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Dueling Taxes

Sep 25, 08 in Business   17 Comments

I have written from time to time about the differing taxes plans of Senator McCain and Senator Obama which often leads to comments from the Obama faithful deriding the credibility of The Wall Street Journal and other such things.  Well another interesting little table appeared in the Journal yesterday.

Mccain_vs_obama_taxes

Interesting, because using information from an analysis by Deloitte it shows that unless you make over $400,000 your taxes are not going up under either candidates proposals.  The only folks that full a lot of pain in the Obama plan are those making over a $1,000,000 annually.  If you like you can download a pdf of the full Deloitte report here.

As an entrepreneurial kid of guy of more interest to me is capital gains tax treatment.  A year ago I made the statement that I would not vote for anyone that wanted to raise capital gains tax.  Perhaps I am not alone as Mr. Obama has changed is position of wanting to raise capital gains tax from 15% to 28%.  He currently states that he would raise capital gains and dividend rates to 20% for families earning more than $250,000 ($200,000 for singles), and eliminate all capital gains taxes on start-ups and small businesses to encourage innovation.  As an undecided centrist I can live with that. 

More broadly, given the current state of economic turmoil I have to halfway agree with Marc Cuban.  Talk of tax cuts for anyone is no longer economically viable.  But increasing taxes on the uber rich is another story.  Taxing the heck out of that dude from Goldman that wants a USG bailout and personally makes about $70,000,000 a year.  Now that's interesting.  Populist or not, taxing ordinary income above, say $10,000,000 annually, at an 80% tax rate might be a way to reel in excessive corporate executive compensation and provide the fortunate more reason to give back to society voluntarily.

Comments

I start to squirm whenever I hear anything in government use the term "excessive". The use of the word implies that there is some well-defined understanding of what is appropriate and what is excessive. It also implies that there is person or body that brokers these decisions. The term "excessive" is used most effectively as a political blunt instrument during the time of a crisis

Golden parachutes are paid to bad executives not because firms want to blow capital on their friends, but because it is often cheaper to accelerate the exit of an executive with a payout than to let them keep driving the firm into the toilet. This happens at all levels, not just in the executive suite, its just that the dollars involved there are so hard to comprehend. If these executives did something wrong, they will be prosecuted. If not, pay them the balance of their contracts and show them the door.

IMO, the idea of capping anyone's pay is analogous to a price control on labor, is anti-competitive and should be avoided.

-d

dsi  |  Sep 25, 08 at 04:55 PM

What do you think of Obama's plan to eliminate capital gains for startup ventures? It would seem that you would prefer that as an "an entrepreneurial kid of guy" (sic :).

One issue with your idea is that uber-high income is just shifted to capital gains through options and stock grants. Obama's plan would seem to most fit what you desire.

Nick Owen  |  Sep 25, 08 at 05:07 PM

Would someone PLEASE explain to me what he means by eliminating capital gains for startups and small businesses? I've got a startup (and a small business). We've got profit, we pay taxes on it - that's not capital gains, that's income and we pay the full rate.
Of course, if I sell my company, I get capital gains on the stock, but that's personal capital gains, not company gains. Is he really suggesting he'll eliminate personal capital gains from sales of small/startup businesses? That's not what it sounds like, and unlikely to be practical in any case.

As I see it, the only way a business has capital gains is when it buys an appreciating capital asset then sells it - for example, if my company bought an office, then later sold it at a profit. No tech startups I'm aware of are going to have anything like that on the books. So who does this benefit, or is it just hot air?

Jungle Dave  |  Sep 25, 08 at 05:31 PM

If Obama's plan to eliminate capital gains for startups is real I like it a lot. I am eager to hear more details of his capital gains tax plan during the debates.

Perhaps it's time to make the taxes on capital gains progressive (and that is what Obama is proposing). This whole mortgage mess is just Enron part two at a higher level. People with the wrong incentives doing wrong things to make money in ways that defy common sense. It's obscene.

Excess is like obscenity. You know it when you see it. And if you don't believe that I suggest you check out Ryan's buffet one evening.

Lance  |  Sep 25, 08 at 05:34 PM

Jungle Dave: Exactly what I want to find out myself. There is a big diff between eliminating all capital gains taxes on start-ups and small businesses and eliminating all capital gains taxes for individuals that found/invest in start-ups and small businesses.

Lance  |  Sep 25, 08 at 05:40 PM

Lance: The second would certainly be great, but I can't see how that would be practical. You may not realize gains from a startup investment for years, and by the time you realize them, the company may no longer be a startup/small business (e.g. Would the Google founders selling their founder's stake get a capital gains break?)

If you say the company has to be a "small business" when the gains are recognized, that probably limits it to sales at valuations < $5m or so, which isn't going to be a great exit for any funded startup.

So again, who exactly does this benefit?

If you want to give a tax break to startups / small businesses (which are likely to be unprofitable for a few years anyway), then get rid of the mandatory taxes they pay - like payroll taxes. THAT would be a huge help.

Jungle Dave  |  Sep 25, 08 at 08:06 PM

Lance - the idea of eliminating capital gains for small business does not help. In fact, many businesses get loans and investments from those "rich" folks that you apparently want to tax more.

If we raise their taxes, it gives them less money (and incentive) to invest in our start-ups. I am an entrepreneur who has used many funds from different groups to build multiple companies and make profits for them.

Please don't lose sight of the fact that it is better to have the money in individual's hands so that they make the investments they want rather than an inefficient government who believes that they can allocate the funds in a more productive way.

Paul  |  Sep 25, 08 at 10:06 PM

From the Obama web site:
"Provide Tax Relief for Small Businesses and Start Up Companies: Barack Obama and Joe Biden will eliminate all capital gains taxes on start-up and small businesses to encourage innovation and job creation. Obama and Biden will also support small business owners by providing a $500 “Making Work Pay” tax credit to almost every worker in America. Self-employed small business owners pay both the employee and the employer side of the payroll tax, and this measure will reduce the burdens of this double taxation."

This quote is ambigous at best, so I can see why there might be confusion. However, if you read this doc:
www.barackobama.com/pdf/taxes/Factsheet_Tax_Plan_FINAL.pdf

You will find this quote:

"Eliminating Capital Gains Taxes for Entrepreneurs and Investors in Small Business. Barack Obama
understands that small businesses are the engines of our economy, and he will eliminate all capital gains
taxes on investments in small and start up firms."

To me, it's basically an extension of the existing capital gains rollover for qualified small businesses. (If you don't know what that is, you should get a new accountant.)

Nick Owen  |  Sep 26, 08 at 11:01 AM

Well, that last quote is certainly clearer. I wonder if it would include the "investment" made by the founders for capital stock. In that case, founders would never pay capital gains on sale of their company / company stock. Someone I doubt that would ever happen.

Jungle Dave  |  Sep 27, 08 at 10:42 AM

@Jungle Dave: If they don't include founders, it just reaks of a gimme for VCs, so I expect it will. As a practical matter, I don't see how they couldn't. A founder can just start a company with an investment of $100.

Obviously, it has make it's way through Congress. Since capital gains are by their nature better than ordinary income, I think a cap is appropriate. I suspect that if this comes to fruition, you will see angel investing become a portfolio category like Hedge funds and an explosion of funds and investor groups, a la the boom days, with perhaps the same results :). Although, as I read somewhere - I think maybe Freidman in the NYT - at least after the internet boom we still had the internet. After this boom, not so much.

Nick Owen  |  Sep 29, 08 at 12:23 PM

Nick, we still have dwellings. Dwellings are good, not as good as the Internet I grant you, but good nonetheless.

Lance  |  Sep 30, 08 at 12:51 AM

Lance:

Great post!

When it comes down to brass tacks this is all really complex stuff and I'd be either a fool or dishonest if I were to say I completely understood it all and all its implications. However with your post I do feel a lot less like that little boy who kept trying to tell the Emperor he had no clothes.

That said, where's @amcrae when you need him? '-)

-Mike

Mike Schinkel  |  Oct 01, 08 at 08:48 PM

Guess I'm getting called out. Obama promises to eliminate capital gains for startups. In related news he also promises to eliminate property taxes for renters.

Angus McRae  |  Oct 01, 08 at 08:56 PM

Angus, your analogy is subterfuge.

Did you not read the part (emphasis mine) that says "Obama will eliminate all capital gains taxes on *investments* in small and start up firms?"

I could be wrong, but I read that to be similar to not be taxed on a profit from selling a house if you invest the proceeds in another house. Doesn't that give you exactly what you need not to hire that developer?

Mike Schinkel  |  Oct 01, 08 at 09:26 PM

That was an unfortunate typo. I meant to type: "Doesn't that give you exactly what you need to hire that developer?"

Mike Schinkel  |  Oct 01, 08 at 09:28 PM

LOUD NOISES!

Russell Jurney  |  Oct 01, 08 at 09:48 PM

How did I get sucked into this one?! Describing a candidates position on taxes isn't a partisan task. Taxes are neither Democrat nor Republican. It's math!

Yes or no, are you saying an "accredited investor" will not have to pay capital gains taxes?

For all you individuals who have a company that you would consider a "start-ups or small business," look at last year's tax return and see how much capital gains taxes you paid. Compare that big $0 to the $0 being promised and you will see why I made the analogy of property taxes for a renter.

If someone really wanted to help entrepreneurs, start-ups and small businesses they would eliminate/reduce corporate taxes and reduce payroll taxes.

Angus McRae  |  Oct 02, 08 at 07:01 AM

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