Federal Government Wins Big From Twitter Sale

CommentaryElon Musk is the best thing to happen to the U.S. Treasury since the 16th Amendment to the Constitution was passed in 1913. The 16th Amendment allowed the imposition of an income tax. The totality of Musk’s 2021 and 2022 business decisions in exercising his non-qualified stock options at Tesla, selling his newly issued Tesla shares, and then buying Twitter should result in likely new additional current federal income tax collections of well over $16 billion or $17 billion when including taxes paid by the Twitter shareholders. (Estimating the taxes to be paid by the Twitter shareholders is little more than an educated guess.) Future federal income tax collections from retirees holding Twitter stock in their pension plans will further yield additional federal tax revenues for decades. The $44 billion of sales proceeds paid to the shareholders of Twitter will, after current taxes, also result in tens of billions of dollars being spent in the economy or being reinvested. Pension plans holding Twitter stock will improve their liquidity. None of the billions of dollars being paid to the U.S. Treasury or the dollars being freed up for current investors of Twitter are the result of anything except the actions of Musk. The man who almost single-handedly demonstrated that it was possible to develop and mass produce electric vehicles to benefit the environment has become the U.S. Treasury’s new best friend. Musk is making a huge and very risky financial bet on Twitter. Twitter has been losing money and Twitter appears to have no existing viable current business plan to become profitable. It’s interesting to contemplate how Twitter could survive without Musk. Twitter appears to need the genius of Musk. In rough dollars, when Musk exercised his options at Tesla and then sold the stock, he received approximately $30 billion. He has reported that he has paid or must now pay $11 billion in federal taxes. This is consistent with a 37 percent top federal tax rate on the ordinary income resulting from his exercise of his Tesla stock options. He’s taking his remaining $19 billion, borrowing $25 billion from various banks, and buying Twitter. To obtain the loans to buy Twitter, he will be pledging billions of dollars of his Tesla stock as collateral. It appears that Musk will retain not a single dollar of net cash from his actions at Tesla and his planned purchase of Twitter. All of his net proceeds from selling Tesla shares are being reinvested in Twitter. If Twitter fails financially, Musk could find himself having made one of the most catastrophic investments in history. It’s arguable that in exercising his options, selling the underlying stocks purchased under the options, and paying his federal income taxes along with paying a 38 percent premium for Twitter, Musk’s current net worth will decline by over $25 billion. He needs to financially fix Twitter and not find himself daily feeding additional cash into the Twitter machine. Make no mistake; Musk doesn’t have unlimited funds to invest in Twitter. Every additional dollar that Twitter prospectively needs will likely require the exercise of options or the sale of something. Either way, he will pay more and more federal taxes if Twitter requires more funds to fix its business model. For Twitter’s selling shareholders, the gross sales price will be $44 billion in cash. Twitter shares are owned directly or indirectly by individuals and pension funds. Every taxable seller will pay short or long-term capital gains taxes. Most will also pay federal investment income taxes along with significant state taxes. The sales proceeds that would flow into the pension funds will ultimately be taxed at ordinary income tax rates as the retirees collect their pensions. When Musk pays his $11 billion and the shareholders of Twitter pay their taxes on their stock sale, the federal government will have a windfall that should equal or exceed $16 billion or $17 billion. Putting that windfall into some perspective, the exercise of Musk’s options plus the taxes paid by the former Twitter shareholders would produce taxes almost equal to or more than the Treasury’s total 2020 estate and gift tax collections. The total combined state budgets of Alaska, Idaho, and Delaware only total about $21 billion. The resulting taxes caused by Musk’s transactions are almost beyond what most of us can easily comprehend. In any reasonable political and social environment, Musk, the hero of Tesla and Space X, would be paraded up and down Fifth Avenue in New York City as a hero. Enter Sen. Elizabeth Warren (D-Mass.). Warren is currently on the stump attacking Musk for purchasing Twitter. She claims Musk controlling Twitter is “dangerous for democracy.” She claims his Twitter purchase is a key reason to have a wealth tax in the United States. “Dangerous for democracy.” Warren has been silent and apparently unconcerned about one family controlling the New York Times for decades and decades and dec

Federal Government Wins Big From Twitter Sale

Commentary

Elon Musk is the best thing to happen to the U.S. Treasury since the 16th Amendment to the Constitution was passed in 1913. The 16th Amendment allowed the imposition of an income tax.

The totality of Musk’s 2021 and 2022 business decisions in exercising his non-qualified stock options at Tesla, selling his newly issued Tesla shares, and then buying Twitter should result in likely new additional current federal income tax collections of well over $16 billion or $17 billion when including taxes paid by the Twitter shareholders. (Estimating the taxes to be paid by the Twitter shareholders is little more than an educated guess.) Future federal income tax collections from retirees holding Twitter stock in their pension plans will further yield additional federal tax revenues for decades.

The $44 billion of sales proceeds paid to the shareholders of Twitter will, after current taxes, also result in tens of billions of dollars being spent in the economy or being reinvested. Pension plans holding Twitter stock will improve their liquidity.

None of the billions of dollars being paid to the U.S. Treasury or the dollars being freed up for current investors of Twitter are the result of anything except the actions of Musk. The man who almost single-handedly demonstrated that it was possible to develop and mass produce electric vehicles to benefit the environment has become the U.S. Treasury’s new best friend.

Musk is making a huge and very risky financial bet on Twitter. Twitter has been losing money and Twitter appears to have no existing viable current business plan to become profitable. It’s interesting to contemplate how Twitter could survive without Musk. Twitter appears to need the genius of Musk.

In rough dollars, when Musk exercised his options at Tesla and then sold the stock, he received approximately $30 billion. He has reported that he has paid or must now pay $11 billion in federal taxes. This is consistent with a 37 percent top federal tax rate on the ordinary income resulting from his exercise of his Tesla stock options. He’s taking his remaining $19 billion, borrowing $25 billion from various banks, and buying Twitter. To obtain the loans to buy Twitter, he will be pledging billions of dollars of his Tesla stock as collateral.

It appears that Musk will retain not a single dollar of net cash from his actions at Tesla and his planned purchase of Twitter. All of his net proceeds from selling Tesla shares are being reinvested in Twitter.

If Twitter fails financially, Musk could find himself having made one of the most catastrophic investments in history.

It’s arguable that in exercising his options, selling the underlying stocks purchased under the options, and paying his federal income taxes along with paying a 38 percent premium for Twitter, Musk’s current net worth will decline by over $25 billion. He needs to financially fix Twitter and not find himself daily feeding additional cash into the Twitter machine.

Make no mistake; Musk doesn’t have unlimited funds to invest in Twitter. Every additional dollar that Twitter prospectively needs will likely require the exercise of options or the sale of something. Either way, he will pay more and more federal taxes if Twitter requires more funds to fix its business model.

For Twitter’s selling shareholders, the gross sales price will be $44 billion in cash. Twitter shares are owned directly or indirectly by individuals and pension funds. Every taxable seller will pay short or long-term capital gains taxes. Most will also pay federal investment income taxes along with significant state taxes. The sales proceeds that would flow into the pension funds will ultimately be taxed at ordinary income tax rates as the retirees collect their pensions.

When Musk pays his $11 billion and the shareholders of Twitter pay their taxes on their stock sale, the federal government will have a windfall that should equal or exceed $16 billion or $17 billion. Putting that windfall into some perspective, the exercise of Musk’s options plus the taxes paid by the former Twitter shareholders would produce taxes almost equal to or more than the Treasury’s total 2020 estate and gift tax collections. The total combined state budgets of Alaska, Idaho, and Delaware only total about $21 billion. The resulting taxes caused by Musk’s transactions are almost beyond what most of us can easily comprehend.

In any reasonable political and social environment, Musk, the hero of Tesla and Space X, would be paraded up and down Fifth Avenue in New York City as a hero.

Enter Sen. Elizabeth Warren (D-Mass.). Warren is currently on the stump attacking Musk for purchasing Twitter. She claims Musk controlling Twitter is “dangerous for democracy.” She claims his Twitter purchase is a key reason to have a wealth tax in the United States.

“Dangerous for democracy.” Warren has been silent and apparently unconcerned about one family controlling the New York Times for decades and decades and decades. She was apparently equally unconcerned when Amazon founder Jeff Bezos purchased The Washington Post. Apparently, a high-tech message service is more dangerous to the country in the mind of Warren than the musings of the two largest newspapers in the country.

Warren’s argument doesn’t stand up as a starting point in a discussion of whether Musk should be able to purchase Twitter.

Unless one believed that the ownership of all media entities should be in the hands of the government, Warren’s concern about Musk’s ownership is little more than political hypocrisy.

Warren hasn’t the remotest idea what Twitter will look like in 10 years. But, she does know based on Musk’s public comments that Twitter will not be burying stories that favor or harm either political party.

And no one knows Musk’s long-term plans for Twitter. Warren appears to assume that he will do no more than hold and control Twitter. The “business play” could be so very different. If Musk can turn Twitter around with resulting successful financial results that many have believed were always possible, he could be planning to take Twitter public again in a very few years. He would have no problem finding public board members who believe in free speech.

And Warren is again promoting a wealth tax because of Musk’s current wealth and actions.

The combination of the taxes Musk paid individually from his exercise of options on his Tesla stock combined with the taxes that will be paid by the shareholders of Twitter approximate the $19 billion he has invested in Twitter.

Musk’s reinvestment of his funds in Twitter and the resulting business activity accompanied by taxes on success are the best possible result of our capitalistic system. Investment in jobs is the great elixir for society, not a taking of wealth from inactivity.

Musk should be the hero of the Green New Deal with his electric vehicles and the hero of the American public with his payment of $11 billion in taxes along with the taxes to be paid by the former Twitter shareholders.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.


Follow

Mr. Hank Adler is an associate professor at Chapman University. He was in public accounting for almost thirty-four years, the last twenty as a top partner at Deloitte & Touche.