Even if it is 60%, I think that's reasonable. In your case, why is the employee selling all of their stock in one year? If they sell over multiple years, they could get gains of up to $250,000 without paying any state tax, which is plenty.
I'd also be in favor of a state income tax, since the sales tax regime in Washington is very regressive.
They are this year, but the Biden proposal wants to raise tax for any income over $1m (LTCG included) to the top marginal rate of 39.6%. Add that to the proposals to increase SS to 12% for income over $400k, ~3% medicare tax, etc.
> why is the employee selling all of their stock in one year?
Because having all of your net worth in one company is a huge risk, and anyone wanting to mitigate risk would want to diversify as soon as possible.
* first 200k: 15%
* 200k-250k: 15% + 3.8% (ACA Medicare Tax)
* 250k-441k: 15% + 3.8% + 7% (New state Tax)
* 441k-1m: 20% + 3.8% + 7% (Federal capital gain tax increase to 20%)
* 1m-1.2m: 39.6% + 3.8% + 7% (New capital gain tax increase to 39.6%)
The tax rate wouldn't be 60% even at the highest marginal rate, which is 50.4%.
The average tax rate is about 30%.
The Biden tax proposal also is adding a 12.4% social security tax for all income over $400k, and it's not split by employer and employee like the first ~$150k is now.
> The average tax rate is about 30%.
What's the average rate if it were realized equally over the 6 years it was earned? Do you feel it's fair this example person pays quite a bit more in taxes versus a similar employee who chose to realize a similar income at a bigco like Facebook?
If a person makes $1.2m paycheck over 6 year evenly, they have $200k paycheck per year. They are subject to about 23% of federal income tax, and about 7% of social security and medicare taxes, so the average tax rate is about 30%.
Combined with the federal tax changes, this may increase LTCG rates for Washington residents to more than 60%. I can see folks wanting this for people that regularly make more than a million a year, but what about the situation more common amongst this community where you take below-market pay in exchange for a potential lump payout in one year.
For example, say a startup employee works somewhere for 6 years. They reach a moderately successful exit and realize $1.2m all at once.
Do you feel it's fair they lose more than half of at least some of that money to taxes, even though if they would have realized it equally over those 6 years they would have paid far less in taxes?