The wealth-building thread

[blueone]

Thought it would be more convincing if the point was made "against interest" as it were. But data is data, regardless of source. You just have to be more skeptical with some folks.

Funny aside re Zucman: A few years ago, he went on a bender on Twitter saying that the phrase "human capital" was awful and only horrible people used it. I went and found his econ presentations online and CTRL-F the term "human capital" is all over one of his introductory presentations! I tipped one of his detractors and he stealthily removed it. Must have taken hours. Hypocrisy is truly the most common vice.

That story about Zucman's behavior is priceless. His reaction is disgusting.

 

[blueone]

Another other good trick is borrowing against your appreciated stock. You avoid the capital gains but have use of the money. As long as the stock goes up you are ok.

This is a derivative of a trick used by millions of homeowners. It's called a home equity loan.

 

[Timcognito]

This what usually happens to starups. Best is to declare 83b distributions within 30 days of the stock grant then it is treated as capital gains.

 

[blueone]

Sure, when you exercise them. But this can be deferred in hopes of realizing bigger future payoffs if the stock grows in value.

Well, yeah. If you don't realize the gain it isn't taxable income. But literally hundreds of thousands (perhaps millions) of people in the US get stock allocations or stock options. In your post I was quoting:

Bear in mind that ultra-wealthy in the USA are typically taxed taxed at lower rates than mere mortals, because only a modest percentage of theirs is regular Earned Income as reported on a W-2 form, as opposed to stock options and other forms of compensation.

Mere mortals get stock options and stock allocations as compensation (even administrative assistants at some companies, like Amazon), defer taxation until they're sold or exercised, and take out home equity loans. And even for capital gains, "mere mortals" have lower tax rates than those defined as "ultra-wealthy people". (Last I looked, the financial industry still defined "ultra high net worth" individuals or married couples as those with $30 million of investible assets or more. Still true?)

And home equity loans are exactly the same type of instrument as financially astute people use when getting low-interest loans on their equity holdings from their brokerage firms. I know several people who take out brokerage loans routinely, and invest the loan proceeds in more financial instruments to multiply the return from their original capital investment. I'm too much of a coward to use that strategy, but I know several people who do. (I also know people who sky dive, like helicopter skiing, bungee jumping off tall buildings (my son did that once that I know of), and paragliding, but I prefer boredom to scaring myself to death.)

 

[RickS]

Thread veered off road and unfortunately the politics got personal. Those posts and replies to them have been deleted.

Please try to stick to facts thanks!

 

[Mart68]

Looks like Ireland is doing something right. Skyrocketing GDP per capita and low tax rates. That is pretty much the definition of prosperity.

Not really. GDP incudes government spending of which at least some portion will be borrowed money.

For example if the country went to war it would need to spend a massive amount of money which would inflate GDP but have zero economic benefit.

Household spending may also be on credit. At best, GDP is a very rough guide to prosperity/economic performance.

Income tax in Ireland is not especially low. Basic rate is 20 percent, 40 percent for every euro earned over 40K. Pretty much the same as the UK. Plus there's a social charge as well which is between 0.5 percent and 8 percent depending on income level.

 

[Sal1950]

Income tax in Ireland is not especially low. Basic rate is 20 percent, 40 percent for every euro earned over 40K. Pretty much the same as the UK. Plus there's a social charge as well which is between 0.5 percent and 8 percent depending on income level.

Where's the incentive to work harder and earn more in that?

 

[Mart68]

Where's the incentive to work harder and earn more in that?

I don't think we can discuss that without touching on politics

 

[JeffS7444]

Where's the incentive to work harder and earn more in that?

It's all relative : It seems a person's feeling of wealth may be relative to how others seem to be doing.
https://insights.som.yale.edu/insights/key-factor-in-well-being-others-apparent-wealth

But one reason I don't necessarily feel like a failure when I see someone else driving around the neighborhood in a Maybach is because I don't know how much of it reflects actual wealth as opposed to borrowed money.

 

[JeffS7444]

Just so you know, I have zero affiliation with Elm (arguably they compete with another part of my firm), but I think Victor Haghani is a good go-to on the subject of wealth building. His book, The Missing Billionaires, is one of my top recommendations.

I've just started to read this book, and I'm amazed to discover how fleeting even vast family fortunes typically are. But as I thought about it, I realized that the families that I thought of as the modern aristocracy are relatively new to wealth.

 

[ahofer]

The majority of billionaires are self-made. The younger you go, the more true this is.

The World’s Billionaires, by Generation

From Warren Buffett to Elon Musk, this graphic shows the world’s billionaires based on their top sectors, residence, and net worth.

www.visualcapitalist.com

Obviously this isn't the entire definition of mobility, and a lot of the 'self-made' benefited from family/education that was likely top quartile. For the bottom quartile in the U.S., if mobility to upper quartiles happens, it happens early on. The middle has a lot of mobility, the top and bottom quintiles tend to stay put more. Just within the top half, there is pretty active mobility.

Stuck on the ladder: Wealth mobility is low and decreases with age

Ariel Gelrud Shiro, Christopher Pulliam and Ember Smith expand on their findings in our new report on intergenerational wealth mobility in the United States by examining when opportunities for wealth occur during working years, and when those opportunities decline.

www.brookings.edu

TLDR: People stuck at poor are the U.S.' salient welfare problem.

 

[Groove01]

Well, yeah. If you don't realize the gain it isn't taxable income. But literally hundreds of thousands (perhaps millions) of people in the US get stock allocations or stock options. In your post I was quoting:



Mere mortals get stock options and stock allocations as compensation (even administrative assistants at some companies, like Amazon), defer taxation until they're sold or exercised, and take out home equity loans. And even for capital gains, "mere mortals" have lower tax rates than those defined as "ultra-wealthy people". (Last I looked, the financial industry still defined "ultra high net worth" individuals or married couples as those with $30 million of investible assets or more. Still true?)

And home equity loans are exactly the same type of instrument as financially astute people use when getting low-interest loans on their equity holdings from their brokerage firms. I know several people who take out brokerage loans routinely, and invest the loan proceeds in more financial instruments to multiply the return from their original capital investment. I'm too much of a coward to use that strategy, but I know several people who do. (I also know people who sky dive, like helicopter skiing, bungee jumping off tall buildings (my son did that once that I know of), and paragliding, but I prefer boredom to scaring myself to death.)

I think generally stock options are much less common then they were in the 90’s and early 2000’s.

I used to get options as part of my bonus, but when the rules changed in the early 2000’s except for executive levels, stock options pretty well vanished for VP and belows (except start ups and some tech companies).

Interestingly, I worked for a start up .Com in the early 2000’s and was granted a hefty option award. The company indicated that after the IPO I could be taxed on the unrealized gain as it would be classified as a “windfall” (I don’t remember the specifics TBH and I’m sure the rules have changed since). To mitigate the risk, on paper, I purchased the options at the then valued price (pre IPO) and the company “loaned” me the money to do so (again all on the paper) to eliminate the “windfall” and fall under a straight capital gains scenario. IE - I own the stock now, so I would not be subject to the windfall tax and would only be taxed at the time I exercised (at which time I would pay the company back the “loan”).

In the end, it didn’t matter - company went the way of the .com bubble prior to IPO. I had left by that point, got a call from the CFO saying to urgently get over in the next hour to reverse the stock / loan transaction or I could be on the hook for that loan as the firm went through the bankruptcy proceedings. Such was my experience in the start up world - lol.

Does that “windfall” rule still exist for pre IPO options?

 

[blueone]

I think generally stock options are much less common then they were in the 90’s and early 2000’s.

I used to get options as part of my bonus, but when the rules changed in the early 2000’s except for executive levels, stock options pretty well vanished for VP and belows (except start ups and some tech companies).

Many companies have partially transitioned to RSUs from options. In the high-tech world (which I was part of), every US-based company I can think of still issues options or RSUs.

 

[Sal1950]

I don't think we can discuss that without touching on politics

 

[Timcognito]

I searched this and wonder if this is part of a greater strategy of market manipulation and wealth consolation but probably just opportunistic

 

[JeffS7444]

The authors of The Missing Billionaires devised a coin-toss experiment, and with no information save for what's presented on the landing page, I gave it a try. I started off with a specific strategy, but as the game progressed, I ditched it in favor of another, and I made adjustments along the way. At the end of the allotted 30 minutes, had amassed a bit over $1700.
https://elmwealth.com/coin-flip/

 

[ahofer]

On the subject of buybacks:

Buyback Derangement Syndrome

Winner of an “Outstanding Article” award in the 20th Annual Bernstein Fabozzi/Jacobs Levy Awards. A seemingly large amount of stock buybacks in recent years has prompted many to claim that buybacks have come at the expense of new investment. Our latest paper shows why neither the theory nor the...

www.aqr.com

...

 

[GDK]

Looks like Ireland is doing something right. Skyrocketing GDP per capita and low tax rates. That is pretty much the definition of prosperity.

Ireland has long been a corporate tax haven and, as a result, many multi-nationals chose to hold their intellectual property there and then "rent" it out to their other subsidiaries in order to maximize Irish profits, which were then subject to a relatively low (12.5%) corporate tax rate. That policy resulted in a significantly higher level of corporate tax receipts and government spending (and therefore GDP) for the country than would have otherwise been the case.

This policy long raised the hackles of the rest of the EU who won a case against Ireland (and Apple) last year and forced them to raise their minimum corporate tax rates on multi-nationals to 15%, in line with OECD policy. In any event, it was certainly the case of "wealth-building" for Ireland, although it came at the expense of the treasuries of other countries.

 

[bachatero]

20yr bond auction ended with a higher yield of 5.047%, now all treasury futures are plummeting and are taking stocks with them too!

 

[tmtomh]

Where's the incentive to work harder and earn more in that?

Contrary to popular belief among us Americans, the total tax burden - federal income tax, federal Social Security and Medicare payroll taxes, state and local income (and property) taxes, and so on - is not necessarily lower in the US than in a lot of European countries. Putting aside any political debates or questions, it's simply a fact that a portion of taxes paid in European countries (and Japan, and others) covers healthcare costs that American must pay out of pocket. Again, this not - or at least should not be - controversial; it's simply a fact and you can conclude whatever you want from it.

And to look at it another way, the tax to GDP ratio in the US is higher than in Ireland - in other words American taxes are higher relative to economic output.