That's the difference between equality and equity. I'd argue that people push too much for the former when the latter is sometimes more appropriate. I'd say this is one of those times.
Since we're talking about the idea of different treatment under the law for rich vs. poor (well, "comfortable", in this case), tax law in the US is a fine example: the more income you make, the higher your marginal earnings are taxed.
The problem with "equity" is that it can mean anything you want. The most blatantly unequal outcomes can always be rationalized as satisfying some higher justice.
> Since we're talking about the idea of different treatment under the law for rich vs. poor (well, "comfortable", in this case), tax law in the US is a fine example: the more income you make, the higher your marginal earnings are taxed.
That's technically true, but misleading.
The long term capital gains tax, which is what most high income earners end up paying, maxes out at 20%, which is lower than most of the regular income tax brackets. It's the reason some CEOs opt for a $1 salary.
The long term capital gains tax, which is what most high income earners end up paying, maxes out at 20%, which is lower than most of the regular income tax brackets. It's the reason some CEOs opt for a $1 salary.
This is simply wrong.
Equity paid as compensation is taxed as ordinary income at the value of the equity at the time awarded, and is subject to marginal rates.
The gains from holding that equity and selling it later is taxed as capital gains if and only if held for longer than one year prior to sale.
Capital gains tax generally only applies to assets that have been previously taxed as income. Equity grants whether to CEOs or normal employees alike are taxed as income at vesting time with subsequent gains taxed as capital gains. Capital gains taxes apply to both the rich and the poor, with the latter paying a whopping 0%.
>> Capital gains tax generally only applies to assets that have been previously taxed as income
No, it does not apply to previously taxed assets at all, only to an additional income you made from those assets. Equity grant is taxed when you excercise your stock options based on their current value. If the stock price goes up later, capital gains tax is only applied to the amount you gained, not the whole sum.
>No, it does not apply to previously taxed assets at all, only to an additional income you made from those assets.
I would call that applying to previously taxed assets. Unvested RSUs (read: not taxed yet) that gain considerably over many years prior to vesting are still wholly taxed as regular income. Without additional income, there is nothing to be taxed therefore there shouldn't be any confusion as to what I mean by that.
Stock options are only one type of equity grants, the other being RSUs which have a cost basis of $0 and therefore the entire sum is subject to income taxes at vesting. Exercising stock options is not free, you must pay to do so at the exercise price which is done using post-tax cash, which again, had to have been taxed as regular income at some point.
It's true that if I buy some stocks for $100k I have (presumably) already paid taxes on that $100k. But if I sell the stock for $600k two years later, that extra $500k hasn't been taxed as income, and is only taxed as a capital gain.
> Capital gains taxes apply to both the rich and the poor, with the latter paying a whopping 0%.
Kind of silly to point that out. It's very easy for a "rich" person to have almost all of of their real income come from capital gains, but nearly impossible for many poor people to even have capital gains, much less arrange for it to be most of their income.
Rich people don’t become rich without first paying income taxes. Sure, once they have wealth, they mostly pay capital gains tax but if you and I have the same definition of rich, to sustain a luxurious life off investments alone, you had to have paid millions in income taxes which is more than most people will pay in their entire working years.
Additionally, turning $100K into $600K in two years is not as easy as you’re portraying it to be.
A better example would be where high earners can shift their incomes into corporate structures and thus treat themselves as a “business”, realizing many tax savings and write offs. A professional Corp making $500k will likely allow for a greater “take home” than a W2.
Capital gains, as others pointed out help in limited circumstances and typical equity compensation only marginally benefits.
Since we're talking about the idea of different treatment under the law for rich vs. poor (well, "comfortable", in this case), tax law in the US is a fine example: the more income you make, the higher your marginal earnings are taxed.