If you ask venture capitalists Marc Andreessen and Ben Horowitz why they’re supporting Donald Trump, amid discussions of crypto and China and AI, you’ll find a much more conventional reason for rich people to vote Republican: They Democrats worry about raising their taxes.
In particular, Andreessen and Horowitz railed against Joe Biden’s proposed minimum income tax on billionaires, which they claimed would destroy the startup ecosystem in Silicon Valley. They are not alone: financing And Technology Commentator angry from Biden first unveiled the plan in 2022.
“Billionaires Oppose Tax Increases” has the quality of a certain “dog bites man” story. But this particular iteration bothered me viscerally. For one thing, Andreessen and Horowitz are complaining about a tax that’s not only dead on arrival in Congress, but one that the Supreme Court, just weeks ago, would find unconstitutional.
The plan is going nowhere. they won Stop cheering!
My other beef is that I think the minimum tax was mostly a good idea. It represents The culmination of decades of scholarship Economists and tax law experts are trying to fix a serious problem with the way the United States currently taxes income from the sale of stocks, real estate and other assets.
Fortunately, I think the proposal was meant to address problems that there are other options to address, options that may not meet the same resistance and pass constitutional muster.
Problems with ordinary capital gains tax
When you buy something at one price, and later sell it at a higher price, it is called a “capital gain”. In tax lingo, you “realize” a capital gain when you eventually sell the asset. If the asset’s value increases without you selling it (eg, a stock you own increases in price), those gains are “unrealized.”
Capital gains tax in the US has a “handover requirement”: you must actually sell the asset to pay the tax. This creates an easy way for the rich to avoid taxes, just waiting to sell.
Imagine a 20-something who starts an Internet company called FriendCo with his college roommates. Let’s call him Mark. (Although I’m obviously basing Mark on someone real, I’m going to simplify the actual numbers to make it easier to follow.)
When founding FriendCo in 2004, Mark and his four roommates each took 10 percent of the company, with the other half to be sold to investors. Initially, their share price was $0. But their website quickly took off and soon had 1 billion users. The company went public in 2012, with a market value of $100 billion. Mark and his roommates’ shares were worth $10 billion.
At this point, the company stands still and remains valued at $100 billion forever (I told you I was going to simplify).
If Mark sells all of his shares after the company goes public in 2012, he will be taxed on the capital gains. First they were worth $0, and now they are worth $10 billion. The top capital gains rate in the United States is 23.8 percent, so he will pay $2.38 billion in taxes.
Suppose, instead, that Mark decides to hold all his shares until he retires 40 years later in 2052. Assuming the tax code doesn’t change, he still owes $2.38 billion. That, right there, is the problem.
Being able to pay tax bills decades into the future instead of now is one huge Advantage If I told my landlord that I would prefer to pay my rent 40 years from now, he wouldn’t find it very funny. At least he would demand that I pay a sum a lot Interest for such late payment. Other major purchases, such as houses and cars, usually are to do Later payments involve paying a ton of interest. Do not make capital gains.
The capital gains tax’s “instrument requirement” thus works like a huge, zero-interest government loan for people who have made money on their investments. They only wait to sell their assets, and they are able to save huge amounts of money in taxes by not paying any interest while they wait.
This is unfair; If you can wait and not sell, you’ll get a big tax break, but if you can’t afford it, you won’t. But regulations can also cause serious economic damage. By forcing people to hold on to investments longer than they normally would, it prevents them from shifting their money to new investments. This makes it difficult for startups and other innovative companies to get the money they need to grow, leading to less innovation and slower economic growth.
The issue is complicated by other aspects of the US tax code. If Mark never sells his shares and instead passes them to his children, they will not have to pay capital gains tax on the gain. In fact, if they sell the shares later, they will have to pay tax on the difference between the value and the price when they sell the shares. When they inherited them. (This is called “step-up in basis” or more evocatively “messenger of deathSo if the shares remain at $10 billion, the kids can sell them and not pay a penny of capital gains tax. The rich are Proficient in evading estate taxAlso, it is therefore very possible that Mark’s fortune will be completely tax-free.
How Biden tries to solve the problem with the minimum tax
The Biden’s proposal The super-rich are meant to pay more. The trick is simple: get rid of the rules of perception.
For people with assets of more than $100 million, the proposal would introduce a new tax system. For easily sold assets with apparent value, such as stocks and bonds and cryptos, capital gains are taxed in the year they occur, whether or not the assets are actually sold. Taxpayers will be able to get a refund if the asset’s value later declines.
Andreessen, Horowitz, and other Silicon Valley types worry about what this means for startup founders whose companies have yet to go public. These founders may be billionaires on paper but have no real cash to pay taxes.
If only these VCs would read The fine print of the planThey would see anyone in this situation No tax yet. If more than 80 percent of a person’s net worth is in “illiquid assets” like shares in private companies, they don’t have to pay annual taxes on those assets. If they sell the asset, they will pay the tax along with a “deferral charge”, a type of interest to be paid the tax year after the gain. The situation would change if the company went public or was acquired — but the new billionaire would suddenly have liquid assets with which to pay their tax bills.
After the Supreme Court’s June 20 verdict, though, it’s all a bit academic Moore v. United States. Although the decision itself concerned a secondary provision in Trump’s tax cuts, one judge, Amy Coney Barrett, wrote a concurring opinion arguing that the capital gains tax needed to be levied to be constitutional. As my colleague Ian Milheiser notes, Brett Kavanaugh’s majority opinion indicated quite strongly that he would side with Barrett on this issue, deferring a ruling for now.
If the Barrett view has at least five supporters on the Supreme Court, the billionaire minimum income tax is dead in the water.
A more modest approach
Of course, the minimum tax probably won’t make it to the Supreme Court. Republicans control the House and are not voting to raise taxes on billionaires. The Biden administration even failed to get a much more modest capital tax increase in 2021-22, when they held a congressional majority. That’s the plan Delivered from the angel of death.
but Internal anti-democratic The idea was killed in Congress. I don’t know of a single honest defense of the Angel of Death Loophole, but unfortunately there are many profoundly dishonest defenses. Former Sen. Heidi Heitkamp (D-ND) spent much of 2021 making this claim Realization at the time of death would wipe out family farms on the plains, for which he offered literally zero evidence. Alas, the gambit worked.
In theory, though, a future Congress could still close the loophole. They could go further and pass the plan of law professors Edward Fox and Zachary Lisko Taxes on the loans billionaires currently use To generate tax free cash. Must be the most ambitious option Add deferred charges to capital gains taxSo the rich have to pay government interest when they defer taxes by not selling their assets.
All of which is to say: America’s billionaire class has plenty of ways to increase its income. And none of this poses any risk to innovation or startups, despite what you may hear from the likes of Andreessen.
