The New York Times ran an editorial yesterday called The Zuckerberg Tax. Mr. Miller, the author in charge of the piece, does have some valid points and some legitimate concerns about the super wealthy getting around paying taxes. It’s certainly not the same old Buffet Rule that’s been making it rounds on the internet, so I thought it would be a good time to discuss his ideas.
His solution is to tax something called “mark-to-market,” also known as unrealized gains. The idea is that, since the super wealthy only have to pay taxes when they sell their stock, it’s easy for them to manipulate how much taxes they pay each year; therefore, instead of taxing their gains when these individuals sell their stock, we should tax the appreciation in their stocks at the end of the year.
For example, if Bill Gate’s Microsoft stock goes from $20 a share to $30 a share, currently he would pay no taxes unless he sells shares. Under the Zuckerburg tax, Mr. Gates would pay taxes on the $10 increase that year, even though he hasn’t technically earned any income.
To sum it up, the Zuckerburg tax is taxing the wealthy on money they don’t have. As the author points out, It would likely force them to sell some of their investments to pay for the taxes. But since they’re super wealthy, they’ll still be doing okay.
A whole list of concerns came to mind in the implementation, many of them were answered in Mr. Miller’s article. After reading article after article by people who clearly couldn’t tell a 4562 from a 5471, or which form relies on Sec. 168, I was impressed reading one by an author who actually knows about taxes.
Unfortunately, while the idea may sound reasonable, ultimately it is even less likely to succeed than the Buffet Rule’s new AMT. Below I have several concerns, some could be resolved based on how the law was written, others I believe would just be too big to overcome.
Mr. Miller is clearly aware that the rich do not have cash just sitting around in a giant pool like Scrooge McDuck. Most of the wealth of the super wealthy is invested in various companies throughout the world and the United States. If we start taxing that money, forcing the investors to sell stock, it would take valuable capital out of the economy. Depending on the amount of the tax, this could lead to a significant decrease in investment. GDP is measured by Private Consumption + Gross Investment + Government Spending + (Exports – Imports). The Zuckerberg tax would be a direct decrease on Gross Investments to increase Government spending. If it were one to one tradeoff, it would wouldn’t matter. That, however, is debatable, with some economists arguing that government spending is better, and others that it actually shrinks the government. To me it makes sense that investments would help the country grow more, but once I get my economics degree and do the definitive research on the issue, I’ll let you know for sure.
As the article notes, only publicly traded stock would fall under this tax. That’s because it would be impossible to do more than that. It’s easy to go to the stock market and see how much the value has increased or decreased for Apple or Microsoft or GE. For a private company, though, valuing stock would be an impossible hassle every year. However, that begs the question that if we don’t tax investments in private companies, what’s to stop the wealthy from moving most of their wealth into private companies? Unless the government adds in a provision stating where the the super wealthy can invest (which I doubt would be very popular), absolutely nothing at all. Those huge amounts of tax revenue would disappear overnight as the wealthy change their investment make-up. I also predict fewer companies going public for fear of losing the investments of some of the wealthiest individuals. It may be by an insignificant enough amount that it doesn’t matter, but it’s certainly something to be seriously considered.
Apparently as a country we are unable to learn the lessons of five seconds ago. One of the reasons California has had such a huge economic downturn is because so much of its tax revenue is born by the wealthiest in the state. As we should have learned by now, these incomes are much more volatile, with huge gains and losses. Good years turn into huge surpluses for the government, and bad years turn to possible bankruptcy. The Zuckerberg tax would just make the federal government even more depend on the taxes of the very few. So when the economy turns down, tax revenues would turn down even more sharply than they currently do.
Mr. Miller suggests that when the super wealthy have unrealized losses instead of unrealized gains they would get a tax refund. From a policy stand point that is very logical—because the super rich are most likely to have these losses in downturned economies, Mr. Miller argues that the cash money they receive in these years would be used to stimulate the economy. Since these are just the wealthiest individuals we’re talking about, it’s not like they need the cash, so they’d probably just reinvest it. These investments are supposed to help automatically stimulate the economy. The only way that would work is if private investment is better than government spending at growing the economy…so why did we make the super wealthy sell their investments in the first place (see concern #1)?
Any losses incurred would most likely occur when the economy is down. So while people are out of jobs, while tax revenue is down, while the country is struggling to make ends meet, we’re going to take money out of the treasury and give it to the super wealthy? Yeah, I can see how this would be a very popular bill. If it were to pass, I imagine within 4 years we would be inundated with so many articles about taking money from the poor and giving it to Warren Buffet that a new law would pass preventing the super wealthy from ever getting a refund, or something similar. Maybe that’s Mr. Miller’s intention, but if it is, we need to go in with our eyes open.
If Mr. Miller’s numbers are correct, this tax would raise “hundreds of billions of dollars of new revenue over the next 10 years.” The 2011 deficit was 1.3 trillion dollars. This new tax would cover probably less than 1/20th of the deficit over ten years if we keep spending as we have under President Obama. It’s a “screw the rich” bill. After it passes, we would still have to come up with an actual plan to either cut spending significantly or hugely raise the taxes of the middle class through a VAT or some other method (note that these links discuss various problems and solutions. Things to consider. Me linking to them doesn’t mean I support the ideas contained this the links).
I don’t know who David S. Miller is, or what he does other than he is a “tax lawyer.” Maybe his intentions are really honorable, but most tax lawyers I know make plans to keep people and companies from paying taxes. What better way to bring in new clients than to write tax laws yourself? Then you’ll be the first to know what loopholes to use. Which really isn’t too uncommon, at least according to one of my accounting professors: work at the IRS a few years, learn their tricks, write a few of them yourself, then start your own business teaching clients how to get around taxes. So maybe Mr. Miller honestly believes this tax will help, but I wouldn’t be at all surprised if he had Warren Buffet on the other line, discussing, for a fee, how Mr. Buffet can get around the Zuckerberg Tax.