under the current tax rules, the total aggregate fair value of ISOs that become exercisable for an individual employee for the first time within a calendar year may not exceed $100,000. ISOs that fail to comply with this provision are treated as non-qualified stock options. Companies with higher valuations would easily hit this threshold for executives and highly-paid employees and therefore would have limited reprieve from 409B.
EDIT: it says “become exercisable”, which is completely separate from actual exercise
> In particular, under the current tax rules, the total aggregate fair value of ISOs that become exercisable for an individual employee for the first time within a calendar year may not exceed $100,000. ISOs that fail to comply with this provision are treated as non-qualified stock options. Companies with higher valuations would easily hit this threshold for executives and highly-paid employees and therefore would have limited reprieve from 409B.
EDIT: it says “become exercisable”, which is completely separate from actual exercise
Not everyone has $x00,000 to exercise options, turning them into illiquid shares in a company which may or may not ever exit. Basically, this: https://qz.com/455109/entrepreneurs-dont-have-a-special-gene...
A lot of larger private companies don't allow early exercise (and even if they did the strike price is often pretty high anyway).
The "become exercisable" language is ambiguous to me.
If you have ISOs that became exercisable in one year that at the time were less than 100k, but you didn't exercise them and they're now worth more than that they still remain ISOs right?
Would you still hit the 100k limit when you tried to exercise them if AMT is repealed or could you exercise all of them and delay the tax burden until you sell them?
If that's the case getting rid of AMT would be a big deal for people in private companies to actually be able to exercise their equity without paying a massive amount of taxes for something they can't liquidate easily.
The "become exercisable" language is ambiguous to me.
If you have ISOs that became exercisable in one year that at the time were less than 100k, but you didn't exercise them and they're now worth more than that they still remain ISOs right?
Would you still hit the 100k limit when you tried to exercise them if AMT is repealed or could you exercise all of them and delay the tax burden until you sell them?
If that's the case getting rid of AMT would be a big deal for people in private companies to actually be able to exercise their equity without paying a massive amount of taxes for something they can't liquidate easily.
Early exercise only works with non-qualified options. They work by granting non-qualified options that you exercise immediately, but then have a claw-back provision that mirrors the vesting schedule of qualified options. Nothing here prevents that arrangement, but it might become less needed since the repeal of AMT removes much of the incentive to early exercise.
I would never work for a company that doesn't allow early exercise. Whether or not you plan to do it, you have to wonder about the attitude of those in charge if they don't allow early exercise.
Allowing early exercise is a legal and accounting headache. Many small startups have a hard time even getting stock option agreements to employees. When you're new, small, and possibly don't even have an HR person you can't really spend time on frivolous things like early exercise.
Not sure where you’re getting the idea that it’s a hassle to offer early exercise. The 4-person company I joined back when offered early-exercise without my even asking, and it was a huge win: I just had to risk a few thousand dollars (since the valuation was low), and it meant I wasn’t forced to later exercise and sell (in order to cover taxes) as they vested, or reached the end of their exercisabilty, or when the company went public, or when it later got bought out by a bigger public company, or even when I left their employment. Instead, I got to decide when to cash in and owe taxes. But you have to be a pretty early employee for this to work well, and not require a big cash outlay up front.
I also thought that early exercise at a certain point could force a company to go public, but it's possible I'm mixing up laws.
I think it had to do with how many share holders you could have, but I think that law also changed to not include employees as share holders.
I think it had to do with how many share holders you could have, but I think that law also changed to not include employees as share holders.
The JOBS Act changed this rule [0]:
"In order to mandate becoming an SEC reporting company, you now would have to have $10 million in assets and at least 2000 shareholders or 500 shareholders who are not accredited investors. Stock issued pursuant to an employee compensation plan would not be counted for this purpose."
0: https://investmentbank.com/summary-of-jobs-bill-and-update/
"In order to mandate becoming an SEC reporting company, you now would have to have $10 million in assets and at least 2000 shareholders or 500 shareholders who are not accredited investors. Stock issued pursuant to an employee compensation plan would not be counted for this purpose."
0: https://investmentbank.com/summary-of-jobs-bill-and-update/
Compensating your employees is not a "frivolous thing".
I would suppose that it matters on the margins when the exercise cost is nontrivial for the early to mid career employee with low liquid assets. (Say mid 5 figures)
There won't be a tax bill but they may be pressed to come up with the exercise funds
There won't be a tax bill but they may be pressed to come up with the exercise funds
> 409B does not appear to impact the taxation of incentive stock options (ISOs), which in conjunction with the repeal of the alternative minimum tax, would make ISOs more valuable
So AMT is being repealed now?
So AMT is being repealed now?
Yes, which is sort of a shame. Frankly if you were serious about simplifying the tax code and reducing unfairness and asymmetry, you'd keep the AMT and throw out the existing income tax.
But whatever: the AMT is an issue for upper middle class taxpayers, and particularly ones (like tech employees, and most particularly startup employees) who see lots of their income in big chunks like stock grants and option exercises. Helping these people is sort of dumb, as they (we) are hardly hurting to begin with. But it won't break the economy either.
Honestly, the Senate plan is... not at all insane (and the House plan only slightly insane). These are relatively modest tax cut bills arriving at a time where the economy is growing and deficits are shrinking, which is exactly where you'd want them. [Edit, hoo boy did this statement the trigger the economics folks. This isn't a growth point, the metric here, which I thought I'd made clear, is "when they are least likely to mess things up". Passing this bill won't break the bank or make progressive reforms in other areas more difficult in the near term.]
After the last year... it's like a breath of fresh air. I still don't think this is Good Policy per se, but the very fact that our government isn't actively trying to make things worse is hopeful.
But whatever: the AMT is an issue for upper middle class taxpayers, and particularly ones (like tech employees, and most particularly startup employees) who see lots of their income in big chunks like stock grants and option exercises. Helping these people is sort of dumb, as they (we) are hardly hurting to begin with. But it won't break the economy either.
Honestly, the Senate plan is... not at all insane (and the House plan only slightly insane). These are relatively modest tax cut bills arriving at a time where the economy is growing and deficits are shrinking, which is exactly where you'd want them. [Edit, hoo boy did this statement the trigger the economics folks. This isn't a growth point, the metric here, which I thought I'd made clear, is "when they are least likely to mess things up". Passing this bill won't break the bank or make progressive reforms in other areas more difficult in the near term.]
After the last year... it's like a breath of fresh air. I still don't think this is Good Policy per se, but the very fact that our government isn't actively trying to make things worse is hopeful.
> These are relatively modest tax cut bills arriving at a time where the economy is growing and deficits are shrinking, which is exactly where you'd want them.
So you want to cut taxes and increase deficits during growth times? This is, of course, not just different but exactly the opposite of Keynesianism. What is it that you plan to do during recessions? Cut spending and increase taxes to close your deficit?
This is insanity.
So you want to cut taxes and increase deficits during growth times? This is, of course, not just different but exactly the opposite of Keynesianism. What is it that you plan to do during recessions? Cut spending and increase taxes to close your deficit?
This is insanity.
Deficits are always necessary. The size of the deficit needs to very. Since we are nowhere near full productive capacity, there is no danger in too many dollars chasing too few resources. The deficit needs to be reduced when economy is at full capacity to avoid inflation.
Saying that deficits are always necessary does not absolve the cut taxes and increase deficits during growth times nonsense.
Cutting taxes and increasing deficits during good times is just populist feel goodism. Yes, it's easy to cut taxes and it's easy to increase spending. Heck, trickle down even says this will increase tax revenues (except that we've tried that and it doesn't.) But not to worry because the people who are responsible for the mess will not have to clean up the mess. No, this doesn't work. We've tried it and it doesn't work.
Keynesianism is a quite conservative approach, actually.
Cutting taxes and increasing deficits during good times is just populist feel goodism. Yes, it's easy to cut taxes and it's easy to increase spending. Heck, trickle down even says this will increase tax revenues (except that we've tried that and it doesn't.) But not to worry because the people who are responsible for the mess will not have to clean up the mess. No, this doesn't work. We've tried it and it doesn't work.
Keynesianism is a quite conservative approach, actually.
Keynesian economics is insanity. Disproven by Milton Friedman and others.
Milton Friedman was a monetarist which is a belief in controlling the supply of money. That's a different instrument but actually quite similar to Keynes: they are both feedback control mechanisms. That said, monetarism is most definitely NOT cut taxes and increase spending in good times. Keynes and Friedman would both call that insanity.
Taxes on fiat currency are away to distribute expenses, not a way to raise funds. A fiat currency government can print money whenever it wants, which is taxation via inflation. (For more, see: Modern Monetsr Theory.)
We've already seen one of Friedman's greatest (in terms of influence) disciples -- Greenspan -- openly question whether his faith in "proven" economics was well-founded. One wonders what Friedman would've thought if he'd lived longer.
(my money is on "he'd have found some way to blame someone else and claim he was still right", but one can hope)
(my money is on "he'd have found some way to blame someone else and claim he was still right", but one can hope)
> exactly where you'd want them
Is that so? Counter-cyclic policy is generally the right choice for stability. If we lower taxes now, when the economy is doing fine at current tax levels, we give up an opportunity to simulate the economy through tax reduction later, when the inevitable recession hits.
Is that so? Counter-cyclic policy is generally the right choice for stability. If we lower taxes now, when the economy is doing fine at current tax levels, we give up an opportunity to simulate the economy through tax reduction later, when the inevitable recession hits.
I enjoy your thorough lack of strong emotions, and I agree that these drafts are special in that they are not obviously intended to harm anyone who isn't WASP.
But the opportunity costs of this futile exercise in trickle-down would seem to make this one of the worse policies from a utilitarian perspective.
$1.5 Trillion dollars (the self-imposed cost limit of the tax plan) divided by $40,000 (what givewell.org estimates to be the marginal cost of saving a life) = 37,000,000 lives.
That's obviously calculation, because those marginal costs would start to rise after the low-hanging fruits are picked, and you may want to think of some other ideas that could be realized with that sum.
But even if I'm off by an order of magnitude...wow.
But the opportunity costs of this futile exercise in trickle-down would seem to make this one of the worse policies from a utilitarian perspective.
$1.5 Trillion dollars (the self-imposed cost limit of the tax plan) divided by $40,000 (what givewell.org estimates to be the marginal cost of saving a life) = 37,000,000 lives.
That's obviously calculation, because those marginal costs would start to rise after the low-hanging fruits are picked, and you may want to think of some other ideas that could be realized with that sum.
But even if I'm off by an order of magnitude...wow.
> the economy is growing and deficits are shrinking, which is exactly where you'd want them.
Would really love to hear your theory on this. Tax cuts are always sold as economy boosters, and the fed is raising rates now to try to be countercyclical. So your idea doesn't match most economic theories I've heard of.
Would really love to hear your theory on this. Tax cuts are always sold as economy boosters, and the fed is raising rates now to try to be countercyclical. So your idea doesn't match most economic theories I've heard of.
you're right that it would be more fair to keep AMT, but that's only because of the complexity of the tax code with all of its deductions and loopholes.
but i disagree that the tax plan is not designed to be dstructive. the bill is tax gerrymandering at it's finest--designed primarily to boost the republican party, it's cronies, and especcially trump himself, while punishing all others, including the poor and powerless. it saddles the federal government with massive debt while providing tax breaks to those who least need it. there is simply no intent anywhere in this "tax reform" to actually improve our economy through good policy; it's rather designed to achieve purely political aims, destructiveness be damned.
but more to the point, the proposed 409b section is about restricting when we can recognize income for tax purposes. while fictitious corporate "persons" are allowed to shift income and losses at will forward and backward along the timeline to avoid taxes, we humans, i.e. real people, cannot. this is simply the exact opposite of how the system should be designed. we should favor real people over fake people (especially over fake entities designed solely to completely shield already-advantaged owners from their failings and mistakes).
even better, let's entirely remove the ability to move income and loss recognition through time for tax purposes. it's simpler and less prone to gamesmanship (i know that's more complicated than it sounds, but it's surely much less complicated than the current rules).
but i disagree that the tax plan is not designed to be dstructive. the bill is tax gerrymandering at it's finest--designed primarily to boost the republican party, it's cronies, and especcially trump himself, while punishing all others, including the poor and powerless. it saddles the federal government with massive debt while providing tax breaks to those who least need it. there is simply no intent anywhere in this "tax reform" to actually improve our economy through good policy; it's rather designed to achieve purely political aims, destructiveness be damned.
but more to the point, the proposed 409b section is about restricting when we can recognize income for tax purposes. while fictitious corporate "persons" are allowed to shift income and losses at will forward and backward along the timeline to avoid taxes, we humans, i.e. real people, cannot. this is simply the exact opposite of how the system should be designed. we should favor real people over fake people (especially over fake entities designed solely to completely shield already-advantaged owners from their failings and mistakes).
even better, let's entirely remove the ability to move income and loss recognition through time for tax purposes. it's simpler and less prone to gamesmanship (i know that's more complicated than it sounds, but it's surely much less complicated than the current rules).
> let's entirely remove the ability to move income and loss recognition through time for tax purposes
That would be incredibly stupid. It would mean that two companies could pay different amounts of tax over a given period simply based on whether they ran losses some years or booked consistent profits. Loss recognition through time isn't a crazy "loophole"--it's the mathematical byproduct of the fact that you're sampling a continuous variable at discrete intervals.
Likewise for moving income. There is no special loophole that allows you to "move income." It's a byproduct of the fact that the income tax taxes income, and not revenues.
That would be incredibly stupid. It would mean that two companies could pay different amounts of tax over a given period simply based on whether they ran losses some years or booked consistent profits. Loss recognition through time isn't a crazy "loophole"--it's the mathematical byproduct of the fact that you're sampling a continuous variable at discrete intervals.
Likewise for moving income. There is no special loophole that allows you to "move income." It's a byproduct of the fact that the income tax taxes income, and not revenues.
you move revenue and expenses around in time to arrive at the income level you desire for a given time period using a variety of mechanisms: revenue recognition, IP transfer, capitalization, cost accounting, bonuses, transfer pricing, accelerated depreciation, etc. that's the whole point of tax advisors/accountants.
you'll need to explain how it's "incredibly stupid". you allude to one of the potential consequences being differential taxation (which you didn't explain very well; but yes, losses in some taxing periods could mean you pay more in overall tax for the same total income over many tax periods). that's part of the "more complicated than it sounds" caveat in my prior post.
but unlike you, i don't think it's all bad. for one, it would disincentivize excessive risk-taking (which lead to losses). and it would better align incentives between managers, owners and employees: it would be harder for executives to inflate income in one quarter and recognize the losses in another for the purpose of realizing undeserved bonuses for themselves. would that be so bad?
(besides, it's already the norm that companies have variable income and pay different amounts of tax over a given period of time for the same overall income--e.g., the apple imbroglio).
you'll need to explain how it's "incredibly stupid". you allude to one of the potential consequences being differential taxation (which you didn't explain very well; but yes, losses in some taxing periods could mean you pay more in overall tax for the same total income over many tax periods). that's part of the "more complicated than it sounds" caveat in my prior post.
but unlike you, i don't think it's all bad. for one, it would disincentivize excessive risk-taking (which lead to losses). and it would better align incentives between managers, owners and employees: it would be harder for executives to inflate income in one quarter and recognize the losses in another for the purpose of realizing undeserved bonuses for themselves. would that be so bad?
(besides, it's already the norm that companies have variable income and pay different amounts of tax over a given period of time for the same overall income--e.g., the apple imbroglio).
AMT is completely not fair. It was not indexed to inflation which means that it has started to affect middle class taxes. Go look at why it was created. The fact is if you are rich you can work around it. If you are mid to upper middle class you to not have enough money to structure things to work around it. AMT penalizes the middle class in the more expensive states to live as the salaries are higher. It is 100% unfair.
why would you want any tax cut when the economy is growing? what about the massive debt we took on when the economy was shrinking?
I believe AMT repeal is a part of BOTH the House and Senate plans.
Yea, it's talked about very negatively by the president because it creates a lot of extra work, both for the IRS and tax attorneys.
Surely, the fact that $31M of the $38M of tax he paid in 2005 was AMT had nothing whatsoever to do with it...
https://www.marketwatch.com/story/read-this-to-see-if-you-ow...
https://www.marketwatch.com/story/read-this-to-see-if-you-ow...
AMT has always been seen as poor solution/compromise and is also in both house and senate versions of this bill
who cares about this populist president's past experience with it
mayyyybe if he made the AMT repeal a part of a red line for him not to veto the bill congress sends him, then you could pull out that article
but making everything about Trump? ehhh its hard to defend
who cares about this populist president's past experience with it
mayyyybe if he made the AMT repeal a part of a red line for him not to veto the bill congress sends him, then you could pull out that article
but making everything about Trump? ehhh its hard to defend
He would pay more with the AMT being repealed, as the higher marginal tax rate would apply rather than the AMT rate.
This trend of going "whaa, but Trump!!!!!!" every time anything happens in government makes for lazy debating.
This trend of going "whaa, but Trump!!!!!!" every time anything happens in government makes for lazy debating.
Per https://en.wikipedia.org/wiki/Alternative_minimum_tax, "Each year a taxpayer must calculate and then pay the greater of an alternative minimum tax (AMT) or regular tax."
If Trump paid AMT, his regular taxes were lower, which means he stands to gain. Is there something I'm missing here?
If Trump paid AMT, his regular taxes were lower, which means he stands to gain. Is there something I'm missing here?
It's "Alternative Minimum Tax", not "Alternative Maximum Tax".
I would think tax attorneys would appreciate more billable hours.
The 'postcard sized tax form' touted by the GOP left me wondering what the makers of TurboTax and other tax preparation software think about that specific proposal.
The 'postcard sized tax form' touted by the GOP left me wondering what the makers of TurboTax and other tax preparation software think about that specific proposal.
The "postcard sized tax form" is essentially the same level of complexity as the 1040EZ, which already exists. See:
https://www.vox.com/policy-and-politics/2017/8/30/16219906/p...
https://www.vox.com/policy-and-politics/2017/8/30/16219906/p...
The standard deduction doubling will mean that most people will be able to use a simple form rather than itemizing.
Regardless of what the standard deduction is, don't you still have to first itemize in order to figure out whether you should itemize?
If your income is less than the standard deduction, you don't need to itemize. If you're living off of stock dividends, or other capital gains, the threshold is when income minus standard deduction hits the top of the bracket for 0% on cap gains.
If you have a general idea of what's itemizable, and an approximate amount for those, and it's much less than the standard deduction, you don't need to find all the receipts and do the work.
If you have a general idea of what's itemizable, and an approximate amount for those, and it's much less than the standard deduction, you don't need to find all the receipts and do the work.
Not necessarily. You could just take the standard deduction without regard to whether or not it was good for you to do so.
Many people are in the situation where they just know that there's no point in itemizing, and more will be in that boat when state/local income taxes are excluded and the standard deduction is raised.
Many people are in the situation where they just know that there's no point in itemizing, and more will be in that boat when state/local income taxes are excluded and the standard deduction is raised.
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If you have itemized before and no material changes have occurred in your tax situation then you don’t have to itemize again.
> If you have itemized before and no material changes have occurred in your tax situation then you don’t have to itemize again.
Explain this a bit more? I mean, it's technically true for most taxpayers that they aren't forced to itemize, but I doubt that's what you meant.
Explain this a bit more? I mean, it's technically true for most taxpayers that they aren't forced to itemize, but I doubt that's what you meant.
I think several people on this thread as using "itemized" as shorthand for "did the paperwork to figure out their total deductions and discovered it was less than the standard deduction."
Eh, once you work through the big ticket deductions (like home mortgage interest), it's usually easy to tell.
TurboTax et al absolutely hate it, of course, and work hard lobbying Congress to ensure it doesn't happen. https://www.propublica.org/article/filing-taxes-could-be-fre...
Quite disgusting to lobby for keeping the process complicated, to justify the middleman.
I'm not using Intuit. TaxAct doesn't seem to do such stunts.
I'm not using Intuit. TaxAct doesn't seem to do such stunts.
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Personally happy to see that the new tax code appears to reduce the inequality between staff and executives, with regard to compensation and taxation. I'm a strong advocate for leveling the playing field for EVERYONE; because it eliminates (or reduces to the extent possible) the ability to negotiate these special options for "deferred" compensation.... for which the vast majority of us will never qualify.
This doesn't do that at all. It punishes employees 100-1000 of late stage startups with unknown, perhaps bankrupting retroactive taxes. The entire 409a system was designed to protect exactly that group of employee after the dot-com crash, and this undoes it.
Founders and execs likely will be fully vested before their options are worth anything at all (figure 8 years from founding to IPO, 4 years to vest).
Founders and execs likely will be fully vested before their options are worth anything at all (figure 8 years from founding to IPO, 4 years to vest).
Tjis tax plan is not likely to pass. It has major stakeholders as active opponents, and an impotant cadre of republican congress-people from coastal states. There’s plenty of reporting on Politco or Washington Post that outlines the difficult road ahead for this legislation.
The GOP has high risk of losing control of one or both chambers of Congress in 2018 of they don't pass some kind of tax reform.
The contents are in flux but I'd happily wager on them passing something they can point to
The contents are in flux but I'd happily wager on them passing something they can point to
throwgoog452(4)
Oh come on. The absolute last thing we need are more things making it harder for people to keep the options they earned after leaving the company.
You're right! Which is why getting rid of AMT will actually make it significantly easier.
I was referring to this part: "Similarly, awards with vesting triggers based on exit events such as an initial public offering or change-in-control would be taxable on grant unless they require the recipient to be employed through the liquidity date"
In my experience those vesting triggers are much less common than a fixed vesting schedule.
Honestly, everyone's just trying to game the system. Someone figures out a way to game the tax code, and then the laws get written to support those games.
Taxes are just too darn complicated! It takes far too long to figure out what I legitimately owe! I shouldn't have to pay a professional or use a computer to figure that out.
Taxes are just too darn complicated! It takes far too long to figure out what I legitimately owe! I shouldn't have to pay a professional or use a computer to figure that out.
> Taxes are just too darn complicated!
While I understand this sentiment, I feel that a complicated tax code (or legal code in general) is just where countries end up going as they become larger and more important in the day-to-day lives of its citizens. All the various financial situations in this country are incredibly complicated.
Perhaps we should take a similar route as public defenders (not in practice but in theory, public defenders are horribly under-funded at the moment). The government could provide a tax management program for the general public that does the basics for you. Basically if you qualify for a 1040-EZ you can just use some IRS front-end system. If you have a more complicated situation, then accountants are always available.
I'm frankly disappointed our governments have not done more with the Internet.
While I understand this sentiment, I feel that a complicated tax code (or legal code in general) is just where countries end up going as they become larger and more important in the day-to-day lives of its citizens. All the various financial situations in this country are incredibly complicated.
Perhaps we should take a similar route as public defenders (not in practice but in theory, public defenders are horribly under-funded at the moment). The government could provide a tax management program for the general public that does the basics for you. Basically if you qualify for a 1040-EZ you can just use some IRS front-end system. If you have a more complicated situation, then accountants are always available.
I'm frankly disappointed our governments have not done more with the Internet.
The problem is that TurboTax lobbies against this. Basically, they benefit from our current system. That's why proposal for things like the IRS filling out your taxes for you are illegal.
Really, what should happen is that the IRS mails you your taxes already filled out, you check for errors and fill in the things that aren't reported, and mail it back. This would kill TurboTax's business, so they lobby against it.
Really, what should happen is that the IRS mails you your taxes already filled out, you check for errors and fill in the things that aren't reported, and mail it back. This would kill TurboTax's business, so they lobby against it.
So the solution isn't to nerf the existing tax code, but instead to elect representatives that are actually looking out for their electorate instead of companies like TurboTax.
One problem I see is that the extended exercises that are popular these days convert from ISO to NQOs, so I wonder what that treatment will be like.
Contractors lose some flexibility over NQOs, but imho they were unlikely to have extended exercise periods anyways so I think the impact is not as large as communicated?
Executive especially at late stage companies lose out because of the exercise cap, but they're doing extremely well anyways so whatever.
Employees at late stage companies might be in a bind here. They probably won't hit the ISO exercise cap (BC the value should be 409A based target than preferred price based) but the currently popular method of giving out RSUs that don't officially "vest" until the company goes public (or the employee leaves, I imagine) might get affected, and that's potentially significant.