If the company is solely owned, there is no stock price appreciation.
And actually, as I remember, a big reason that Gates and Allen took Microsoft public was so their employees could share in the wealth.
Not quite. Even if a company is private, there are still stockholders.
Microsoft, to that point, had been somewhat generous to employees and stock grants. And they were getting big enough, i.e. enough private stockholders/employees, they were going to have to register with the SEC. Though Gates’ preference was to keep the company private, the IPO made sense given what they would have to go through.
I am familiar with the idea of a “closely held” corporation but @LSLGuy referred to a solely held corporation, which suggests one owner.
As an aside related to the OP, I’ve been searching, without success, to find out the answer to this question:
What percentage of income in America is ordinary income versus capital gains income?
Low-income taxpayers will have minimal, if any, long term capital gains income. But I’m wondering how much income of high-earners is actually long term capital gains?
It depends a LOT on what you mean by “income”.
If I sell some long-held stock for cash, I receive cash. I’m no wealthier than a moment ago, it’s just in a different form. I’ve made no income. In fact I’m probably a few bucks poorer for having paid some transaction fee to somebody to make the trade.
But from a tax perspective, I look to my basis in the sold stock and find it appreciated by a total amount of $1,000 net of commissions over the entire lifetime I held it. I now owe income taxes this year on that entire $1,000 even though the actual appreciation took place in fits and starts over the e.g. 5 years I owned it.
Consider a different case. Same stock, but this time I don’t sell it. I still have gained $1,000 of capital, but I have no taxable income and no taxable capital gains. I have gained capital, but don’t have a capital gain. At least not a realized capital gain. So no income, and no taxes. But I am wealthier than I was before.
This is often exploited by the very wealthy. Instead of selling stock to obtain cash to spend on whatever consumption, they borrow money pledging the shares as collateral and spend that money instead. No income, no taxes, just spending. And a growing debt against what they hope are also appreciating stock assets. It’s like a goose you feed birdseed to that keeps laying golden eggs to sell. Until / unless you develop a taste for foie gras or the goose dies of natural causes, the money fountain just keeps pumping out untaxed money.
Further muddying the waters, a carefully crafted feature of the tax code permits hedge funds and such to recharacterize ordinary income as if it was long term capital gains and get the special low tax rate. Google “carried interest” for more.
So a lot of short-term money made by workers and businesses in the financial industry is magically taxed as if it was long term capital gains. Just because.
I’m not rich. I am part of the so-called mass affluent, having had a good job, careful saving, and decent investing for most of my life. Net of a couple of total financial screw-ups over the years, although fortunately no BKs.
IOW I’m Mr. nice car, nice house, expensive taste in restaurants & scotch, but no yacht, no overseas tax haven, no kept mistress(es).
I make a hefty annual W2 income. Most years my capital gains are 2 or 3x that. I’m mostly in buy and hold mode and a good-sized chunk is in 401K / IRA (“qualified” accounts) so no taxes on any transactions there. Except for rebalancing in my non-qualified accounts, there are no taxable sales to generate capital gains. Because of the buy and hold, when I do sell something, it’s almost always a long-term gain, not a short term gain.
Bottom line: large capital gains most years, negligible capital gains for tax purposes. My total wealth increment year over year most years is far more attributable to my assets than to my wages. Despite the fact my wages are pretty far up the percentile rankings of all W2 earners.
And again I’m waaay below what I’d call rich. The ratio is far more lopsided for them than it is for the likes of me. And the likes of the thousands (millions?) of other high wage professionals, be they upper-middle managers, executives, lawyers, doctors, medium business owners, software gurus, superstar commission salespeople, etc.
I have no problem with people being rich, heck, I wish more people were. But I can believe in capitalism and still think that anybody that can build their own spaceship has too damn much money.
I get that, but the point is that Microsoft wasn’t one. It was already held, in part, by its employees. Going public wasn’t a move intended to help those employees financially gain on the company’s success, as you suggested.
It was a move to go whole hog since they were going to have to deal with the regulatory headache anyway. Gates wanted to hold onto the company privately and keep the gains more closely but the IPO and subsequent decade was vastly more successful than they anticipated.
In that respect, Gates seems to have mellowed in later years or maybe decided he’s actually made enough money and should use some of it to the benefit of others, so good on him but concern for sharing the wealth with his employees wasn’t a part of the calculus of going public.
And even then, Gate’s + Allen’s share of the publicly held company was huge while the combined share of all the others was comparatively small. And each individual’s piece was tiny. Because of Microsoft’s overall sustained long-term success after that IPO, those original small percentage distributions did generate a lot of people who were wealthy compared to mere wage-earners.
But imagine how different it would have been if that same share distribution had continued unabated to today, while Gate’s and Allen’s ownership shares had declined to zero by e.g. year 2010.
I did call its present-day form absurd and outrageous. You’re not getting any disagreement from me on this.
Can’t go with this though. It’s just not true anymore.
Most individuals on the Forbes 400 list did not inherit the family business but rather made their own fortune. Kaplan and Rauh found that 69 percent of those on the list in 2011 started their own business, compared with only 40 percent in 1982.
Another article from 2019 found the percentage still high.
There are 2,604 billionaires in the world, and 55.8% of them are self-made.
That’s according to the Billionaire Census published Thursday by market research firm Wealth-X.
Taken together, self-made billionaires have a total of nearly $5 trillion.
Another 30.9% of billionaires made at least some of their wealth themselves, according to the report, while 13.3% inherited their wealth entirely.
The idea that entrepreneurial billionaires “created” all the wealth and the knock-on effects of that wealth is really questionable. All of of the most high profile examples show the pattern. Bill Gates and Elon Musk and Zuckerberg all famously innovated in some respect, but they also all very famously cannibalized and stifled competitive innovation. It’s not the case that Bill Gates invented all personal computing or Musk invented the electric car, Zuckerberg invented social media, or whatever; what is the case is that they were involved in innovations but were personally enriched well beyond their own personal contributions by being effective at boxing out, threatening, cheating and absorbing everyone else in the space.
When it’s all said and done, you get people attributing all of the success of all of Musk’s companies to Musk, but Musk didn’t build them. He just won the infighting over who got to take credit for them. Without him in the space, it is true that he personally doesn’t make billions, but it’s not true that the innovation doesn’t happen at all. If some hypothetical cap to his own ability to earn money was applied, that would just mean other people got richer, not the reverse.
But when do you start drawing on your retirement accounts, those dollars will be treated as ordinary income, and not capital gains.
I think you are an exception, but that’s just my opinion. I cannot prove it either way.
Eh - define “self made”. If that means their families did not contribute in any way, those statistics don’t hold. They typically define not being self made as “took over family business and began wealthy”.
Bill Gates is a good example of how that can be distorted. He “dropped out” of Harvard and is considered “self-made”, but his mother served on several different boards and some of those connections are widely considered to have been crucial to Microsoft’s early days. For example, she served along John Opel (at the time Chairman at IBM) on the national board (!) for the United Way and not long after mentioning her son’s new company, IBM gave them their first big contract.
That is not to say he did not personally work hard or contribute greatly to his own success, but that sort of help is not what the average person thinks as entirely self-made.
Or heck, the Kardashians would be considered “self-made” by the same criteria as those cited articles. Several have become billionaires but not on the back of any existing family business.
As I pointed out earlier, megacorps tend to make a lot of people rich, not just the founder and/or CEO. Which is not to say that CEOs aren’t often overcompensated.
I think that is a horrible idea.
The reason we assume ownership in a company should continue as the company grows is that as a society we generally respect the concept of “ownership”. What is an “unmitigated evil” is the government coming into a company once it reaches a certain size and saying “we own this now” based on some misguided populist notion of “helping the poor”.
An owner’s right to own a company should be based on his ability to keep in running profitably. If he fails to do that, then he may be forced to sell it. But the idea that a company should be confiscated by the government once it reaches a certain size or after a arbitrary period of time is absurd.
Henry Ford didn’t invent the car, Edison didn’t invent electricity, Rockefeller didn’t invent oil. So what? They created businesses which got cars, electricity, and oil out to ever larger publics. Their methods were far worse than any used today, mostly because governments kept making their practices illegal.
People, if we’re going to generalize, don’t understand how businesses work or what part they play in making ideas reality. The world is created by businesses, not by ideas, inventors, or experimenters. That large businesses are ruthless in the pursuit of profits is as true as saying the sky is blue. As I keep saying, there are ways to curb that. But I don’t think there are any hugely-successful entrepreneurs, billionaires or not, who didn’t get that way without being ruthless. Being a large-sized asshole also seems to correlate.
We’ve never had such a cap (you seem to be using terms that apply to income rather than wealth: we’ve been talking about wealth in this thread and I’m continuing to do so, since the two things are almost entirely separate) so there is no evidence one way or the other. I think the likelihood is very near 100% that the result would mean that far less wealth would be created and therefore everybody would be poorer.
A lot of it is in Roth and some of it is post-tax contributions to non-Roth, but yes, there will be ordinary income taxes owed on a chunk o money. Whether by me or my heirs.
I’d suggest that for someone successful who’s also late in life it’s pretty common. I’m fast approaching retirement. My W2 vs. annual capital gains ratio was a lot more even when I was 40 and was tilted much the other way (in favor of W2) when I was 25. Despite the fact my W2 then was much smaller than it is now.
So in one sense you (or I) can look at my personal trajectory as a sample of cross sections from low-capital to semi-high-capital people. And we can extrapolate upwards from there towards the seriously wealthy where their wages, if any, are tiny compared to their capital.
Said another way, a financially successful life (for the non-uber-wealthy) consists of the continuous accumulation of capital which eventually leads to it being a bigger lever on your total annual wealth increment than is your W2. And when that capital lever is big enough, you can retire. Net of considerations about SS, medical insurance if under age 65, etc.
But big picture, a self-funded retirement is all about accumulating enough capital that its earnings & appreciation can replace your accustomed W2 net of concomitant expense changes in retirement.
Some people retire as soon as they cross that semi-nebulous threshold. Others keep plugging until they’re far past it. For various personal reasons I’ve chosen Door #2, but am about to be defenestrated into retirement anyhow.
…I’ve been reading this thread.
And I think the biggest problem in my eyes is that I’m finding most of the concepts here largely incomprehensible.
If we start with the question in the OP:
“what harm, if any, does it do the poor if my $10k becomes $2.2B while sitting in my IRA account?”
And we start to imagine all the possible ways that $10K magically becomes 2.2B just sitting in the IRA account and…it isn’t possible, is it? Its a fantasy scenario.
But that fantasy scenario seems to play out in real life all of the time. For example Sam Bankman-Fried was worth at one stage 26 billion dollars. Now he isn’t worth very much at all. Elon Musk was the richest man in the world. A week later he suddenly isn’t.
Travis Kalanick is apparently worth 4 billion dollars. But the company he co-founded, Uber, has only ever been profitable when they’ve played creative accounting. If it weren’t for Venture Capital, the entire gig economy would probably collapse.
I’m simply not convinced that any of this is real. And by real, I mean any more real than that $10k magically becoming $2.2B while sitting in the OP’s IRA account. The thing is: poor people are completely divorced from this system. They don’t understand it because fundamentally it doesn’t make any sense.
And I’m not looking for anyone to explain it to me. I understand capitalism well enough. It’s this perversion of capitalism, the worship of unrestrained capitalism, where wealth inequality has exploded over the last few decades, that is the problem for me. The basic principle of building a profitable, sustainable business has gone out the window. I can’t see how any of this ends well for anyone.
The reason I chose the scenario in the OP is that in 2011, bitcoins were 30 cents each. $10k would get you 33,333 of them. 10 years later, in November 2021, each bitcoin was worth $68,000. That’s $2,266,644,000. All one had to do was sit on the investment for 10 years, not a long time at all for an IRA. It’s an extreme example, to be sure. But hardly impossible.
…did someone actually do it?
I’m sure someone got pretty rich off of bitcoins. But they never contacted me about it.