[idiopathic]

Ah, OK, now I understand a problem I can agree with - so it's not so much the damage from paying 1.5% on a profitable transaction (employees exercise options as part of winning start-up lottery) but rather the company has to pay cash for a gain it only realised in paper. So now I understand why they were saying a company going for IPO would have to pay most of the money raised as taxes, rather than just 1.5% of it.

Why is no one suggesting applying the 1.5% when cash exchanges hands? Everyone is either suggesting keeping the 1.5% as is, or scrapping it completely for stock options. But surely a middle ground allows cash for taxes as a small percentage of cash from profits?

[crux_]

I'm not sure I follow your post; apologies if it's my own up-too-late-itis. "When cash exchanges hands" is when the tax does apply, assuming by that you mean options being exercised.

That's why in my imaginary example a post or two ago, one of the more fantastical & unlikely parts of it was a full 30% option pool all being exercised at once.

Hence, (and I apologize for any inaccuracies in paraphrase) the post you are replying to is recasting the tax as a potential cash-flow issue, rather than a great and unfair ongoing burden: because it's not.

[idiopathic]

My understanding was the same as yours above, but it seems that if there is a valuation event – an IPO, for example – then the rise in value of all shares is counted, not just the ones which were sold.

Separately, I do not think the tax is unfair. Tax has to come from somewhere, and if SF can show a nicer environment for employees and founders to live in, then they can charge a higher price for the environment. Tax competition takes care of testing whether this is a wise decision, and there is plenty of tax competition in the region surrounding SF.

To me, tax becomes unfair if it is arbitrarily applied to some people, but not to others, e.g. letting Twitter and Zynga off, while taxing other start-ups.

[crux_]

> My understanding was the same as yours above, but it seems that if there is a valuation event – an IPO, for example – then the rise in value of all shares is counted, not just the ones which were sold.

Well, that would explain a bit of the whining, but I will need a nice solid citation before I believe a word of it.

First, because I cannot fathom how it could possibly work: What's a qualifying "valuation event"? What if another event comes along and the valuation has dropped -- is the company entitled to a refund, then?

Second, because that would be the only tax scheme I've ever heard of, except maybe some proposed & hair-brained wealth taxes, that directly taxes unrealized gains. (Wealth taxes I'm aware of that actually exist tax unrealized gains under simple growth assumptions, not based on any sort of actual valuation.)

Third, because if that were the case you'd think that the vocal opposition would be able to articulate it more clearly.

> To me, tax becomes unfair if it is arbitrarily applied to some people, but not to others, e.g. letting Twitter and Zynga off, while taxing other start-ups.

Exactly the problem that the options tax was introduced to solve, as well. If there is a tax on employee compensation, why shouldn't the executive compensation of $1 salary + $300 million in options be taxed at the same effective rate as the janitor's wages?

(N.b.: I think a payroll tax is dumb, but a regressive payroll tax is dumber!)

(Edited a bit for clarity & removed a side comment.)