Nobody likes to be called a dummy by a dummy.

Rich people owning stock taking out loans

I think it's an interesting topic.  I had no idea that some dudes like Jobs and Ellison take out loans instead of cashing in stock. Seems like an unintuitive choice.

But you know what? Regular people do it, too. Every time we use a credit card or open a home equity line of credit, we're borrowing on assets and future income. 

A loan has a steady measurable value associated with it.  A stock's price changes wildly.  You don't want to sell at a bottom and lose out on potential income just because you need a new pair of underwear.  Selling stock for income is kinda like selling shelf space in your store. 

So taking out loans is cool by me.  I think that not doing so is pretty dumb.

What gets my goat is this:

>>If Mr. Zuckerberg never sells his shares, he can avoid all income tax and then, on his death, pass on his shares to his heirs. When they sell them, they will be taxed only on any appreciation in value since his death.

***WHAT IF THEY NEVER SELL THE SHARES?***

Rich people could conceivably continually pass down shares to the next generation.  Each new generation simply takes out a loan backed by those shares.  You pay off the loans, of course.  And when you do, you pay taxes on the shares you sell in order to pay them.  The big issue is all the remaining shares which have never ever paid any form of income tax.

When you die, all your shares ought to be liquidated.  Taxes are then paid at that time.
Permalink Kenny 
February 9th, 2012 10:33am
http://www.nytimes.com/2012/02/08/opinion/the-zuckerberg-tax.html

Wow that is absolutely fracked (the estate loophole for appreciating shares). Incredible. I actually didn't believe it which is why I did a Google search.
Permalink df 
February 9th, 2012 10:44am
I'm gonna amend my assertion.  You shouldn't have to sell your shares upon your death.  But you do have to pay taxes on their current market value before they get transferred to your inheritors.
Permalink Kenny 
February 9th, 2012 10:48am
That is the only sensible way for it to function. I am absolutely astounded that such a egregious loophole exists in the estate laws. I still can't believe it -- that article must be wrong.
Permalink df 
February 9th, 2012 10:52am
http://www.bloomberg.com/news/2011-11-23/steven-jobs-trust-reports-holding-7-7-stake-in-walt-disney-1-.html

"Under U.S. law, the trust can sell the shares and incur taxes only on the appreciation since Jobs’s death. If Jobs had died in 2010, when there was no estate tax, his heirs would have faced the capital gains tax on his entire investment profit if they had sold. That provision lapsed in 2011 when the estate tax was reinstated."

Incredible.
Permalink df 
February 9th, 2012 10:53am
##***WHAT IF THEY NEVER SELL THE SHARES?***

It's not a simple as you people might want to make it seem.

They will sell the shares at some point. Plus, they do have to pay taxes on dividend income. If the share's never pay a dividend, then at some point someone's going to have to sell those shares to get real $$.

And depending on who actually owns the shares, there is a estate tax liability every time the owner croaks, and the shares are transferred.

Plus, borrowing against shares is not risk free. You have the interest payments. Sometimes these payments are non trivial. Interest rates can swing very quickly.

Covenants for loans backed up by liquid securities like shares tend to be very prescriptive. Things can get very very ugly, very quickly. Just ask this guy
http://www.bloomberg.com/news/2012-01-16/former-irish-billionaire-sean-quinn-declared-bankrupt-1-.html
Hi downfall was borrowing against shares.

A good way to look at this, is at some point, Larry decided that it was made sense to borrow and buy Oracle shares. As long as the interest payments are lower than the returns on Oracle stock, he is in the black. This can change very quickly. See Quinn above.
Permalink PigPen 
February 9th, 2012 11:02am
Kenny: "But you know what? Regular people do it, too. Every time we use a credit card or open a home equity line of credit, we're borrowing on assets and future income."

Income is -taxed-.
Permalink armchair Freud. 
February 9th, 2012 11:07am
>>Income is -taxed-.

I only meant that the parallel was that you borrow on your future income as collateral.  The whole being able to defer taxes into eternity thing is obviously not available to non-investors.
Permalink Kenny 
February 9th, 2012 11:12am
PigPen, some rich dudes like Warren Buffet don't spend a whole lot.  I think he still lives in the same house he bought 50 years ago?

If you gained a billion dollars worth of shares and you only spend $1 million a year (which is actually tough to do), then taking out that much in loans is just a tiny blip, even over the course of a lifetime. In Zuckerberg's case, if all he ever does is hang out at his bachelor pad and go on the occasional ski trip, he's not gonna spend a lot of his money.
Permalink Kenny 
February 9th, 2012 11:16am
It is odd that the tax system is founded on the exchange of moneys. Well, one part of the tax system is -- I pay a lot in property tax, each and every year, based upon the value of my property. As my property grows in value, including as I put money into it and make it better, my yearly tax liability increases.
Permalink df 
February 9th, 2012 11:18am
##PigPen, some rich dudes like Warren Buffet don't spend a whole lot.  I think he still lives in the same house he bought 50 years ago?

There is a whole lot of myth in that story.

##If you gained a billion dollars worth of shares and you only spend $1 million a year (which is actually tough to do), then taking out that much in loans is just a tiny blip, even over the course of a lifetime.

Actually a million is very easy to spend. Very easy. I bet the Buffet household runs annual expenses > $1m

##In Zuckerberg's case, if all he ever does is hang out at his bachelor pad and go on the occasional ski trip, he's not gonna spend a lot of his money.

Heh. He won't be living in the bachelor pad for long. Sure, once you are in the billions it gets increasingly harder to spend it all, but it can be done. Ask all the >$100m earnings sportsmen who now have nothing to show for it.

Again, taxes are paid by Facebook on their profits, and indeed by the stockholders on dividend income.
Permalink PigPen 
February 9th, 2012 11:22am
>>There is a whole lot of myth in that story.

Dude, you're such a dick.  If you're going to refute, at least take a little effort to back your shit up.

http://en.wikipedia.org/wiki/Warren_Buffett

>>In 1957, Buffett had three partnerships operating the entire year. He purchased a five-bedroom stucco house in Omaha, where he still lives, for $31,500.
Permalink Kenny 
February 9th, 2012 11:26am
>>Again, taxes are paid by Facebook on their profits, and indeed by the stockholders on dividend income.

What makes you think there will be a dividend?  When's the last time AAPL issued a dividend?
Permalink Kenny 
February 9th, 2012 11:28am
One of the RedHat founders took out a loan against his stock value in order to refurbish a mansion.

When the market tanked during the dot-com crash, the bank called his loan. Which meant he had to actually sell the stock in order to pay the construction dudes.

The market saw an insider selling, and drove the price even lower.
Permalink Send private email xampl9 
February 9th, 2012 11:28am
If you cash in stock the taxes you pay can be higher than any interest rate on a loan. Also, the stock can always be an asset you can use to get a lower rate on loans. With stock held long term you want to wait until you get the government to lower rates for you, or arrange for a loophole.
Permalink Idiot 
February 9th, 2012 11:45am
##Dude, you're such a dick.  If you're going to refute, at least take a little effort to back your shit up.

Myth was probably the wrong choice of word to use.

My point is that it is easy to 'still live in the home you bough in 1958' when you are a globe trotting exec on the road all the time.

He still has that address, and I have no doubt that he stays there when in Omaha. That said, he was still shacking up with Susan when she moved to San Fran in the late 70s. Wonder what her accommodations were there, and at the time of her death. Nevermind all the other 'homing' he does when he is away on business, and indeed pleasure.

Bottom line though, is that it certainly costs more to run his household than the "he still lives in the same home he bought 53 years ago" might initially suggest.
Permalink PigPen 
February 9th, 2012 11:48am
##What makes you think there will be a dividend?  When's the last time AAPL issued a dividend?

There are many reasons for no dividends. One of them is an unintended consequence of tax policies.

Actually, this was intentional, since for a long time governments were of the opinion that businesses should be incentivized to hold on, and reinvest their profits instead of handing them back to shareholders.

Now, at some point, the shareholders will see more value in getting the cash, tax rates be damned, than to have AAPL hold onto all that cash, either earning Treasury rates or chasing expensive large acquisitions.

Hell, even MSFT only started paying dividends some 17 years after their IPO. Dividends will happen. Just a question of when.
Permalink PigPen 
February 9th, 2012 11:54am
On the tax issue. Sometimes firms will return money too, not via dividends, but by buying back their stock. But that's another different story.
Permalink PigPen 
February 9th, 2012 11:55am
Execs take out loans against their holdings at low or no interest.  Sometimes these loans are "forgiven" and never have to be paid back.

Those credit cards in the back right pocket of your jeans works just a wee bit differently.
Permalink CircusAttraction 
February 9th, 2012 12:10pm
But insider loans are a whole different story though.

The IRS really keeps an eye on these, and can penalize you for lower than market rate interest rates (the difference is effectively treated as a benefit/income for the lifetime of the loan), and in certain cases, will tax these loans at the same rate as dividends if they deem them to be of the never-pay-us-back (effectively a dividend) sort.
Permalink PigPen 
February 9th, 2012 12:40pm
The Mark to Market idea in the article is of course insane. It assumes that Zuckerberg could sell his 27% of shares in facebook without submarining the value?

I'd also hate to be a stockholder in a dot com in 2000. I'd pay huge taxes one year, then when the value tanked in 2001, I won't even be able to sell my stock to fund my tax bill.

More generally...

Non-divisible assets are also a problem for wealth taxes. Let's say I invest in a domain name. The government says it's worth $10,000,000.  How would I sell part of a domain name to pay the wealth tax?

Quite apart from practical reasons - like valuing non-realized asset wealth is very hard and always contains grossly unfair cases -  There's a more fundamental reason why taxes on wealth are a terrible idea - they penalize good choices.

Consider:

Jo has an income of $10,000,000 over some period, say a year. He spends some, but mostly invests it wisely in stock, and it preserves the value, and even increases.

Kim has an income of $10,000,000 over some period, say a year. He spends it on coke, whores, giraffes, and a giant mansion in New Zealand. He wastes his money.

Tax on wealth - Jo pays more tax than Kim.

OR

Tax on income - Jo and Kim pay the same

Which is fairer?

Same argument applies whether Jo and Kim have $10m or $100,000.  Yes, Steve Jobs or Zuckerberg can survive unfairness better than a Middle Class Jo, but we don't want to design a system that is fundamentally unfair to anyone.
Permalink MobyDobie 
February 9th, 2012 3:46pm
After the housing bubble, the term "Mark to Market" will invite much more scrutiny than before.
Permalink Send private email xampl9 
February 9th, 2012 4:27pm
I think there's room for a progressive death duty on wealth. Consider the problems facing Gina the Hutt - if we reinstated estate taxes in Oz even a 99% top rate would still leave all of her kids mutimillionaires but possibly reduce the problems facing their poor mother ...

http://www.businessspectator.com.au/bs.nsf/Article/Rineharts-children-ignore-mothers-threat-pd20120206-R8NYP?OpenDocument&src=hp10

http://www.danilic.com/the-sydney-mining-herald-fairfaxs-future/
Permalink trollop 
February 9th, 2012 6:23pm
Moby,

What that you have said doesn't apply to property tax. If you have a $10,000,000 property, and somehow have no other wealth or income, and the property tax bill comes for $500,000, do you sell the garage to pay the tax bill?

Further why does anyone upkeep, renovated, or improve their homes? Clearly they would be better off letting it turn into a crumbling shack, thus reducing their tax bill. Etc.

Some reasonable small wealth tax is *not* going to change behaviors, whatever hysterical scenarios appear to try to fearmonger.
Permalink df 
February 9th, 2012 7:20pm
It does apply to property tax. It just is considered acceptable because the property tax, as a percentage of the property value, is very low. Even then property taxes are immensely controversial - because houses prices go and up and down, and it's very hard to agree what they're worth.

But:

You'll never convince me that it's either morally fair - or that's it's good for society - that if 2 people have the same income (Jo and Kim in my example), that we should penalize the one who saves (Jo), and reward the one who wastes his money (Kim).
Permalink MobyDobie 
February 9th, 2012 8:04pm
>and reward the one who wastes his money

Sidenote - don't you have consumption taxes as well? Here Kim would be paying 13% in consumption tax on that coke and the hookers. Well, assuming they are properly registered businesses (they are, right?  Right?)
Permalink df 
February 9th, 2012 8:30pm
>>You'll never convince me that it's either morally fair - or that's it's good for society - that if 2 people have the same income (Jo and Kim in my example), that we should penalize the one who saves (Jo), and reward the one who wastes his money (Kim).

Well, the latter does a lot more to support society...
Permalink Kenny 
February 10th, 2012 9:47am
You don't think investing is a better use of money than on spending it on conspicuous consumption - a large part of which is crap imported from China or other third-world hell-holes?
Permalink MobyDobie 
February 10th, 2012 9:50am
You need both.  If everybody only invested and never bought anything, society would fail.
Permalink Kenny 
February 10th, 2012 9:57am

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