Again, this is just incorrect on the merits. On the meta level I think I already agreed that these concerns can be plausible for some wealth taxes, but I don’t think it’s reasonable to set our standard of belief about tax law (or indeed any law) at certainty that some malicious actor out to victimize us personally could have hidden something in legalese. This isn’t the standard of belief we apply to anything else and is not a worthwhile way to understand the tax system! I should also mention that many people are more afraid of legal jargon than is reasonable—legal jargon exists and the distinction between legal and everyday definitions of words is important, but it’s (1) not that hard to recognize when legal jargon is present, and (2), in most cases, not hard to figure out what it means either. I think the rest of this comment will demonstrate why I believe that a smart but legally-uninformed person can usually work out what a law says pretty explicitly.
In order:
Not being able to sell is not a usable defense, in the way you describe it to be, because “unable to sell” and “unwilling to sell” are not legally distinguishable until much further into litigation than anyone wants to get.
It is a usable defense! In some sense it’s the only usable defense. “The government might send you a bill for more money than you can possibly scrounge up and destroy you forever” and “the government might make you prove that you have less money than you do, which is a long process” are not the same claim. In the typical case these are pretty hard to distinguish, because the typical person who can by any metric claim to have a billion dollars in assets is not ever at risk of being unable to find 50 million dollars in cash, and the government is usually strict about things that look like tax evasion. But if you got a bill and realized you can’t afford all of it (which is the atypical case), you could anticipate this and hire a reputable third party to try to find a sale in as reasonable a timeframe as you can manage, which would be the gold standard as far as this sort of defense is concerned, and if you anticipated it, you would not have to get deep into litigation before the case was dropped. (The government doesn’t want to continue prosecuting cases that it knows it will lose! Indeed, the government is in many cases incapable of investigating suspected cases of tax abuse by ultra-wealthy people because even if it’s right, the litigation won’t be worth the payoff.)
The ODA mechanism specifies that in order to use it, you have to give up several of the causes of action that you would want to use to dispute the tax. It also says that the Franchise Tax Board will create a contract, leaving some freedom in what that contract will contain, which likely means giving up additional causes of action.
This is correct but I don’t see how it’s relevant. The government doesn’t want to give people two chances at disputing the correctness of a tax—if the tax is being assessed incorrectly you should do it now, not wait around for a more favorable political climate and for the trail to run cold on which assets were where.
The ODA mechanism specifies that “A taxpayer may only attach assets or groups of assets to an ODA to the extent that the amount of additional tax that would be owed as a result of Section 50301 (without the use of an ODA) would exceed the sum of the combined value of all of the taxpayers’ assets subject to the valuation rules of paragraph (1) of subdivision (c) of Section 50303.” My my read of paragraph (1) of subdivision (c) of Section 50303, this includes all cash, cash equivalents, and easily tradeable commodities. … The definition of “Publicly traded asset” in 50308(j) is “an asset that is traded on an exchange; traded on a secondary market in which sales prices for such asset are frequently updated; available on an online or electronic platform that regularly matches buyers and sellers; or any other asset that the Board determines has a value that is readily ascertainable through similar means.” A literal reading of this definition would seem to include cars used as primary transportation.
(Emphasis mine)
This is where the legal jargon avoidance becomes an issue. Many laws govern publicly-traded assets and so this is an established legal definition. In general, if you want to understand what a law says and you see a phrase that you expect appears in lots of other laws, you shouldn’t go with your best guess at the most natural reading in context, you should look up other laws and rulings to figure out the prevailing definition (or more precisely the prevailing interpretation of that definition). Cars are not publicly-traded assets! They simply are not. (See also 50303.9 which allows the exclusion of up to 5 million dollars worth of assets which are not publicly traded and explicitly lists vehicles as an example of such an asset.)
(The legal justification here, for those curious, is usually that the sales price for a type of car might be easy to determine on average, but the sale price for a specific car depends on the specifics of that car.)
50302(e) says that “No debt or liability, including recourse debts described in subdivision (a), shall reduce net worth if the debt or liability is owed to a related person or persons; or if the existence or amount of the liability is contingent on future events that are substantially uncertain to occur or that are substantially uncertain to occur within the subsequent five years; or if the debt or liability was not negotiated for at arm’s length.” This would exclude convertible notes, which are a common financial instrument used by startup investors.
I think in most cases this would not exclude convertible notes. The type of liability is contingent on future events, but the existence and amount typically isn’t. There are definitely ways you could structure convertible notes to be subject to this clause, but they’re mostly tax evasion—you don’t get to evaluate your company one way when trying to get financing and another way when paying taxes. If you’re consistent about both, you’re basically never subject to clauses like this.
And maybe another meta-level point: the framing of laws in terms of “gotchas” is anti-productive here. If you believe that laws exist basically to victimize you personally (or some hypothetical version of you who’s subject to them), you will often be able to find things that look like traps. Of course, as I mentioned, there are usually mitigating factors, and any competent lawyer would be able to get you out of these apparent traps. But this fact isn’t available to you in the mindset I think you have—sure, the law makes assurances in obviously-unreasonable cases, and sure the judge and prosecution would see that coming a mile away, but if they’re out to get you, you’re not going to get a reasonable judge and the prosecution will keep litigating even when they know they’re going to get nothing!
I think most of your errors here come from your dismissal of the idea that inability to sell an asset at a price would nakedly prove that it can’t be evaluated at that price, which is ~the reason that the scenario you originally described cannot possibly happen. You’re correct that there’s some subjective evaluation here and argument could go back and forth, and ultimately this means that a sufficiently-motivated government could bill you for more than you’re worth and then make it impractical for you to prove that the bill was wrong. But the government is not sufficiently-motivated! It’s not out to get you, it’s not even out to get Elon Musk or Peter Thiel most of the time. This is not what happens in practice, in practice this is paranoia.
To be clear: bad incentives can still exist, and overvaluation is possible! I’m not disputing that. In rare circumstances, and considering legal fees incurred as part of the tax, I think it’s possible that an exceptionally unlucky person could end up paying closer to 15% (or maybe even 20% if their tax lawyer is really bad) of their net worth, not the 5% the bill claims to charge. But this person would still end up with hundreds of millions of dollars in assets and would not be in any danger of destitution whatsoever. I agree that we have a world model difference about this (though I wouldn’t consider myself a proponent of this initiative), but I don’t think your world model here is at all defensible, and it seems to be supported mostly by misunderstandings of legal terms and a mistaken belief that every part of the law exists to be maximally punitive.
Again, this is just incorrect on the merits. On the meta level I think I already agreed that these concerns can be plausible for some wealth taxes, but I don’t think it’s reasonable to set our standard of belief about tax law (or indeed any law) at certainty that some malicious actor out to victimize us personally could have hidden something in legalese. This isn’t the standard of belief we apply to anything else and is not a worthwhile way to understand the tax system! I should also mention that many people are more afraid of legal jargon than is reasonable—legal jargon exists and the distinction between legal and everyday definitions of words is important, but it’s (1) not that hard to recognize when legal jargon is present, and (2), in most cases, not hard to figure out what it means either. I think the rest of this comment will demonstrate why I believe that a smart but legally-uninformed person can usually work out what a law says pretty explicitly.
In order:
It is a usable defense! In some sense it’s the only usable defense. “The government might send you a bill for more money than you can possibly scrounge up and destroy you forever” and “the government might make you prove that you have less money than you do, which is a long process” are not the same claim. In the typical case these are pretty hard to distinguish, because the typical person who can by any metric claim to have a billion dollars in assets is not ever at risk of being unable to find 50 million dollars in cash, and the government is usually strict about things that look like tax evasion. But if you got a bill and realized you can’t afford all of it (which is the atypical case), you could anticipate this and hire a reputable third party to try to find a sale in as reasonable a timeframe as you can manage, which would be the gold standard as far as this sort of defense is concerned, and if you anticipated it, you would not have to get deep into litigation before the case was dropped. (The government doesn’t want to continue prosecuting cases that it knows it will lose! Indeed, the government is in many cases incapable of investigating suspected cases of tax abuse by ultra-wealthy people because even if it’s right, the litigation won’t be worth the payoff.)
This is correct but I don’t see how it’s relevant. The government doesn’t want to give people two chances at disputing the correctness of a tax—if the tax is being assessed incorrectly you should do it now, not wait around for a more favorable political climate and for the trail to run cold on which assets were where.
This is where the legal jargon avoidance becomes an issue. Many laws govern publicly-traded assets and so this is an established legal definition. In general, if you want to understand what a law says and you see a phrase that you expect appears in lots of other laws, you shouldn’t go with your best guess at the most natural reading in context, you should look up other laws and rulings to figure out the prevailing definition (or more precisely the prevailing interpretation of that definition). Cars are not publicly-traded assets! They simply are not. (See also 50303.9 which allows the exclusion of up to 5 million dollars worth of assets which are not publicly traded and explicitly lists vehicles as an example of such an asset.)
(The legal justification here, for those curious, is usually that the sales price for a type of car might be easy to determine on average, but the sale price for a specific car depends on the specifics of that car.)
I think in most cases this would not exclude convertible notes. The type of liability is contingent on future events, but the existence and amount typically isn’t. There are definitely ways you could structure convertible notes to be subject to this clause, but they’re mostly tax evasion—you don’t get to evaluate your company one way when trying to get financing and another way when paying taxes. If you’re consistent about both, you’re basically never subject to clauses like this.
And maybe another meta-level point: the framing of laws in terms of “gotchas” is anti-productive here. If you believe that laws exist basically to victimize you personally (or some hypothetical version of you who’s subject to them), you will often be able to find things that look like traps. Of course, as I mentioned, there are usually mitigating factors, and any competent lawyer would be able to get you out of these apparent traps. But this fact isn’t available to you in the mindset I think you have—sure, the law makes assurances in obviously-unreasonable cases, and sure the judge and prosecution would see that coming a mile away, but if they’re out to get you, you’re not going to get a reasonable judge and the prosecution will keep litigating even when they know they’re going to get nothing!
I think most of your errors here come from your dismissal of the idea that inability to sell an asset at a price would nakedly prove that it can’t be evaluated at that price, which is ~the reason that the scenario you originally described cannot possibly happen. You’re correct that there’s some subjective evaluation here and argument could go back and forth, and ultimately this means that a sufficiently-motivated government could bill you for more than you’re worth and then make it impractical for you to prove that the bill was wrong. But the government is not sufficiently-motivated! It’s not out to get you, it’s not even out to get Elon Musk or Peter Thiel most of the time. This is not what happens in practice, in practice this is paranoia.
To be clear: bad incentives can still exist, and overvaluation is possible! I’m not disputing that. In rare circumstances, and considering legal fees incurred as part of the tax, I think it’s possible that an exceptionally unlucky person could end up paying closer to 15% (or maybe even 20% if their tax lawyer is really bad) of their net worth, not the 5% the bill claims to charge. But this person would still end up with hundreds of millions of dollars in assets and would not be in any danger of destitution whatsoever. I agree that we have a world model difference about this (though I wouldn’t consider myself a proponent of this initiative), but I don’t think your world model here is at all defensible, and it seems to be supported mostly by misunderstandings of legal terms and a mistaken belief that every part of the law exists to be maximally punitive.