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Wednesday, April 10, 2013

McCaffery: Mark Zuckerberg May Never Pay Taxes Again

ZuckerbergCNN op-ed:  Zuck Never Has to Pay Taxes Again, by Edward J. McCaffery (USC):

So, you think you have it bad this tax season. Have you heard that Facebook founder Mark Zuckerberg will pay between $1 billion and $2 billion in taxes? That sounds like a tough pill for anyone to swallow.

But it is premature to start a pity party for Zuckerberg. The twenty-something billionaire reaped large financial gains from exercising the stock options that triggered his tax bill, and he has benefited from favorable tax rules along the way. Even better, Zuckerberg will survive his encounter with the tax man in a position to never have to pay taxes again for the rest of his life. ...

The truly rich do not have to pay any tax once they have their fortunes in hand. They can follow the simple tax planning advice to buy/borrow/die: Buy assets that appreciate in value without producing cash (like shares of Internet stocks), borrow to finance lifestyle, and die to pass on a "stepped up" basis to heirs wherein the tax gain miraculously disappears.

Zuckerberg now has $11 billion or more with which to play this game. He can live off money borrowed against that huge sum (rest assured, he can get good interest rates), never having to sell any asset at a gain, and never having to get an "ordinary" salary again.

(Hat Tip: Ann Murphy.)  For more, see Edward J.  McCaffery (USC), Distracted from Distraction by Distraction: Reimagining Estate Tax Reform, 40 Pepp. L. Rev. ___ (2013).

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Comments

Sounds like class envy to me. Let's see.....Mark paid 1-2 $Billion on paper money he created (sounds like the Fed to me) by doing something very few people have the ability to do. Along the way he is responsible for creating tens of thousands of jobs, both directly and indirectly and providing technology we can all use beneficially. And....when he dies, the gov't will take upwards of 50% of his estate.

Sure, we need some tax reform so that taxes are fair to the rich and not so rich, but who gets to determine what is fair? Now.....that's something worth talking about Mr. McCaffery.

Posted by: Shotgun | Apr 10, 2013 9:46:52 AM

McCaffery makes a good point.

Here is an example on a smaller scale. Consider two owners of $1M homes (in California, naturally), both purchased in 1980 for $200,000. Each home has an inflationary paper gain of $800,000, far above the non-indexed Section 121 exclusion amount of $250,000 (single) or $500,000 (married). One owner is worth $10M, the other has no major assets other than the house.

The rich homeowner has enough liquidity and enough borrowing power to delay selling his home until death. The illiquid middle class homeowner will need to sell his home when large expenses arrive for health care, retirement, and/or long-term care.

Our tax system will extract hundreds of thousands of dollars from the middle class homeowner, nothing from the rich homeowner.

Section 121 is irrelevant for a rich homeowner. He can avoid selling until death. Section 121 serves to confiscate a fraction of the property of a narrow slice of the public: Long-time homeowners who did not move for decades and who lack sufficient other assets. It's a tax on non-wealth and on stable home ownership. This violates anyone's notion of equity, left or right.

Posted by: AMTbuff | Apr 10, 2013 2:11:47 PM

In trying to assess how our tax system should change, it is unwise to test rules against extreme facts unlikely to exist. Does anyone know someone of wealth without gross income (in the tax sense) living year after year on cash flow derived from borrowing? Our goal should be to have a tax system that works in fact rather than one that works in theory.

Posted by: Joseph W. Mooney | Apr 11, 2013 8:48:14 AM

Hey McCaffery...a bit jealous?

Posted by: Realist | Apr 11, 2013 9:47:08 AM

Wow @ AMTbuff.

"Section 121 serves to confiscate a fraction of the property of a narrow slice of the public"

That's... quite a perversion of Section 121.

The default state of Income is that it gets taxed. Every last drop. That's Section 61. Section 121 provides an exception to the notion that everything gets taxed.

Posted by: Anon | Apr 11, 2013 2:05:50 PM