Asymmetrical Information

What does this have to do with carried interest?

1. Doesn't reduce anyone's personal income tax rate but does increase net income, which is nice for people who own entire companies, like private equity funds.

2. Same as 1 and would drastically shift capital structures over to equity. Don't know what effect that would have, but worth looking into. Also, one would think you'd want to favor dividends over compensation, since the CEO is not indifferent.

3. So you really want my tax rate to stay at the ordinary income rate.

Right, not sure what any of this has to do with the article or carried interest, which is like buying $1 of stock and getting dividends on $20 of stock and being able to call it all capital gains. It certainly wouldn't make Schwarzman start paying more than his secretary.

This proposal made an interesting "whooshing" noise as it went over my head.

What forms of non-ERISA compensation are currenlty untaxed? (With cites to IRC, please)

deferred more than untaxed altogether, such as 'tophat' plans, although certain deductible perks might be considered compensation (use of the corporate jet). Get your own cites, I don't accept assignments.

Also, why exempt ERISA plans? Haven't you read the health care comment threads?

a bow to entrenched interests. Couldn't bring myself to even imagine making 401k matches taxable.

(Too bad your "remember info" button never works for me - always a pain to retype my info - in any case...)

I like your tax plan. I'd support it. My only concern is that it leaves one huge loophole open for the rich, unless I'm missing something. Right now, the rich who control companies end up using the companies as if they were their own private property, living in houses owned by the company, using company jets, etc. That is compensation that is never treated as compensation and is never taxed.

Even if you counted it as income, they would come up with a dodge to get around that, claming all of their private jet travel is for "company business" and therefore isn't compensation, scheduling phony meetings in Hawaii, for instance, at an odd hour so that they just MUST use the corporate jet to get there on time. Policing that would destroy the simplicity of your proposal, because now we have to dig deeply into everything a company does to make sure it isn't disguised compensation (untaxed income) for the fat cats.

Yes, compensation would be taxed at ordinary income, while dividends would be taxed at ordinary income + 15%, so there is still a bias.

No. Read *again*. Cash dividends are *deductible* to the corporate payer (and not taxed at the LLC/partnership level) and therefore are taxed only at OI, regardless of whether they are from private equity investing or regular common stock.

I am also not sure what you mean by the difference between LLCs and regular corporations. LLCs are taxed as disregarded entities or partnerships by default, and can elect to be taxed as corporations. Is there some other type of taxation?

LLCs are essentially taxed as pass-through income to the individual. The lower the corporate tax rate, the less the double-taxation or difference between corporations and LLCs/partnerships. The dividend deductibility further narrows the gap.

OK, I see how this works now. But,

3. So you really want my tax rate to stay at the ordinary income rate.
as opposed to?

Taxing mine at theirs!

Your plan is close to my plan, which is to eliminate all intermediate taxation and have households pay the entire tax burden explicitly, once a year in a lump sum, the day after Christmas.

My reaction to this plan, and specifically to Jane Galt’s Tax Plan, is a bit of a wonder. I consider this all nothing more than a means to continue with the monopoly accountants and financial people have over control of people and their money. The movement of money in and out of different ‘taxable buckets’ is just overspray from the basic core idea that ‘Any money earned should be taxed evenly, whether individual or business, no hidden deductions.’

Actually, the idea of a 100% negative income tax in Jane Galt’s tax plan is a bit ludicrous to me. Why should those on welfare and not wanting to work (the windshield wipers at your local corner) be paid money just because they exist? And why would we want to top out the tax at 35% for the big money people? Moving that income tax level up would be more equitable, wouldn’t it? Also, it’d be better to require EVERYONE to pay tax so that we all feel some pain from the Taxman, but also because we feel we are contributing something to society.

So, if we have a tax structure that requires at least 0.5% of income at the low end to about 85% of income at the upper end, then it would be more equitable (if you make a billion, you still get ot keep 150,000,000 USD by the government). Heck, you’ve even dismembered exemptions for a number of things (houses, etc.) for individuals, the few things good for the middle class. Since the rich don’t really care about such piddling amounts, and the poor don’t have houses and such, it wouldn't hurt any but those in the middle, who aren't pandered to by politicos or "Movement" groups, and are truly on their own.

Of course there would be howls of protest from businesses, and they’d declare they want to get the heck out of Dodge and go overseas somewhere, anyplace they think they can keep more of their ill-gotten gains.

The resolution to that is to strengthen the laws that state any person who is a citizen of the USA and a partial or full owner (or shares in profits) in a company, then that company pays all US taxes, regardless of other taxes they may pay to other countries. This would eventually be ‘fixed’ by consolidating a World Government with Regional States (NAU, SAU, EU/Russia, Pan Africa, Glorious Sharia, and The Asian Hegemony), fixing all tax rates for everyone, worldwide, so no one could creatively use accounting techniques to screw their fellow citizens.

And the heck I say, to getting rid of the estate tax. When a person dies and the goods are to be inherited, whether they are in a trust fund or not, everything over a max of 100,000 USD per individual, should be appropriated by the government. Why should a rich family be entitled to continue in their richness, just because they were born in the family? You get a lot of useless people that way. Wouldn’t it be more equitable to spread that money around to the less fortunate in the form of performance bonuses, government run day-care starting at age 3 (they are still malleable), nationalized medicine (no matter your ailment, everyone gets into that single line Jane likes so much, so that no one person can get ahead of another - doable by using computer databases), and tighter controls over food growing and distribution, so that the fine standards for food quality and safety currently in effect are continued in our society.

ERISA and 401k plans shouldn’t be exempt from taxation any more than the sales taxes you spend buying a car or luxury boat. Let’s be even-handed and not give it all away to the moneyed interests.

The reason I ask for cites is not to give anyone an assignment, but because if we're going to talke about the law, we should probably be talking about the law and not what anyone thinks the law might be, should be, or would be under some new proposal.

a rule that would stifle pundits everywhere. After all, the post is about what I think the law "should be or would be" and it is hardly necessary to pedantically list tax deferral methods to acknowledge their existence.

For instance, if your employer provides you with a house, that's taxable income unless it's for the "convenience of the employer" and you're required by your job to live in that particular place. 26 U.S.C. 119. Property managers qualify; rich guys in fancy mansions don't.

Similarly, use of a company car is income to you unless, say, you're a professional driver who is merely allowed to take it home at night as a fringe benefit. 26 U.S.C. 132(e)(1).

In the short time that I have had to look, I can't comment on the use of private jets to go to genuine business functions, but I'm confident that personal use qualifies as income, not to mention fraud against the shareholders.
and yet widely practiced. Remember the head of RJR Nabisco flying his dog around?

to go back to the original nit, tophat plans are generally not deductible to the company until paid and not taxable to the employee until received. I've been told there are even ways to widen the gap between the payment and the receipt, but that is the stuff of private rulings and IRS fines, I suppose.

I have an improvement to #2; other than that, this is close to the plan I've been proposing.

Make the corporate tax rate the same as the top individual rate, but base it on GAAP income.

Don't tax capital gains at all; they have been taxed already as retained income.

But just basing the corporate tax on GAAP income would be a big improvement.

I agree that the use of GAAP would further politize the FASB, but it seems to me that it would politicize it in a non-harmful direction. Currently, all the incentives are for a company to keep GAAP income as high as possible; this would give an incentive to keep it accurate. Also, compliance costs for taxes (which are quite high) would be much lower, with no need to maintain a second set of books, and no opportunities for opaque tax subsidies to favored industries.

My thought is that not ALL capital gains would have been taxed, but most of them would be, since most capital gains are retained earnings. It seems to me that the few that aren't are pretty much random, and so not very useful in any kind of tax-avoidance strategy.

Imagine a stock trading at 15X $1 of earnings ($15). It earns $1.10 the next year and trades at 20P/E, or $22. The company has earned and been taxed on $1.10, the capital gain is $7. $5.90 has not been taxed.

Even if the multiple is flat, the stock appreciates to $16.50, leaving $0.40 of the gain untaxed. A big share of capital gains are multiple-based and untaxed.

My intent is not to be pedantic or stifle pundits, it's to make sure what you're saying is actually accurate as opposed to what you read in some op-ed written by someone who doesn't know what he's taking about.

Likewise, it serves those who propose new laws well to know what the current law says--because it may already say what they want, or because their proposal may be disruptive or complicating in ways they don't expect.

For instance, I cannot find, in my quick scan of the IRC, an exemption from gross income for employer-provided life insurance (it may be there, and I've just missed it, I'm not sure). But such insurance is unambiguously an ERISA employee benefit plan. Suppose that no such exemption currently exists, you propose creating one. Any good reason for that?

None of which is to say that your proposal is a bad one, although it certianly moves the tax code even further away from GAAP in a somewhat alarming way.

By way of clarification, while I don't aim to stifle pudits, I don't see big harm in stifling inaccurate factual claims. Mistatements of the law are a pet peeve of mine, sorry to pester you with it.

And I do want to stifle Congressmen, who too often seem to act as though they have no idea what the current law says, despite the fact that many of them are lawyers and all of them employ lawyers.

Either I'm missing something, or you are.

If the company randomly earns 10% more on the same capital, that's a random gain.

Usually, though, the company's earnings are pretty proportionate to capital (moving ROE is hard).

So if the company earns 10% more, because it has 10% more capital--where did it get the capital?

So let's do it this way.

This year--$15 stock price (=capital), $1 earnings, $0.53 dividend, $0.17 tax paid, $0.30 retained earnings (added to capital).

Next year--$1.02 earnings, stock price $15.30=prior year+retained earnings.

I'm not seeing the untaxed gain.

If you want to incentivize savings, don't tax them at all. Do away with all this 401(k) and Roth nonsense, just say up to $X per year you can save into an account that you can't touch until retirement without a huge penalty, and you don't pay taxes on the principal, or the interest, ever.

I fail to see why any "tax it now or tax it later" savings scheme is better, except in that it creates government revenue, but I count that as a bug rather than a feature wherever it appears.

Mindles Dreck,

I would avoid using the italics to respond. I think it better to use bold and a different color for your font or, even better, address the issues in separate comments. It is extremely confusing otherwise.

"An increase in PE or strong earnings can, and often does create a profit that has not been taxed."

Right. I agree with this.

My thinking is that capital gains tax is a recordkeeping nightmare, and accounting for inflation makes it worse--so I'd like to avoid it if possible.

I think the PE changes and strong earnings are pretty random (in contrast to more capital=proportionately more earnings), so my tax structure avoids tax structuring/tax sheltering. I don't think it avoids untaxed gains; I think it avoids predictable untaxed gains.

Definitely better.

All of the above sounds like the Tax
Accountant's Security Act of 2007. Why is it not possible to create a very simple, straightforward tax system under which average taxpayers can do their own returns, if required.

Why is it not possible to create a very simple, straightforward tax system under which average taxpayers can do their own returns, if required.

1) I've never paid anyone to do my return, and I've been using the regular 1040 since I was a teenager because my taxes have required it.

2) It is possible to create a simpler tax system, but then you lose a lot of "fairness," too. Go ahead, define "income." It's not trivial to define it in a really simple way that fits with what most people think should and should not be taxed.

I consider myself more of a bleeding-heart (BH) authoritarian. By golly, if a family was lucky enough to have an ancestor make some good decisions, resulting in amassing a good deal of wealth, what good comes of that wealth going down the generations, especially if the recipients just suck off the teat of privilege and don't do anything worthwhile with that wealth? I understand there is a lot of room to define what is worthwhile; a BH Libertarian might think it worthwhile to have no drug laws, saving scads in law enforcement costs, whereas a BH Authoritarian might believe a Major War on Drugs (not a Bush-led one, but something effective) should be waged to protect people from the parasites that would prey upon their corpus.

I'd think that, to be consistent, a BH Libertarian would want to do away with an income tax entirely, and set up a tax that does not pry into a person's personal, private life, something impossible if you have an IRS. Base a tax on consumption (with the BH quality strong, you'd exempt absolute necessities like food, water and shelter from the tax), or perhaps tax the bejesus out of buying luxury items (really big boats, cars, planes, needless gems and trinkets, etc.). That way there is no need to pry into your background, and it isn't punitive on the po'folk.

As far as the costs of immigration...well, let us erase those dratted borders and allow the market to facilitate who gets to live where, who gets to buy land, etc. The only thing is, about every 50 years there needs to be a revolution, such that everything is given a good shake so that those with the tall piles of money fall into the hands of the 'less fortunate among us.' That can easily be done without government intervention... actually, getting rid of the government every now and then is a good thing, in my BH eyes.

FYI, the group life insurance exemption is currently $50,000. That is, a company may pay the premium on up to $50,000 of group life insurance coverage per employee. The company will get a deduction for the cost of the insurance and the employee will have no taxable income. The premium on coverage in excess of the $50,000 limit is taxable to the employee.

As for the idea of linking corporate taxable income to GAAP income, I don't think the government would like it. The purpose of GAAP is to fairly measure income. The purpose of the IRC is to raise tax revenue. Almost all of the differences between GAAP and tax methods of accounting are in the government's favor -- the changes tend to accelerate the recognition of income.

Note: This change would NOT simplify the tax code. Back when I used to have the paperback volumes of the IRC and Regulations and of FASB's statements (and the related authorities) on my desk, the GAAP authorities made a larger stack. (The publisher was the same, with the same typeface, size of page, etc.) The GAAP rules are not less complex than are the tax rules. The GAAP rules, in general, just make more sense. While the tax rules would not be simplified by this change, there would be significant reductions in the cost of compliance with the tax law. Most firms are now required to keep 4 or more sets of books. One set using GAAP rules. One set using federal income tax rules. One set using state income tax rules. One set using AMT rules; and one set use "E&P" (earnings & profits) rules. (I know that adds up to 5 sets of books, but most firms blow off the E&P set of books.) Using GAAP would save a ton of tax accounting work. (And my children would starve! Mindles, what have you against my kids?)

From my perspective, the most bang for the buck in tax simplification would be the elimination of state income tax rules. If a state wants to tax income, it should be required to use the federal tax rules to measure the income. If more than one state wants to tax the same dollar of income, federal law should mandate the one and only method of allocating the income among the states. I have clients who earn income in several states. Each state has its own rules for measuring taxable income and for determining how much of the income is taxable in the state. This can greatly multiply the complexity of tax compliance and can result in the same dollar of income being subject to tax in more than one state.

My desired change will never happen. (The states would lose too much power to reward favored interest groups.) But I thought I'd throw it out there as long as we're dreaming.

Well, your plan would increase the tax bracket for the upper 5% drastically by getting rid of the 0% income tax bracket called "increase on basis on death". That's the one where your capital gains tax is zero if you hold the money until you die, and then your heirs don't pay capital gains taxes on the money, either.
Never gonna happen. It's unconstitutional for rich people to pay money. You are a commie for even suggesting it.

"Capital expenditures should be 100% deductible"...by this I'm assuming you mean deductible on a cash basis, at the time the expenditure is made, rather than being capitalized and then depreciated over time?

If that's indeed what you mean, it would be helpful to asset-intensive businesses such as railroads and heavy manufacturing.

As far as the costs of immigration...well, let us erase those dratted borders and allow the market to facilitate who gets to live where, who gets to buy land, etc. The only thing is, about every 50 years there needs to be a revolution, such that everything is given a good shake so that those with the tall piles of money fall into the hands of the 'less fortunate among us.'

Sure, if you want our country to resemble Mexico. Back in 1836, Texans envied Mexico for it's wealth, and Sam Houston had a heck of a time keeping men in his army fighting for Texas independence rather than going south on looting expeditions. Then Mexico went through several revolutions, with the winners "redistributing the wealth", and now there are a few incredibly rich Mexicans, and the rest of them are flooding across our border.

Of course, when those revolutionists "redistributed the wealth", that mainly meant to themselves. What did you expect?

When the wealthy feel secure from confiscation, they invest it in enterprises that employ people, use capital to improve productivity and invent new products, and make everyone wealthier, When they don't feel secure, they keep their money where it's easier to protect it.

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