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Facebook’s 99%: Later employees may pay almost double the tax rate

39 points by triketora 15y ago

deleted 15y ago
[deleted]
ck2 15y ago
Meet Facebook's 1% http://news.ycombinator.com/item?id=3561273 http://news.ycombinator.com/item?id=3561273 Shows you how out of the loop I am about Facebook, I didn't even know who this was Dustin Moskovitz has a 5% stake in Facebook, which for an $85 billion company would equate to $4.25 billion. That's around $157 million for every year of his life. (if I understand it right, he only will pay 15% tax on that - and Forbes says he has 7.6% stake, not 5%)
- shalmanese 15y ago
  In the movie, he was the guy trying to figure out if that chick was single or not, giving Zuckerberg the inspiration to add relationship status to Facebook.
  - ck2 15y ago
    Unfortunately I am at least two years behind on movie releases, not even sure I'd see that film anyway though.
alsocasey 15y ago
Yes, this is truly tragic.
jdludlow 15y ago
Can we please knock off the nonsense of this "Buffett secretary" talking point? Debbie Bosanke is estimated to make north of $200k per year, while Buffet is paying capital gains rates. Of course her rate is higher.
- jshen 15y ago
  "Of course her rate is higher." I think the vast majority of people would expect a billionaire to pay a higher tax rate than an upper middle class person. I wouldn't call that nonsense.
  - jdludlow 15y ago
    I'm sure that you're right, but then the vast majority of people are easily swayed by cheap political rhetoric. If they're playing by the same rules, which it appears that they are, then what's the problem? It's not like he hasn't already paid income tax on that money the first time he earned it, and his absolute tax bill is vastly larger than hers is. If not being jealous and covetous of those who make more than I do puts me in the minority, then I guess that's where I'm at. Sadly, I believe that to be the case.
    - justincormack 15y ago
      Capital gains are not really double taxation. Sure he paid tax, but then he earned more. Many countries charge income and capital gains at exactly the same rate, eg the UK does now.
      - walkon 15y ago
        How are they not being taxed twice? A company (which has owners) pays income tax on their profits, so the company and therefore, owners, have less capital remaining. Then, if the owners want to cash out anything from the post-income-taxed margin, they'll have to pay capital gains as well.
        jshen 15y ago
        It's not that simple. One could just as easily make the case that workers get a lower salary due to higher corporate taxes, therefore they should pay a lower tax rate than owners. In short, it's not at all clear that a higher corporate tax rate is purely a tax on owners, and nothing else.
deleted 15y ago
[deleted]
jpdoctor 15y ago
They almost certainly don't understand the story: It's more likely worse than they are mentioning. Most reporters have never heard of the 83B election. tl;dr = Zuck already paid the tax on his options for exercise, at par (0.001 $/share is typical.) The tax system is truly brain-damaged.
- RyanGWU82 15y ago
  Isn't that the whole point of the story? Zuck paid income tax on the initial grant's value (which may be par value), and the stock's appreciation will only be taxed at the reduced capital gains rate?
  - jpdoctor 15y ago
    > Isn't that the whole point of the story? No, it is not. This sentence in bold tells you they do not understand: "Zuckerberg will be paying taxes on $5 billion in gains from exercising options." If you don't understand why that is different than my comment, then you don't understand the issues of the 83B election also. Now, odds are you a smart person. And that is my point: It doesn't matter how smart you are; The vagaries of the tax law are so numerous and extreme and obscure that you can only come to the conclusion: The tax system is truly brain-damaged.
    - jadc 15y ago
      Thank you for the 83(b) mention. The article completely glosses over that.
    - furyofantares 15y ago
      Can you please explain it?
      - jpdoctor 15y ago
        First, IANAL. Second: 83b election essentially says: Dear IRS, I know I received all these unvested unexercised options, but I want you to tax me on them as though they were all exercised when I received them. You do this in the year they are assigned to you. Since this is before the company actually takes funding, the shares are worth some stupidly low number ($0.001/sh). So 1M shares is $1000 of income. Since he was not making much money, that amounts to maybe $200 of income tax on 1M shares. When he goes to exercise the options, no income tax is paid because he already paid it! He can use those share for ALL SORTS of collateral for the future. As long as he doesn't actually sell the shares, no income tax is due.
lurker17 15y ago
Is the article's bogeyman description of RSUs accurate at all? My understanding was that an RSU was equivalent an option priced at $0. The issue is the exercise date, not option-vs-RSU. Lots of public companies (Amazon, Google, etc give at RSUs). the issue, as jpdoctor mentions in this thread, is that you pay income tax on the value of stock (minus option price, if any) on the day you exercise, which is some time between vest date and sell date (option/stock-holder's choice). RSUs are only expensive if they vest when the stock is expensive, exactly the same as with options. In either case, the earlier they vest, the lower taxes are (due to capital gains tax rates) The only way I can imagine the article making sense is if Facebook gave employees delayed vesting schedules beyond the usual 25%/yr, and so stock grants vested later (at higher market price) than they would otherwise. Yes?
- sokoloff 15y ago
  An RSU is not exactly equal to an option with a strike of $0, because you control the exercise date on an option. Not so on an RSU. The taxable event with options is the date of exercise (or the 83b election), not the date of vesting. The option owner has control over the date of exercise, meaning they can delay exercise until after the vesting date. An RSU, having a "strike price" of $0, "exercises" (and therefore is a taxable event) the instant it vests. In both cases, the gain (the surplus of fair market value over exercise price) is ordinary income and taxed as such. In both cases, the gains (or losses) after the initial taxable event are capital gains, and the rules are not as simple as for stocks, but basically, for employees with typical vesting, hold the shares for a year after exercise and these gains are long-term capital gains.
simplefish 15y ago
Just to spell it out - there are three (main) reasons why we would want capital gains taxed at a lower headline rate: 1) Capital gains are already taxed at the corporate level. People seem to intuitively understand how this works at the dividend level (dividends are paid with post tax dollars), but if you do the math, it works precisely the same with capital gains. (Please note: Tax incidence is complicated. Not all the corporate tax is borne by investors. Especially in small open economies like the UK, it's actually mostly paid by the workers via lower salaries.) 2) Speaking of which...capital gains are a tax on investment. Investment leads directly to increased labour productivity. Productivity leads directly to higher salaries. If we want employees to be paid a lot, we want, as a matter of public policy, to encourage investment. At this point the observant will pipe up "wait, are you saying it's good for the workers if we tax worker salaries more heavily than capital gains income?!" Yes, that's exactly what I'm saying, and it's supported by a rich body of empirical and theoretical backing. Heavy capital gains taxes are the precise policy you'd implement if you wanted to keep labour poor and unproductive. (If it helps, consider that investment is saving - it's an accounting identity - and the US has a big problem with low savings rates, which in turn means that they struggle to get enough investment without borrowing from overseas lenders. See the problem?) 3) Finally, investment income isn't just already taxed at the corporate level - it's also already taxed at the personal level too. Imagine two people, Spendthrift Sally and Frugal Frank. Both work at jobs making $200k/year, after tax. Sally spends all her income on consumption, and saves $0. Frank spends 75% of his income on consumption, and saves $50k/year by purchasing stocks which go up in value by 5% per year. After twenty years, Frank has spent $1m total on stocks now worth a cool $1.7m (clearly he follows the buy-and-hold school of investing). He is retiring, and wants to sell them all to re-invest in safer bonds. What tax rate do you think is fair? He made those investments with after-tax dollars. Do we now tax him again on the result of those investments? Don't we want people to behave like Frank, instead of Sally? And if we charge him 15% on his capital gains, he'd end up paying over $100k MORE total tax than Sally. Does Frank, who has scrimped and saved his whole life, really deserve to pay more taxes than Sally, who never saved a penny? (The analysis becomes more complicated if Frank received the stock as compensation, instead of purchasing it with his salary. But keep in mind that he's still (1) taxed on that initial compensation and (2) is deferring consumption; a responsible choice which we as a society probably want to encourage.)

39 points by triketora 15y ago

deleted 15y ago

[deleted]

ck2 15y ago

Meet Facebook's 1% http://news.ycombinator.com/item?id=3561273 http://news.ycombinator.com/item?id=3561273 Shows you how out of the loop I am about Facebook, I didn't even know who this was Dustin Moskovitz has a 5% stake in Facebook, which for an $85 billion company would equate to $4.25 billion. That's around $157 million for every year of his life. (if I understand it right, he only will pay 15% tax on that - and Forbes says he has 7.6% stake, not 5%)

shalmanese 15y ago
In the movie, he was the guy trying to figure out if that chick was single or not, giving Zuckerberg the inspiration to add relationship status to Facebook.
- ck2 15y ago
  Unfortunately I am at least two years behind on movie releases, not even sure I'd see that film anyway though.

alsocasey 15y ago

Yes, this is truly tragic.

jdludlow 15y ago

Can we please knock off the nonsense of this "Buffett secretary" talking point? Debbie Bosanke is estimated to make north of $200k per year, while Buffet is paying capital gains rates. Of course her rate is higher.

jshen 15y ago
"Of course her rate is higher." I think the vast majority of people would expect a billionaire to pay a higher tax rate than an upper middle class person. I wouldn't call that nonsense.
- jdludlow 15y ago
  I'm sure that you're right, but then the vast majority of people are easily swayed by cheap political rhetoric. If they're playing by the same rules, which it appears that they are, then what's the problem? It's not like he hasn't already paid income tax on that money the first time he earned it, and his absolute tax bill is vastly larger than hers is. If not being jealous and covetous of those who make more than I do puts me in the minority, then I guess that's where I'm at. Sadly, I believe that to be the case.
  - justincormack 15y ago
    Capital gains are not really double taxation. Sure he paid tax, but then he earned more. Many countries charge income and capital gains at exactly the same rate, eg the UK does now.
    - walkon 15y ago
      How are they not being taxed twice? A company (which has owners) pays income tax on their profits, so the company and therefore, owners, have less capital remaining. Then, if the owners want to cash out anything from the post-income-taxed margin, they'll have to pay capital gains as well.
      - jshen 15y ago
        It's not that simple. One could just as easily make the case that workers get a lower salary due to higher corporate taxes, therefore they should pay a lower tax rate than owners. In short, it's not at all clear that a higher corporate tax rate is purely a tax on owners, and nothing else.

deleted 15y ago

[deleted]

jpdoctor 15y ago

They almost certainly don't understand the story: It's more likely worse than they are mentioning. Most reporters have never heard of the 83B election. tl;dr = Zuck already paid the tax on his options for exercise, at par (0.001 $/share is typical.) The tax system is truly brain-damaged.

RyanGWU82 15y ago
Isn't that the whole point of the story? Zuck paid income tax on the initial grant's value (which may be par value), and the stock's appreciation will only be taxed at the reduced capital gains rate?
- jpdoctor 15y ago
  > Isn't that the whole point of the story? No, it is not. This sentence in bold tells you they do not understand: "Zuckerberg will be paying taxes on $5 billion in gains from exercising options." If you don't understand why that is different than my comment, then you don't understand the issues of the 83B election also. Now, odds are you a smart person. And that is my point: It doesn't matter how smart you are; The vagaries of the tax law are so numerous and extreme and obscure that you can only come to the conclusion: The tax system is truly brain-damaged.
  - jadc 15y ago
    Thank you for the 83(b) mention. The article completely glosses over that.
  - furyofantares 15y ago
    Can you please explain it?
    - jpdoctor 15y ago
      First, IANAL. Second: 83b election essentially says: Dear IRS, I know I received all these unvested unexercised options, but I want you to tax me on them as though they were all exercised when I received them. You do this in the year they are assigned to you. Since this is before the company actually takes funding, the shares are worth some stupidly low number ($0.001/sh). So 1M shares is $1000 of income. Since he was not making much money, that amounts to maybe $200 of income tax on 1M shares. When he goes to exercise the options, no income tax is paid because he already paid it! He can use those share for ALL SORTS of collateral for the future. As long as he doesn't actually sell the shares, no income tax is due.

lurker17 15y ago

Is the article's bogeyman description of RSUs accurate at all? My understanding was that an RSU was equivalent an option priced at $0. The issue is the exercise date, not option-vs-RSU. Lots of public companies (Amazon, Google, etc give at RSUs). the issue, as jpdoctor mentions in this thread, is that you pay income tax on the value of stock (minus option price, if any) on the day you exercise, which is some time between vest date and sell date (option/stock-holder's choice). RSUs are only expensive if they vest when the stock is expensive, exactly the same as with options. In either case, the earlier they vest, the lower taxes are (due to capital gains tax rates) The only way I can imagine the article making sense is if Facebook gave employees delayed vesting schedules beyond the usual 25%/yr, and so stock grants vested later (at higher market price) than they would otherwise. Yes?

sokoloff 15y ago
An RSU is not exactly equal to an option with a strike of $0, because you control the exercise date on an option. Not so on an RSU. The taxable event with options is the date of exercise (or the 83b election), not the date of vesting. The option owner has control over the date of exercise, meaning they can delay exercise until after the vesting date. An RSU, having a "strike price" of $0, "exercises" (and therefore is a taxable event) the instant it vests. In both cases, the gain (the surplus of fair market value over exercise price) is ordinary income and taxed as such. In both cases, the gains (or losses) after the initial taxable event are capital gains, and the rules are not as simple as for stocks, but basically, for employees with typical vesting, hold the shares for a year after exercise and these gains are long-term capital gains.

simplefish 15y ago

Just to spell it out - there are three (main) reasons why we would want capital gains taxed at a lower headline rate: 1) Capital gains are already taxed at the corporate level. People seem to intuitively understand how this works at the dividend level (dividends are paid with post tax dollars), but if you do the math, it works precisely the same with capital gains. (Please note: Tax incidence is complicated. Not all the corporate tax is borne by investors. Especially in small open economies like the UK, it's actually mostly paid by the workers via lower salaries.) 2) Speaking of which...capital gains are a tax on investment. Investment leads directly to increased labour productivity. Productivity leads directly to higher salaries. If we want employees to be paid a lot, we want, as a matter of public policy, to encourage investment. At this point the observant will pipe up "wait, are you saying it's good for the workers if we tax worker salaries more heavily than capital gains income?!" Yes, that's exactly what I'm saying, and it's supported by a rich body of empirical and theoretical backing. Heavy capital gains taxes are the precise policy you'd implement if you wanted to keep labour poor and unproductive. (If it helps, consider that investment is saving - it's an accounting identity - and the US has a big problem with low savings rates, which in turn means that they struggle to get enough investment without borrowing from overseas lenders. See the problem?) 3) Finally, investment income isn't just already taxed at the corporate level - it's also already taxed at the personal level too. Imagine two people, Spendthrift Sally and Frugal Frank. Both work at jobs making $200k/year, after tax. Sally spends all her income on consumption, and saves $0. Frank spends 75% of his income on consumption, and saves $50k/year by purchasing stocks which go up in value by 5% per year. After twenty years, Frank has spent $1m total on stocks now worth a cool $1.7m (clearly he follows the buy-and-hold school of investing). He is retiring, and wants to sell them all to re-invest in safer bonds. What tax rate do you think is fair? He made those investments with after-tax dollars. Do we now tax him again on the result of those investments? Don't we want people to behave like Frank, instead of Sally? And if we charge him 15% on his capital gains, he'd end up paying over $100k MORE total tax than Sally. Does Frank, who has scrimped and saved his whole life, really deserve to pay more taxes than Sally, who never saved a penny? (The analysis becomes more complicated if Frank received the stock as compensation, instead of purchasing it with his salary. But keep in mind that he's still (1) taxed on that initial compensation and (2) is deferring consumption; a responsible choice which we as a society probably want to encourage.)