| Tuesday May 24th 2016

The Zuckerberg Tax

Since taxes are charged or then refunded depending on whether a share appreciates or depreciates in value, all that’s changing in this system versus the current one is when the tax is applied (that is, they pay capital gains before selling the shares rather than after). The argument for this is that it prevents families from profiting off of inheritance law by putting off paying their capital gains until the owner of the shares passes away.

Facebook stockOk, so why not just change inheritance law to fix this (author alleged) discrepancy? The Zuckerberg tax is a somewhat convoluted solution that has the side effects of discouraging longer-term investments and requiring that the wealthy increase their liquid asset holdings.

Just create a law either stating that inherited shares are still subject to the capital gains taxes of the previous holders, or require that payment of capital gains taxes be made before the shares are given out by the estate. Simple.

When Facebook goes public later this year, Mark Zuckerberg plans to exercise stock options worth $5 billion of the $28 billion that his ownership stake will be worth. The $5 billion he will receive upon exercising those options will be treated as salary, and Mr. Zuckerberg will have a tax bill of more than $2 billion, quite possibly making him the largest taxpayer in history. He is expected to sell enough stock to pay his tax.

But how much income tax will Mr. Zuckerberg pay on the rest of his stock that he won’t immediately sell? He need not pay any. Instead, he can simply use his stock as collateral to borrow against his tremendous wealth and avoid all tax. That’s what Lawrence J. Ellison, the chief executive of Oracle, did. He reportedly borrowed more than a billion dollars against his Oracle shares and bought one of the most expensive yachts in the world.


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