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The spacex IPO has happened and made Elon Musk a Trillionaire.
There are probably hundreds of potential topics from this story, feel free to go off on your own tangents.
What I am interested in is that this is a company that is building real world things, and not fake internet shit. It feels like a lot of new wealth and investment in America comes from and is directed to the internet. I think one of the main reasons has been that large investors are generally play-it-safe followers. They see which companies are newly striking it rich: Facebook, Amazon, Netflix, Google, Apple, etc. And they are happy to invest in copy-cats.
I'm hoping the spacex IPO has a similar effect. That investors start chasing new copy cats. But this time copy-cats of spacex rather than copy cats of facebook or google.
From what I can gather, the consensus on the left side of the political spectrum in the USA is that it's a great injustice that there exists a trillionaire in a world where there exists poverty. Now, there are a lot of implicit beliefs and values mixed up in such a judgment, such as the false notion that it would be possible to fix world poverty or even USA "poverty" with a trillion dollars in cash and that it would be possible for Musk to convert his net worth into a trillion dollars in cash (at its limit, people literally seem to believe that Musk has a bank account somewhere with 13 digits on its balance, claiming that he's "hoarding" the wealth, as if that wealth isn't actually in the form of various companies that are functioning to produce and sell things right now). It seems like it's mostly driven by a hatred of inequality and a desire to collect one's pound of flesh.
Which I think is perfectly reasonable. One of the many reasons Musk is able to have such a high net worth is the fairly dependable capitalist system that we all uphold and partake in, and demanding that he pay the government a fee for the sole reason to appease our envy, even at the cost to overall prosperity and wellbeing of humanity might not be ideal, but it's not unreasonable.
But, as many people have pointed out, Musk - and any billionaire - has most of his assets in productive companies, and the productive nature of those companies is what makes them so valuable, and so liquidating them to put more money in the government coffers would both be logistically very difficult and also likely destroy a lot of value. If the government were to take shares away from Musk to take partial ownership of his companies, that would also likely destroy a lot of value, both because some of the value is tied to Musk being the owner and because the government is likely to have lower ownership skills than the typical private owner. Furthermore, since Musk's - and, again, almost any billionaire's - net worth is defined mostly by the market price of shares of his companies, which are volatile, it's difficult to even figure out the correct value of his net worth to use for any sort of wealth tax.
So I'm left wondering what sort of wealth tax could be implemented, in a way that doesn't destroy too much value while still being meaningful enough to appease the envious (though some may argue that the limit does not exist for that one). It would probably have to take some sort of rolling average of net worth over a period of time, the tax would have to be something like in the form of non-voting shares, and perhaps we'd need to create a ton of new government bureaucracy jobs to manage the logistics of all of that. In effect making almost any company above a certain value automatically partially nationalized. It would have to be progressive without some sharp cutoff point so that there's no single value that any company owner is motivated to keep under. We'd also likely need to have laws around giving shares to family members in order to skirt around the wealth tax - either that or just accept the creation of essentially an aristocracy where successful company owners keep sharing their wealth with more and more family members while still being de facto owners in order to minimize their wealth tax burden. Along with a bunch more government jobs to enforce this.
Of course, I heavily doubt that any of the collected money would have meaningful impact on solving poverty. On net, with the additional government costs and the reduced income tax collections from the employees of these companies, it might actually leave less money to fight poverty than just the current system as-is. But that's not the point, the point is to take money away from really rich people.
I'm not an economist, so I'm probably missing a lot of things. Does anyone have any good ideas for how the USA could implement this without causing too much economic harm? Would be especially good if it could stand up to Constitutional scrutiny as well (of course, the Constitution can always be changed or ignored, but both tend to create a lot more friction and pain than otherwise).
I think a major component of this is borrowing against the shares. Musk doesn't have a liquid net worth of a trillion dollars. But he is borrowing against his shares in order to get liquid capital. Somebody correct me if I am wrong, but I believe this isn't taxed. I think the simple answer is that if you borrow against unrealized capital you should be taxed at some value of that capital. You are using that capital with a loophole to get cash. This is probably the cleaner solution to the stupid tax on unrealized gains that the Dems proposed last election season as it really only hits people with large capital assets and limited liquidity, not the average homeowner or stock bro when their shares/homes appreciate. Whether or not this is a fair policy is probably open to interpretation and not something I have made my mind up on. I'm sure people in the comments can tell me why this is a bad policy economically...
What if you borrow against your home to finance an improvement?
To me, make capital gains tax rate at 10% and you eliminate these silly games whilst probably raising revenue.
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This isn't a loophole. There is a loophole here, but it's not that loans aren't taxed; loans aren't income. Under your proposal, the same money is taxed twice, as @The_Nybbler says: once when a loan is taken out against it and a second time when the shares are sold to pay back the loan. Loans just defer the tax burden -- defer and increase it, since you have to pay taxes on the shares you sell to pay back the interest too. And while the rates on these loans are better than you or I could get, they're much more than what the government pays out on treasuries; they should be happy to wait, given the rate is higher than their own discount rate.
... But there is a reason rich people do this: cost basis resets on inheritance. This is the actual loophole; just defer capital gains until you die, then your heirs can sell your shares with no capital gains to pay off your creditors and start the cycle over again. (They do have to pay estate tax, at least for the ultra-wealthy class we're talking about, but it's better to dodge one of the two than to dodge neither.)
At one point there was a credible argument that the heirs might not be able to figure out the true cost basis, but I doubt that's very often the case today. I don't think there's any other serious defense of the practice. If you want to remove loopholes, this is the very first place to look.
(That said, I don't think your proposal is a terrible compromise, so long as the tax paid on the borrowed money can be used as a credit against future capital gains. I'd be for it if I thought it would actually satisfy the eat-the-rich crowd, which I doubt.)
My understanding is that yes technically, but no basically. As long as your shares increase in value it reduces the loan-to-value ratio, and at some point you use the difference to take out a new loan to pay off the old one with some interest grace period. This very much requires the stock assets to keep going up, which doesn't always happen. But it has happened to enough rich folks that its noticeable.
It's as you pointed out probably not a real loophole, but I think to many people it feels like a loophole. I think the deferring part of it feels like a way to avoid paying taxes while still living large. I would interested in seeing how much of a given UHNW-individuals income comes from this sort of personal loan mechanism before really making a judgement.
I also doubt because it's envy driven tax policy. It is however I think a fig leaf towards the less unstable set of eat-the-rich crowd. I think even a set of moderates/center-lefts/center-rights are being persuaded by the eat-the-rich-rhetoric around the growing wealth inequality in the US. Doing something to cut down on it is probably going to be a requirement at some point soon.
Yeah, so two separate things going on here: first, yes, the stock might appreciate faster than the interest... but it also might not. (You already understand this, clearly, but just to make it explicit.) Putting aside the loophole, this is really equivalent to taking out a loan to buy stock in a single company which is also your employer, which no sane financial advisor will tell you to do. From low to high (hopefully): there's a theoretical guaranteed safe rate of return (which is not literally the rate on treasury bonds, but it's close enough), then there's the rate the bank will offer you a loan at (since if they were only getting treasury returns, they'd just buy treasuries), then there's return from a well-diversified stock portfolio, and then there's the return from your controlling interest in a single company which:
The last has a substantial risk premium because it's a very substantial risk. But of course the people for whom this doesn't work out aren't on any lists of the world's richest people, so we don't talk about them.
Second: the government can borrow at the treasury rate. If they can (effectively) loan you money at the higher bank rate (which is how the math works out), they'll do so happily, issue more treasuries to cover the temporary shortfall, and pocket the difference in rates. They're not impatiently waiting for you to finally stop deferring your tax burden and pay the whole bill, they're coming out ahead every day this state of affairs continues (until you die and the principal vanishes due to the cost basis step-up).
(The point about deferred interest is more potentially problematic, but it still would eventually get paid if not for the step-up.)
Well, it might or might not be a large portion of their income, but I don't think that's really the relevant factor here. The real problem (in terms of satisfying populists) is that:
But then populists compare the bullshit (high) net worth figures to the bullshit (low) tax figures and get mad about it. Taxing savings is a terrible idea -- if you tax something, you get less of it, and capital is the main driver of economic growth -- but taxing consumption will never give a satisfactory number.
Yeah, possibly. I don't have a good answer for this problem. I do think we should fix the cost basis step-up issue, but that's probably too complicated to satisfy the (large and growing number of) people who get very angry about this subject.
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That seems really reasonable to me, but also, being ignorant of the actual reality, I have to wonder just how much the Musks of the world are borrowing against their assets, and if that's enough to make a difference. Surely they're not borrowing anywhere near their total net worth, but rather some amount much less than the total expected appreciation of their assets (so that they can actually pay back the debts while also having more left over to actually grow wealthier)?
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Consumption taxes are generally considered the best taxes, but they are pretty damn regressive. This sounds... really good from an efficiency standpoint, is appropriately targeted on the wealthy (though we need some way to exclude middle class HELOCs) and seems much harder to game than a consumption tax too. Go run for office.
Only apply it above a given net worth that even very lucky and geographically well situated middle class people will not reach.
I would consider it- I'd make a good crank candidate- but I suspect the background checking would result in this very forum shutting down, and besides, it's incredibly expensive.
Stolen valor! Get your own presidential run-viable topic!
I like this one solely for the interesting incentive structure it could create where prospective political operatives deliberately risk sending themselves to prison and then bribe during the selection.
Only if we survey everyone who would want to as a Top Secret poll and then exclude them from the selection process. I'd rig an election for this idea.
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yes HELOCs seem to be the corner-case that presents a problem, and unfortunately any carve out there is just likely to be repealed later down the line. The government loves another way to get free money. I think the easy answer is to tie to just capital gains based collateral, not property.
Ewww. Probably says something about me that I find the idea of being a politician relegated to the narcissistic and sociopathic.
HELOCs are a bullet I am willing to swallow. Tax-free consumption out of unrealised capital gains on primary residences is the same mischief as tax-free consumption out of unrealised capital gains on founders' stock, and causes the same social problems in a more distributed way. Protect the middle class with a $100,000 lifetime exemption.
I'm not sure how you distinguish a concentrated zero from a distributed one.
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Such loans involve interest payments and eventually result in consumption, which is usually taxed. Paging @DuplexFields to shill the Fairtax which might be a better approach to consumption taxation.
Right "eventually" but this is more like taxing capital gains. Its a loophole designed to get around realizing the assets and thus needing to pay the capital gains taxes, but still getting liquidity. We do tax capital gains even if that "eventually" also results in consumption. This is just fixing a current loophole. And believe me if Fairtax or LVT was on the board, I'm in agreement. However, unlike other libertarian-adjacent folks though, I live in reality...
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So you borrow money, you're taxed on the money borrowed, and then when you make money to pay it back, that gets taxed too? Maybe banks should be taxed on the value of their deposits too.
Uhhh... I had to look this up but you are not taxed on a personal loan, the IRS treats it as debt not income. So saying that you are taxed on the money borrowed is incorrect.
Not now. But that's what your proposal is.
My proposal is a tax on a collateralized personal loan as a means to avoid paying taxes on realized capital gains. I think thats a bit different than taxing a personal loan. Philosophically its about using your high net worth to unfairly secure taxation solutions that allow you to still appreciate your wealth without being required to pay for it. This tactic is not available for the vast majority of people on account of not having 100s of millions in unrealized capital gains.
The neat part is actually the stock can appreciate and reduce the leveraged burden allowing you to take additional lines of credit to pay your existing lines of credit. If I understand the process somewhat, you are never really called to pay the loan back unless the stock depreciates greatly in value and the bank views you as unreliable enough to call the loan in.
Feels like a strawman.
It’s called a margin loan. If you aren’t super poor, you can mortgage against your stocks.
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Have you never heard of a reverse mortgage?
A HELOC is the more comparable financial equivalence. Reverse Mortgages are only available to 62+ year olds, and operate differently than a HELOC or SBLOC. While we are definitely approaching gerontocracy with a large number of boomers and X-ers with large home values, I don't think many have homes valued at 100s of millions of dollars.
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Designing a working country is engineering, not philosophy. What is important for the policies is to work, not be coherent, make sense or be derived from deep ideological principles.
If a blue collar worker pays effective tax rate of x percent, then it is ok to make the upper echelons of society pay at least x.
No, this thread started by talking about how it was a 'great injustice' that a trillionaire existed. That's already out of the realm of engineering; you don't get to switch now and ignore 'philosophical' objections.
This, too, is outside the realm of engineering. It might be "engineering" to determine what Musk's effective tax rate IS, but in practice it will be entirely dependent on assumptions made which are outside that realm.
Identifying the problem is philosophy; figuring out how to fix it is engineering.
Yes, but we don't agree on the identification, and thus we're firmly in the realm of philosphy.
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