By borrowing against their holdings. The framing is deceptive. You can do this too: there is no requirement to have billions in collateral. If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth.
The gotcha is market risk. If there's another crash akin to the housing crisis - and there will be - the bank will liquidate your holdings and possibly leave you on the hook for more. The difference is that Elon may be diversified enough to survive, while less savvy margin-surfers might not.
I disagree the framing is deceptive. A big reason this is done is to avoid paying taxes altogether - borrow against your equity, and then when you die your heirs receive a step-up in basis, so the gains are never taxed. To make it worth while you need to have a crap ton of money, such that the interest on your loans is less than the estate taxes you'd pay. Only very, very rich people pay any estate taxes in the first place because a couple's estate tax exemption is currently over $27 million.
The issue is the step-up in basis, not borrowing against assets. The step-up in basis really is a giveaway. I think that it would make a ton of sense to transfer the basis rather than step it up.
Or the issue is the money printing that tends to be going on. This strategy should be too risky to work. They'd be losing interest on the money each month and they'd go bankrupt in the long term due to eventually borrowing money into a market downturn.
If interest rates are too low though then they wouldn't pay interest each month and the market will keep inflating - so the strategy will work.
Basically, this looks like a tax-effective strategy to stand in front of the money hose. If the money hose wasn't there it would be a tax-effective path to near certain ruin and much less attractive.
One of the best things when you are rich, you can buy when everyone wants to sell, and sell when everyone wants to buy.
At one level of money you are not impacted by a market downturn or crisis.
Many very rich people in Germany became very rich during or after WW2 - but they already were rich. Normal people just get poor in a crisis or market downturn.
A. Yes. Plus selling to the Wehrmacht ("war is a racket"), often with forced labour - or both, first stealing from Jews then selling to the Wehrmacht (like the current owners of BMW, ancestors sold to the Wehrmacht, profited from forced laber and additionally stole from Jews [1]). In communist East Germany Jews even couldn't get back their assets after the war, because Jews where "capitalists".
B. The vast majority of Germans profited from stealing from Jews (see book "Hitlers Volksstaat"), e.g. Germany was out of money before Kristallnacht and Jews had to pay 1 billion Reichsmark after the progroms, which helped the German state. Also jewish furniture etc. was auctioned off to all Germans - people too often only talk about arts and houses.
[1] The Quandts already were rich selling to the Prussian army, then during hyper-inflation of the economic crisis bought struggling companies, then "bought" companies from Jews who were forced to sell, then used forced labour in their companies, sold to the Wehrmacht, after WW2 got everything back and the debt they accumulated to buy all of that had evaporated because of the war. Today they own large chunks of BMW for example.
> One of the best things when you are rich, you can buy when everyone wants to sell, and sell when everyone wants to buy.
Generally untrue, since most rich people hold their assets in what's being sold. There are a handful value investors left, who bother holding cash equivalents when PE ratios get absurd, but they are few and far between. Tech billionaires, in particular, are very unlikely to be sitting on much cash.
If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k.
It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
In my country (Sweden) if you don't know the purchase price, you can use an approximate purchasing price (e.g. for equities you are allowed to assume that it was acquired for 20% of the current value, so you'd be taxed on 80%).
> If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k.
There’s nothing “obvious” about tax policy. It’s an arbitrary determination of what’s in and what’s out.
Taxing capital gains at all is not “obvious”.
Taxing transfers of assets to your children, whether it’s while you’re alive or after you die is not “obvious”.
> It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.
Getting rid of the stepped up basis doesn’t require that we realize the gain at death. Just transfer the basis to the heirs, and if/when they sell, then realize the gain.
Yes. As a Swede, I don't even think of individual ownership of assets.
I see a line of descent as the unit which holds property, rather than individuals from that line, and from that PoV inheritance tax of course makes no sense, but similarly, disinheriting somebody, and some other notions, don't make sense either, so it's a different perspective.
I think the Swedish state actually takes my perspective on this, because in Swedish inheritance law you can't disinherit somebody, and we don't have inheritance tax.
I think you've misunderstood what they're suggesting - they're considering the transfer from parent to child to not be a realization, so there's no taxes, and no change in basis.
The child who sells the house, then has to pay gains from when the house was first purchase, rather than against the value when they inherited it
> The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.
Well, "homestead" exemptions are usually already a thing in most countries' inheritance laws. There is no need to draw stocks into the mix.
> Taxing transfers of assets to your children, whether it’s while you’re alive or after you die is not “obvious”.
It actually is obvious, at least if you want to prevent a return of feudalist eras.
Most parents don’t want meritocracy. They want their children to have an advantage over the children of others. They just have not squared this instinct with political ideology.
This is a kind of odd framing. I have children and I don’t see it as zero sum, as in your description. I want my children to do well. I don’t want other children to do worse, necessarily. I don’t care about other people’s children because I don’t know them and I’m not raising them. I want my kids to do well because I have put huge amounts of labor and love into them. The great beauty of most western systems is that they don’t have to be zero sum and they empower individuals and families.
You have projected your bias onto my comment. I do not advocate for an estate tax and don't necessarily support it. And claiming that opposition to an estate tax is an opposition to the success of other people's children is also definitely not anything I believe or claim. Our economy is not zero sum. Everyone can win. Also, redistributive policies almost always fail and waste vast sums while failing.
> Most parents don’t want meritocracy. They want their children to have an advantage over the children of others.
Thing is, "meritocracy" doesn't exist on its own either. Even if a poor person's child is among the more intellectually gifted in school, it's hard to compete against the children of those who are blessed in money. And that extends to adult life as well: those born to academic parents are much more likely to go into higher education themselves and have an easier time there (both due to connections as well as the simple opportunity of having parents to ask how to best format a paper or to proofread one), those born to rich parents can simply afford to "try themselves out" - for someone with millions to burn, they can easily afford to seed-fund whatever scheme their kid comes up while most other potential founders depend on sheer luck meeting someone in a random elevator.
And the importance of children being "advantaged" ruthlessly is a recent trend too. Up until 30, 40 years ago, most kids worked in farms or the trades and they were happy with it. But ever since employers demanded higher education and everything else became decried as "something for immigrants" aka low economic lifetime perspective, that shifted... funny, cities would drown in garbage in a matter of weeks when there would be no garbage haulers, but they would continue to be livable if Wall Street went up in flames.
> The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.
So make an exception for a single home the inheritor personally lives in and tax everything else.
> It's utterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
Who do you think writes the laws and the tax code?
Yup, here in Japan inheritors have to pay 10-55% (progressive based on the amount) of the value of all inherited property globally within 10 months.
As an American, knowing that I could have gotten away without this tax had I decided not to live in Japan long-term, and knowing that I will have considerable inheritance when my parents pass is a bit of a downer; but logically speaking, the step-up basis loophole is BS and it probably ought to be this way, or some variant of it, everywhere.
If you exceed the inheritance tax exemption then you are taxed on the $10k so LTCG would be double taxing. You could argue that the inheritance tax should have a much lower exemption but double taxation is harder to justify.
Bullshit. "Double taxation" is such a weak argument to me.
When I buy gas at the pump it's taxed multiple times. State sales tax. City sales tax. Federal gas taxes. State gas taxes. Quadruple tax on me there.
My wage income has several taxes. FICA taxes. Payroll taxes. Federal income taxes. Potentially state income taxes. Potentially city income taxes.
When I pay for a hotel there's often a bevy of different taxes on that. When I pay my phone bill there's a bunch of different taxes on that. Even getting a drink at a bar there's a sales tax and a liquor tax.
And all of that is on money I've already paid all those several income taxes on, so it's really all just stacking there.
Oh but boo hoo ultra wealthy get their massive inheritance "double taxed". Get bent crying over your "double taxed", I'm quadruple taxed and more all the damn time. Weak argument.
But like, why? It's a worthless point. If there were five taxes of one percent each versus one tax of 20% how is the one tax somehow better? Which one would you choose, getting taxed five times or once?
It doesn't really matter that there's a FICA and an income tax and a payroll tax in the end, what really matters is the overall tax rate and if that's fair given some moral decision of fairness of sharing costs of society.
If a city chooses to levy sales taxes and hotel taxes to capture more revenue from visitors because their town is a tourist destination and want to collect from tourists more than locals that's fine. I won't weep a tear for those getting "double taxed" on their vacations.
Local and state taxes generally actually help you. Your local infrastructure is maintained, and your kids go to schools funded by your taxes.
Federal taxes, however, are largely transfer payments from the productive to the unproductive, as well as funding wars in areas that have absolutely nothing to do with you.
It's pretty easy to make the distinction between "good" and "bad" taxes.
>> If there were five taxes of one percent each versus one tax of 20% how is the one tax somehow better?
Would you rather pay five different tax authorities a 1% tax each or a single tax authority 20%? Not asking about the morality of those five tax authorities, in this example they're all the same.
The argument is against this idea "double taxation" is something inherently wrong. In the end it's not a matter of how many different taxes actually apply to a given transaction, what matters is the tax amounts and where those taxes are going to.
I'm generally helped by my federal taxes going to help feed students in poor areas. Both from a feel good standpoint and that those students have a better chance at becoming more productive, which means they can buy stuff from me.
I also benefit from those foreign wars because they keep the US empire of cheap shipping open, so I can buy stuff for cheap from countries who've specialized in manufacturing
Payroll tax is a problem because it’s not accounted for in your overall tax rate, it’s accounted for via lower wages. So you have no idea what your actual income would be if not for all the taxes your employer is paying.
> So you have no idea what your actual income would be
Payroll taxes aren't some secret things which are impossible for an employee to calculate on their own. You're right, it's not usually directly shown to an employee on their paystub, but it's pretty trivial to do the math and see what your employer paid (or was at least originally liable before any weird tax handouts, but typically rare) for your salary.
I do think payroll taxes should be required to include on paystubs if even just as an informational aspect to people. People should have a real understanding of how much labor is taxed compared to capital. People see "capital gains is 15%? Gosh that seems high..." without realizing how much of their W2 income was taxed. Most people I talk to can't even ballpark what their effective income tax rate was, I often hear "oh I had to pay like $800 in taxes this year, that sucked!" No, you paid a lot more than that, you just didn't pay attention.
You're right, its pretty common for the wealthy to try and trick poor people into feeling sorry for the wealthy actually paying taxes on things.
As my other post pointed out, tons of things have multiple layers of taxes. But the things people suddenly have some big moral issue with "double taxation" are things like estate taxes and corporate earnings and dividends and capital gains.
Few people bat an eye at us double taxing the low income nicotine addict. Everyone seems to want me to shed tears for the billionaire having to pay "double taxation" on their third vacation mansion they're inheriting.
Argue the rates are too low or too high for a given transaction. I can get behind that. But just crying because there's two different taxes being applied to a given transaction? Really?
> People get plenty mad about sales taxes double taxing taxed income, too.
Yeah, and it's a dumb position to take. Like what, we can only apply one tax from one source to a given dollar bill's serial number after it leaves the fed, and after that point that dollar can never be taxed again? Otherwise, gasp, double taxation!
The company shouldn't pay payroll taxes, they charged sales taxes to get that income to pay the salaries. I shouldn't pay any income taxes, the company paid payroll taxes on the money that had sales taxes on it. I shouldn't pay sales taxes, I paid income taxes on the money that had already had payroll taxes that had already had sales taxes that had...
Suddenly nobody pays any taxes anywhere because somewhere up the chain someone else already paid taxes on that dollar!
What you tax is not really relevant as long as it doesn't disrupt some activity you want to continue happening. If it was up to me I'd tax spending not income. Regardless of what you are spending on. Bread? Sure! Employee? Yes! 10% of Tesla? Same!
> If it was up to me I'd tax spending not income. Regardless of what you are spending on
Under this system the poor who spend the majority of their income just to survive pay the highest effective tax rate while the wealthier who save most of their income have the smallest effective tax rate. That sounds like a fair and equitable system to you?
You're just moving the point a little along the scale though. So now instead of the super poor paying a higher rate, now it's the slightly less poor. And the slightly less poor as you keep moving that transfer cutoff point. You're still going to have some point where the wealthier are paying a significantly lower rate than those who make a good bit less than them.
I absolutely agree on this point, and that curve adjustment would just continue into people we'd definitely agree are wealthy. But in the end those millionaires are paying a higher tax rate than those wealthier than them. Is that fair?
And yet the rich spend vastly more money than poor. You can see it trivially by noticing that the poor have all their money from the work that they do for the rich.
Taxing spending would be way more equitable than whatever we are now doing.
We are already doing some taxation of spending. VAT, sales tax, social security fees. All of those are paid by buyers of goods, services and labor. If we did the same for investments government would have so much more money to deal with the problems instead of borrowing it from commercial banks at interest.
> And yet the rich spend vastly more money than poor
You're just totally ignoring the effect of effective tax rates.
Sure, the billionaire spent way more money than the poor person. But who spent a higher percentage of their income? And who had vastly more opportunity to spend that in a place outside of that sales tax jurisdiction? Are the poor people flying to other countries to buy their luxury goods?
To you, is society fairer for poor person and the billionaire to pay the same nominal amount or the same tax rate? Is it even fair/good for the poor and the wealthy to pay the same for either of these values?
> But who spent a higher percentage of their income?
Everybody knows. That's because we tax income. And income, unlike spending is easier to muddle. You can always fabricate a loss or at least a temporary loss to avoid paying taxes on your income. It's harder to hide spending.
> And who had vastly more opportunity to spend that in a place outside of that sales tax jurisdiction?
It's just as easy today to move your profits to another country if you are rich.
If you tax spending, you can just tax money transfers to other countries as spending. Rich can fly wherever they like but they still had to pay taxes on the plane they bought, fuel they put in and all the money they spent on their trip.They could buy crypto, but guess what, on crypto purchase, also a spending tax. They can even move to live in another country till they die, but still their money transfered outside of their home country into their new one, taxed on exit.
You brought the money into the country because you are in the business of exports? Great, here's a tax credit. You may deduct it from the tax you pay on your excursions abroad.
The problem is not what is the moral thing to tax. The problem is how to do it efficiently with no loopholes without affecting desirable behaviors negatively and promoting undesirable ones.
Taxing spending would also help with vast empires that cosist of inherited money. Income was already done, century ago so there's nothing to tax. If you try to tax wealth, so many people would equate it to theft. But if you tax spending ...
> Taxing spending would also help with vast empires that cosist of inherited money
Or we just finally actually tax inherited wealth like other kinds of income instead of giving wealthy many many millions of handouts and tax subsidies.
> with no loopholes
We've both shared examples of lots of ways one can have loopholes on spending money. If the standard is to find a way of "no loopholes", well, spending money outside of the tax jurisdiction away from the knowledge of the tax jurisdiction is a loophole. One wealthier people will have a far easier time exploiting than the poor. Expecting the wealthy are going to report their sales taxes on goods purchased overseas is as hopeful as back in the day states hoping people would report their online purchases. We both agree there's countless ways to obscure your income, if they can obscure their income why is it now impossible for them to obscure their purchases?
> You brought the money into the country because you are in the business of exports? Great, here's a tax credit. You may deduct it from the tax you pay on your excursions abroad.
So those who make money on exports pay even lower tax rates than those working domestically, by design? And who in that "business of exports" actually gets that benefit? The shift worker in the factory making the widgets, the marketing director making the campaign for the widget overseas, the salesperson making the actual sale to the foreign distributor, or the owner of the corporation? Me thinks that benefit isn't going to the shift worker or the marketing person or the salesperson. Cool, even more handouts for the wealthy here. Great ideas. They'll get a tax break on their expensive foreign vacation while us plebs here pay full tax rates.
I'm not trying to make the argument that what we have today is good. There's so much wrong with it. But thinking that throwing it all away and just taxing spending is somehow itself a good and just way of doing it also doesn't make much sense to me. Having poorer people pay more effective tax rates than wealthier people doesn't strike me as fair.
> spending money outside of the tax jurisdiction away from the knowledge of the tax jurisdiction is a loophole.
Yeah, but how? How do you carry it or send it across the border? Cash? Gold? Good luck with that. You'd basically have to set up a smuggling operation for cash like people now do for drugs. With the risk of cash going missing and every step of the road. Becasue it's not hot and whoever steals it can use it as they please immediately.
> Expecting the wealthy are going to report their sales taxes on goods purchased overseas is as hopeful as back in the day states hoping people would report their online purchases.
I'm not expecting anyone to report that they bought something abroad. I expect their bank to to report they made a transfer abroad and deduct spending tax automatically.
> So those who make money on exports pay even lower tax rates than those working domestically, by design?
Yes, because exports are desirable for building wealth of a country. There's a single country on Earth that benefits from exporting not goods or services but dollars. That's because they are printing them for free and the world for one reason or another wants them. Any other country benefits from exports and it's an activity every government tries hard to promote to get purchasing power in the global economy for the stuff the country can't make themselves.
> And who in that "business of exports" actually gets that benefit?
That's the question. In case of VAT burden is transferred along the chain. In spending tax, tax credit could be similarily propagated. Everyone could have tax credit on their sales and tax to pay on their purchases. This already works for companies for purposes of VAT. All transactions between companies are tracked so purchases could be taxed and sellers can be taxcredited (the opposite of VAT). In case of individual people, they make many transactions that are not specifically linked to them (and we want to keep it that way for privacy). Their spending tax can be collected and paid by the companies that sell stuff directly to consumers. The tax credit for individuals could take a form of direct cash transfer from the governement budget to supplement their salary. There's of course incentive for this companies to not report their sales to customers and not pass the tax paid them by the consumers to the country budget. But that's the same thing as we have now that companies have incentive to hide sales income to not pay income tax on it so exisitng solutions to combat that should perform no worse than they do now (mystery customers, recipt lottery, comparing income+financing with spending).
Tax credit wouldn't be 100% of sales (because companies on average earn more than spend so they would never pay tax while operating normally) and transfers to individuals could be shaped freely. They could be associated with their salaries or not or a mixture of two. This way governement could very effectively promote specific economic activities with tax credits to companies and keep the poorest out of poverty with direct money transfers but also promote job seeking and career advancement by paying some addtional money to workers, less as their salary level approaches societally desired "middle class".
I don't have all the kinks ironed out. It's just an idea that I had about a month ago. I haven't written my own tax code. Yet. ;-)
> They'll get a tax break on their expensive foreign vacation while us plebs here pay full tax rates.
Well, if somebody operates a successful company, especially an exporter they should be rewarded. But the reward should be transparent and controlled and not up to their weaseling, tax dodging tax and fabricalting fictional losses. As you know they are already getting the handouts. If the system is tight and clean we can decide how much of a reward they actually deserve through a political process. I am aware that our political system is terrible for that, but it's terrible for what we have now too so that's beside the point.
The point of my idea is mostly to introduce transparency and control and vastly simplify and integrate the myriad of tax systems we use in parallel in one country. Income taxes, VAT, duty, social security, health premiums, captial gains tax, fuel tax, excise. All of that could be replaced with one framework of taxes on spending. This would also be good for migrating to economy that's not reliant on infinite growth because doing more with less would be promoted by the tax structure. You are taxed on what you use, you are 100% taxed on what you waste or consume.
> Having poorer people pay more effective tax rates than wealthier people doesn't strike me as fair.
That's not at all what I'm advocating for. Poor people mostly don't matter from tax perspective. If tax credit for them is set up in a way that they pay effectively very little or zero tax or even get money for nothing it wouldn't matter for the govermenet budget and there would be strong, popular opposition to lowering their tax credit as that would be direct hard cash on their accounts recieved every month. In modern system it's vastly easier to give tax cuts for the rich than for the poor and nearly impossible to give anything to the totally destitute.
> I expect their bank to to report they made a transfer abroad and deduct spending tax automatically
So we're not taxing spending, we're taxing bank transfers as well. Maybe they just put it in a savings account overseas. Maybe they're paying off a loan for money sitting elsewhere. Who says it was a sale? Prove they bought something.
>> Having poorer people pay more effective tax rates than wealthier people doesn't strike me as fair.
> That's not at all what I'm advocating for.
But that is what you're advocating for, by pushing it to just an extremely complicated sales tax and complicated system of fractically more complicated credits for exports and subsidies for the poor to hopefully reduce their tax burdern and what not. Inherently the wealthy will spend a smaller percentage of their income. The wealthiest practically can't spend it as fast as they get it even flying private jets around the world, but tons of middle-class people seem to barely have anything in savings. You just keep ignoring it and offering half measures to address it.
> So we're not taxing spending, we're taxing bank transfers as well
No. We are taxing spending. Transfering money abroad counts as speding. Transfering within the country doesn't.
> Maybe they just put it in a savings account overseas.
Doesn't matter. Once it leaves the system it's treated as spending.
> Maybe they're paying off a loan for money sitting elsewhere.
Paying off a loan is spending. Both abroad (as everything else abroad) and within the country too.
> Prove they bought something.
No need. Spending is something defined not something natural that needs proving. What I'm proposing is defining spending as reduction in amount of owned currency due to either transfer abroad or due to any agreements between companies or companies and customers.
> But that is what you're advocating for, by pushing it to just an extremely complicated sales tax and complicated system of fractically more complicated credits for exports
If you think that's complicated don't ever read on current taxes, fees and procedures.
My idea is comparably simple. General rule is that spending gets taxed. Tax credits are awarded to promote certain activities (like exporting or living). Nothing else. No need for income tax, corporate tax, VAT, sales tax, social security fees, health premiums, import tariffs, excise taxes and so on.
> Inherently the wealthy will spend a smaller percentage of their income.
At this point I don't think you can imagine it being any other way. I think you are fixating that we all have same stomachs and since poor people earn less feeding ones stomach will always be a larger percentage of money that available for them to spend (so higher percentage of tax).
But the rich don't spend money on what they eat alone. They spend it on cars, yahts, luxury, and what's way more impactful real estate, companies, assets, investments in general, even lobbying ... things that they must do because those are the things that bring them money ... those are the things purchasing which made rich rich in the first place and make them keep getting richer ... all of those would be taxed. I don't think you can say the same for any other proposed or real system for taxing the rich that relies on accounting for income or wealth.
Musk buying Twitter would be taxed on this purchase.
If giving the poor tax credits so that they have negative tax doesn't solve the conundrum for you I don't think anything ever will.
Talk about "double taxation" and wealthy being able to avoid taxes. I need a loan to buy a car. Taxes at the purchase, taxes as I pay back the loan. I take out a mortgage. Taxes on the sale, taxes on the mortgage payment. Meanwhile someone able to drop several hundred thousand in cash pay taxes once.
Paying back a loan is spending but taking a loan is income and taken as individual might award you tax credit.
But yes, if you use a service, you pay for tax. Even a service of renting some capital.
Again, as a poor person you can get tax credits on your income or just because you are alive that offsets that if the government thinks poor people buying things with loans is societally beneficial or not. Today government does this by raising or lowering the rates which affect so many other things in the economy.
Fine grained control is better.
And what's wrong with double taxation? If you earn money today, you pay income tax, and use it to buy fuel then you also pay VAT and excuse tax. That's triple tax on the same money. Spend your money in societally undesired ways and you are getting it taxed multiple times even today. But just with a myriad opaque systems that don't play nice with each other and are full of loopholes.
Moreover, unless you are nearly dead, it doesn’t make sense to optimize for far off estate tax avoidance since (a) you will be dead anyway, (b) tax laws change all the time, and (c) it would have to be discounted appropriately so it may not even be a win.
Personally I think we shouldn’t have capital gains taxes at all so this avoidance method doesn’t bother me.
>>Moreover, unless you are nearly dead, it doesn’t make sense to optimize for far off estate tax avoidance since
It's the other way around. This strategy allows you to not pay any taxes during your lifetime, so you have more money to play with and enjoy. Your inheritors might not have to pay tax on this money, but that's not your concern because like you said - you're dead at this point.
At some stage in wealth, perhaps, and not avoid but postpone. More important probably are cases where actually selling the shares means giving up control over a business, or having to settle things with the rest of the family whose "destiny" it is to hold these shares in common.
There is confusion between capital gains tax and estate tax (and estate planning devices like trust law). And that matters.
Is the problem capital gains tax as some people claim or is it elsewhere?
In the process described, capital gains tax is not even postponed (and that write up does not provide for Peter's major expenses during life). That write up works (when it does) because of bypassing estate tax.
The need for realizing capital gains is eliminated through trust, estate planning and other estate tax law (seems to me). The whole of the procedure is in that side of the equation. Not in capital gains tax law.
So the question: Does this all call for a change in capital gains tax law or changes in estate planning (trusts) and estate tax law?
When you use margin loan or pledged assets lines of credit, you are postponing. Which you can potentially kick all the way into estate tax (which your estate may pay if it's large enough). That write up is different still and describes working around even that estate tax. And then the question does matter of which law you are asking to change. (Besides the traditional method of making a law, any random law, thereby solving all problems for eternity - or at least gaining some voter satisfaction.)
The article goes into great detail and gives several example of several CEOs borrowing for actual decades, so it passes the sniff test because it does actually happen.
The article gives examples of CEOs borrowing against their shares. The article provides no examples of CEOs rolling those loans over until their death.
> Only very, very rich people pay any estate taxes in the first place because a couple's estate tax exemption is currently over $27 million.
That's federal estate tax. State tax can be different. Massachusetts, for example, has estate taxes on over $2M ($4M for a couple who manages their estate plan wisely).
State estate tax is just a tax on people who are ignorant of it, unwilling to plan for it or who's relationship with their heir(s) is too dysfunctional to dodge it. The rich almost always avoid it. The poor are never subject to it.
It's like greasing a couple rungs in the middle of the economic ladder IMO. I'm not a fan.
At the time the estate tax is being considered isn't that usually down to a single surviving individual? I imagine it's uncommon for a couple to die at once to qualify for the 27m exemption.
You don’t have to die at the same time. If you leave everything to your surviving spouse, it’s also possible to transfer the benefit of your remaining estate tax exclusion.
Yes but that is because taxes are incoherent and abhorrent
Why do we tax realized capital gains at all and why based on the ruler of fiat which is controlled by those who tax (they keep making the ruler shorter)
If the goal is to creat drag on multiplicative dynamics then do so coherently
Tax should make sense at least in core targets. Yet there are no core targets.
This explanation never made sense to me. Say someone gives you a $1M loan. Holy cow, it's not taxed, what a loophole!
But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income? So you still end up paying taxes on $1M either way? How in the world does this bypass taxes?
Edit: To people bringing back the "buy, borrow, die" story:
(a) Yes, I saw that a couple months ago too. It was very hand-wavy in some crucial places. And there were quite a few people pointing out flaws with the reasoning. [1] [2]
(b) If dying is part of the the strategy then why is it omitted so often? (My whole point with the comment here is that the aforementioned explanation is inadequate.)
(c) If having enough money to pay off your collateral-secured debts until your death is a requirement for this to work then why do so many people claim "you can do it too"? Who has that kind of money sitting around? The "Buy, Borrow, Die" post explicitly said you can't get that kind of loan until you have $300M in assets.
At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. So the capital gains tax on your assets are $0 as their cost basis is the same as the price so the appreciate is $0. If _you_ sold the stocks before your death then likely there would be a large gap between the cost-basis (price you bought the stock) and the current price resulting in a large capital gains tax.
So, when your estate sells the stocks to pay back the loan they pay the applicable taxes on the $0 and then uses the remaining proceeds to pay back the loan.
It’s called the stepped up basis and yes, only applies to your estate.
A married couple who bought a house in Palo Alto for $250k that’s now worth $5.25M and who bought $250k of Apple stock that’s now worth $20.25M would have a Federal tax bill of ~$5 million if they sold those assets and gave the cash to their kids. If however they were hit by a bus on the way to their accountants office, and the kids inherited the assets and sold them the next day, they would owe zero tax.
There’s a popular myth that estate taxes are a second tax on income but many assets for the very wealthy are never taxed..
This is because for a long time, the USA does not tax assets other than real estate.
Our tax system is structured around the fundamental idea of taxation occuring on transactions, whether that's income in exchange for labor, income resulting from the sale on (non-real-property) assets etc.
I'm not sure if this is a good thing (it might be, it might not) but it's the way it is.
The reverse approach has issues as well, primarily for assets that aren't easily divisible.
The obvious example is family farms, or indeed the family house. Capital taxing the asset on death means a (potentially large) tax bill happens in many cases this can't be paid without selling the asset.
If the sale was to another family looking for a farm, then that could be argued is neutral. But it won't be. It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms.
This doesn't just apply to property. The family silver collection, the family business, the list goes on.
Inheritance tax is tricky. Just passing money down entrenches an aristocratic class. Taxing it though destroys value in all kinds of areas.
It is under a system where ownership transfers are treated as taxable events. The recipient needs to pay the taxes, but cannot afford to without liquidating the inherited asset.
I think you just need to propose a set of related rules changes. Replace the inheritance basis step-up with a similarly scoped rule that says this inheritance does not count as a taxable ownership transfer, so taxes are not due at that point.
You may also need new rules for estimating the basis when records are lost across multiple inheritance events?
The current system is a bit like a tax foregiveness jubilee, but dribbled out to individual families rather than synchronized across the whole economy. It resets things so that regular people can function in this system, without requiring all the family accounting and records keeping of some aristocratic dynasty.
Forcing people to "Sell the family Farm" has been used by estate-tax detractors for so long that there are multiple special programs in place to ensure it never happens (interest-free loans, etc). Given that the current limits are over $13M per person or $26M/couple where zero tax is owed, I don't think this "woe is us" routine resonates any more.
idk, maybe because their parents liked them? Do you really want to incentivize against people working hard to make sure their offspring, has a good life? Also a family-home might have sentimental value, and this really doesn't only apply to rich people, quite the contrary actually.
> Do you really want to incentivize against people working hard...
You mean by taxing labour and taxing commerce?
Sorry for the snark, but come on...
The Roman empire was built on never taxing labour, because that was seen as an atrocity (never mind the slavery). Instead they taxed luxury goods and debased their currency. The United States was built on never taxing labour, because that was seen as an atrocity (never mind the slavery). Instead they taxed importations and debased their currency.
Since all land was created by God and everything else was created by people's labour, the really unjust thing is to tax labour instead of taxing land. But "territory" is an instinct so deeply ingrained that it's probably been with us for millions of years. However, which other mammals allow members of the same species living on their territory which are not family? As in renting.
> The Roman empire was built on never taxing labour, because that was seen as an atrocity (never mind the slavery). Instead they taxed luxury goods and debased their currency. The United States was built on never taxing labour, because that was seen as an atrocity (never mind the slavery). Instead they taxed importations and debased their currency.
Interesting, even though I don't see if you are for or against taxing labour, commerce or inheritance.
Inheritance tax is a way for the establishment to take land from small landowners. The state isn't a good counterbalance to "greedy" corporations, the state is there to support big business.
> It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms.
Please see Bruce511's comment above, he explains it better than me.
The thing is that with an inheritance tax, you make it impossible for someone to live with little or no money, and caring for their off-spring, by giving them a place to stay.
> Since all land was created by God...
Aha, but in the commandments it says that you shouldn't steal, so having property doesn't seem to be forbidden?
> But "territory" is an instinct so deeply ingrained that it's probably been with us for millions of years
So, is caring for your off-spring, kindness and brotherhood. What is your point?
It's mostly practical, I think. Not all assets can be valued, or are liquid. Once a transaction occurs though you have both a price to tax on and the money to pay the tax.
It’s awfully convenient that this ambiguity in asset prices leads to a massive an unprecedented tax break to the richest people in the country — many of whom are literal experts in valuation.
Since 1921 [1]. When the estate tax was in force, it was meant to avoid double taxation. In 1976, the Congress replaced the step-up basis with a carryover basis (you don't pay taxes on death but neither do you step up the basis). In 1980, it repealed the carryover basis "due to the record-keeping problems associated with reconstructing what a long-deceased relative might have paid for properties that had been held for generations," but didn't re-instate the step-up basis. In 2010, the estate tax was repealed. (EDIT: It was reinstated in 2011 in a neutered form [3].)
The Wikipedia article does a poor job of explaining that it is not "step up basis", it is "basis adjustment to fair market value", which may be up or down. They do have a paragraph further down about "stepped down basis", but it still doesn't make the point clear.
> the current price resulting in a large capital gains tax.
There's nothing special about the capital gains tax rate on such a sale. It's likely to be the long term one, and compared to income tax and taxes in most other parts of the world, it's low.
> But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income?
No, you just borrow against yet more stock. You need never sell any, much less pay yourself any significant income, provided you have enough stock. Since you don't sell the stock, you need not pay capital gains taxes. Since you have no real taxable income, you need not pay much in income taxes either.
Let's say you're worth $100bn. You don't need to spend $1bn a year, just even a few tens of $ millions will be plenty, so you're borrowing a minute portion of your net worth. And your stocks will be going up in value, typically, so... you'll never run out of money. Plus you'll be a great customer for the banks that lend you money, so you'll get preferential interest rates. You'll never run out of money. You'll die and still have the lion's share of your wealth, only now it will pass to your heirs and charitable foundations.
> You'll die and still have the lion's share of your wealth
and i don't see anything wrong with that at all.
It seems, recently at least, that a lot of people believe they're somehow entitled to the wealth that these high networth individuals have managed to accumulate.
Let's say every year your portfolio goes up 10%. Every year you borrow 3%. You never pay down the principal, and I think you can just let the interest payment get added to the principal. Also, the interest is tax-deductible.
The "loophole" that people often complain about is specific to the "buy, borrow, die" tax exemption opportunity. And it's mostly about the VERY wealthy who can really use this until they die.
(1.1) Different parts of America have additional taxes on estate - eg. MA is $2M not $13M, - about 10% of the state has $1M today.
(1.2) Estate tax rate and capital gains rates are different.
(1.3) You can take a tax-deduction on the interest of the loan - if you use it to buy investments. Which is something the ultra-wealthy can easily do.
(1.4) Different assets (eg. Real Estate) have vastly different loans compared to Margin/Portfolio lines of credit
(2) Because the people in question are alive. If you complain about a billionaire not paying taxes because they live off loans, presumably you want that to change. No one complains that Vanderbilt isn't taxed anymore.
(3.1) You definitely don't need 300M to do it, but if you're actually part of the bottom 95%, you'd probably need to liquidate some funds to make it to death, so you can only do this with a small amount of money or you risk margin calls.
(3.2) The "big portfolio" benefit is termed loans instead of margin - banks are way more likely to give you a huge chunk of cash for a fixed time/life if you have a lot more assets.
There is another difference that is related to risk.
Larger loans allow access to lower risk opportunities.
If I had many millions in stocks, and I was greedy for more, I would borrow against it to develop residential real estate in a high rent neighborhood. Yes, there's some risk, but it's as close as you can get to buying a money fountain. I'd be very confident that the rents from the building would pay back the money I borrowed and then some.
Even if I borrow against all my holdings, I can't afford to make that kind of investment. The only options I have are much higher risk. And as you said, I won't survive a failure. Therefore, while the bank would let me do it, I would be very foolish to try.
I've owned property to rent in the past. I feel it's worth pointing out to folks keen on this route that, while profitable, it's a Lot of work.
Owning stocks is zero effort. You might glance at your results from time to time. Your fund manager does the heavy lifting (and gets a small % fee for it.)
Owning a property is a pretty constant stream of work. Organizing maintainence. Dealing with complaints. Occasionally evicting non-payers. Finding new tenants. Filtering applicants to filter out the non-payers.
It's so much work you'll likely offload this onto someone rise to do. The cost is not insignificant. (Neither is maintainence.)
The returns may be good, but its not "passive income".
I agree with most of your comments. However, most tax authorities in highly advanced countries view income earned from rental property as passive income, regardless of how much work you need to do. This might be some minor deductions if you act as a real estate agent, but that is a lot of work in most jurisdictions, as real estate agency is normally a highly regulated area of work.
Indeed. Passive income is taxed at a much lower rate than working income in the U.K, and that includes property rents (after paying expenses like a managing agent) and dividends
> Passive income is taxed at a much lower rate than working income in the U.K, and that includes property rents (after paying expenses like a managing agent)
Is that right? I thought that income from property rents (after paying expenses like a managing income) had income tax levied like any other income.
But honest day’s work income has an additional payroll tax which totals about 20% marginal for the majority of people (plot about 60/40 between employer and employee).
For many reasons, including tax and liability, any serious property owner will have a company structure to own the building, collect rent, pay bills etc. Doing it in your personal capacity is pretty insane.
So yeah, you have all the paperwork to run the business as well.
I had a friend that bought a second house as a rental.
One day he described what happened when his renter left. They had money troubles, so they quit paying bills (including the rent). When they were evicted, he found that they had been throwing their garbage down the stairs into the basement so they didn't have to pay the trash service. The stench was unbearable, and the mess horrendous.
Everything that I read about real estate investing says you should aim for middle class housing, as the return-on-investment from rental cashflow is (normally) higher that more expensive housing. To be clear: My statement is only looking at rental cashflow, not capital appreciation. To me, there are both important, but separate concerns.
Keep in mind that the bench mark rate is almost always something akin to bills so is a very short time horizon. That may be great or not so great compared to what rate you might get on say a 5/10/15 yr collaterlized loan.
Nice link. Thank you to share. This notice bothers me a bit:
> IBKR will assess a surcharge of 1% on large loan balances unless otherwise prearranged with IBKR. The 1% surcharge would apply to all balances in the highest tier.
I wonder what exactly "prearranged with IBKR" means. Call them up... "I need to borrow 50M USD, and pledge my Meta stock." Them: "Hang on. <muzak> Yeah, sure."
My guess, if the loan is large enough, the want to coordinate with their internal stock-borrow lending (SBL) desk to ensure proper liquidity.
<<(Not A) Shill Warning>> I am continuously blown away by the institutional-like level of services (and prices) available to plebs like me. IB is really built to grow with you: From the first 10K USD saved as a 25 year old, to a 50 year old with millions in liquid assets. I still cannot believe they don't have any minimum balance for individual account. Ref: https://www.interactivebrokers.com/en/accounts/required-mini... To be clear for other readers, that cost cannot be zero on their end. I don't know how it works, other than crazy levels of automation.
For many things, IB is great. Certainly if you are a futures trader it is very good, same for most equity/option trading. But for bond trading, expect a complete nightmare at tax time. Their "tax department" has no clue how to properly and consistently amortize bond premiums and quite honestly (personal experience) does not give a rats.
Does this mean you are buying bonds with a price greater than 100%? If yes, can you explain why? On the institutional side, there is an allergy to premium bonds; they only want to buy at par (100%) or less, so normally the coupon rate is adjusted just before issuance to meet their needs.
I think it's probably more about hedge funds etc where they will negotiate bespoke terms/pricing across the board (including assessing risk which at that level might partly be based on track record, identity of the underlying investors, strategy etc).
Once the amounts get lumpy there needs to be complete assessment of counterparty risk (you). IB can't assume that you are only borrowing from them and that the collateral in your account won't first be liened by another party, etc.
Yes, it helps to have a relationship with a private bank. But as pointed out, some brokerages will let you do it too if you are too poor to be allowed to enter through the door of a private bank.
BUT
The main thing that is skirted around in the article is that it still needs to go through the financial institution's credit committee.
So, for example, you cannot just rock-up with a million in Tesla shares and expect a loan against them, or at least not at a sensible LTV ratio.
The financial institution will want a boring portfolio with government bonds and low-risk corporate shares.
Any bank that would be willing to lend against a high-risk portfolio is probably not the sort of bank you want to do business with anyway.
This is not true: "very low rate." My brokerage starts at 12+% which I would not call low. It never even reaches prime at millions of borrowing, and I do not have remotely enough to get much better a rate.
To be fair, there are very accessible options like margin loan or pledged assets which you can also keep going indefinitely - possibly all the way into estate tax which - as a "little guy" - you wouldn't owe. They are higher interest rates (to the point of not being all that interesting - depending on what you want to do.) And they don't have the same features.
But if you are high assets and low income, they might still allow you to buy a house with a loan - if it's what you want.
1) buy a painting for X
2) have it evaluated, sometimes the price is higher than X
3) put it in storage or a tax loophole between countries
4) use said painting as collateral for low interest loans
Now you have money to invest, as long as you make more than the low interest loan, you're making profit.
Art is like Schrödinger's cat, its value is only determined when it changes owner.
If someone pays 1M€ for a piece of art, it is "valued at $1M" and you can use it for collateral for a loan at some percentage of its valuation.
Will it actually be 1M€ if it needs to be liquidated? Nobody knows. It can be worthless or it can be worth 10M€ - it all depends on what the next person is willing to pay for it. But until that point it's "worth" 1M€.
---
This is why there are so many empty (commercial) properties, they were valued at a specific €/m2 price and were used to take loans based on that value.
Until they're rented/leased again, that is their worth and value. Could the owner get someone in the property by lowering the price? Definitely.
Would that also cause a rolling cascade of loans not having enough collateral to back them up? Yup.
but then you do not get the tax benefits discussed above.
The market for "investment art" I huge and everyone involved
has an upside by art appreciating in value.
> The artist may get more money (since the artist only gets paid in the
initial transaction the artist may only get a fraction of the value
as it increases. The artist may find that later work will become more
valuable as other investors want more of his art.
>The gallery gets more money, and it may attract more art investors
> and the auction house gets more money if it ends up there.
How much art is worth is difficult to estimate on its own.
I mean a white canvas painted uniformly white is worh a lot
of money if a famous artist does it.
It is worth entirely nothing if I do it.
I expect then that the market decides the value.
All investors want art to get more valuable and are in on it.
As an art lover, this is such a tragic scheme.
Unknown amount of art that will never been seen by the public.
Locked up inside a storage facility in a big box
Often the investor has no interest in the art at all, just an
investment made by some form of a broker.
there was a loophole that allowed wealthy people to donate to museums works of arts in exchange of a write off on the value of the artwork. to limit abuses they patched it so that you can writeoff only the purchase price not the market value. I heard a workaround is having living artist create a artwork directly for you and getting it appraised to a crazy amount for writeoffs.
Yes. In a margin loan, the "things of value" never leave the institution handing out the loan. The borrower buys stock, for example. And the institution giving out the loan has the right to sell whatever you bought to prevent losses on the loan, without your permission if certain conditions are triggered.
In a loan backed by collateral, all the money can leave into some external account controlled by the borrower. To get some or all of it back requires an expensive and lengthy process that doesn't guarantee success.
Sounds like the GP is saying that there are additional protections with the equity loan. Such as portfolio liquidation prevention if you move assets to another bank.
Your brokerage will likely lend you money but you will be disappointed by the rate. It is not "very low". Not even "low". At least not where we are now in the interest rates cycle.
For very large stakes, the terms tend to be much more bespoke though - an automatic sale of collateral amounting to a large % stake is probably not in either borrower or lender's interest.
If I have 1 million in some stock can I go get a 1 million loan from the bank with this as collateral? If so can I reinvest this million in the same stock again and then goto the bank again etc?
Your broker isn't letting you withdraw margin lending. You cant use it for consumptive purchases.
But its true, you can find a real lender for your stocks. You dont have to be rich.
Its not controversial, you have to pay it back. There are other quirks the rich have:
Already post-tax assets to pay something off
They are in control of the stock, they can issue more new shares for themselves or cause the corporation to do a stock buyback to pump their holdings more if market conditions are favorable.
Borrow more against the increased value or just sell something and pay the taxes that year.
Purchases of primary issuances are taxed differently than secondary market purchases.
But who cares when you can be a neocolonialist for a year in Puerto Rico too, 0% capital gain for new positions and prorated against old ones
> broker isn't letting you withdraw margin lending. You cant use it for consumptive purchases.
There is no rule prohibiting the withdrawal of margin cash. Or, for that matter, short selling and withdrawing that cash. As long as you're Reg T compliant, the Feds don't care. (If you're a family office, even better--you might get to be treated as an institution.)
Yes, margin can be dangerous at times and is not that cheap. About 6% over fed rates, or 11-13% right now. Over $500k you'll probably get a better deal.
What taxman22 says makes me wish I kept my holdings in my Schwab account. (I guess there is nothing stopping me from doing an asset transfer.)
But I agree with you about margin borrowing's interest rate not being that amazing, although it is of course cheaper than most credit cards. Vanguard is, as you said, 11-13%. <https://investor.vanguard.com/client-benefits/margin?msockid...> By contrast, my Amex line of credit charges 6%, and I am preapproved for an Amex personal loan for 8.98%. I presume others on HN can get comparable or better.
In any case, my Amex line of credit charges 6%, and I am preapproved for an Amex personal loan for 8.98%. I presume others on HN can get comparable or better.
> Is Schwab known for being unusually low with its rate for this product?
The Schwab rate sounds high. Fidelity, for instance, charges SOFR + 190 to 310bps [1]. I haven't had an SBLOC for a few years, but I remember Stifel charging no more than 200 bps over Libor.
> If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth.
This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it."
Unrealized gains should never be taxed. However, as soon as you try to use it as realized in ANY way you should be taxed immediately.
That does not track for me. If someone has $20k in Schwab and chooses to use their credit card instead of selling stock and paying cash, I don't think they should have to pay taxes on that or suffer a criminal penalty. Same for taking on a car loan or a mortgage.
If that's what was happening you'd be right but it isn't. Credit cards have high rates and low limits for a reason: they are unsecured credit. Loans with collateral are secured by the collateral, and it makes some sense that should be considered a realized gain for that collateral (or loss for that matter).
My bank will give me a 6 figure line of credit at prime+0.5% because they see all the assets I have (savings, cash, investments, mortgage). The line of credit is indirectly secured against all of the assets my bank can see.
Should I be taxed when I use the line of credit my bank extends to me?
What OP is missing is the role of collateral. It becomes more important the more perilous the borrower is or might be.
Apple borrows for 20 years unsecured at 31 bps above the U.S. [1][2]. That wouldn't contract much if they offered collateral, because the difference in relative risk is modest to the point of immateriality. Similarly, someone with a century of living expenses in marketable securities really only needs to be restricted from blowing their stockpile--other risks are absorbed by that wealth.
TL; DR The rich don't need collateral as much as the middle class and poor. Penalise the use of collateralised loans like that, and you just make collaterised lending go away or become much more expensive.
> Elon could just go fetch $44bn from a bank to buy Twitter without anything to back it?
Collateral "becomes more important the more perilous the borrower is or might be." It's immaterial to "someone with a century of living expenses."
Elon Musk could probably have borrowed even $100mm unsecured on terms damn close if not identical to that which he could get on a secured loan, ceteris paribus. But Elon is uniquely leveraged. That makes him a more perilous borrower. And $44bn isn't lifestyle borrowing, either.
Nevertheless, he could still probably get a hundred million lent unsecured on terms quite close to his secured rates--there are groups who would do that for relationship building alone.
Why should it be illegal? It’s not a realised gain. It has to be paid off … with money which has to come from somewhere (and be taxed as income or realised gains or whatever).
What reason do you have for wanting it to be illegal, other than not liking it?
How is it not realized? When I can use it as "realized" to borrow against it? When it comes to paying taxes I go "sorry Uncle Sam, this is fictitious, I don't really have this" but then I head over to the bank and go "look at my brokerage accounts, I have ALL THIS MONEY, lemme borrow against this now all-of-sudden realized money..."
You are paying property tax on that money you are using for that HELOC.
If I bought a house at $300k, I owe $250k and house is now worth $750k the County will be slapping me with $10k/year property taxes whereas before I was paying like $3k. My gains are realized each year via property tax assessments :)
> My gains are realized each year via property tax assessments :)
You are confusing two very different things. You'll realize the gains (and have to pay taxes on) your house value increase only when you sell it. The fact that you were paying property taxes on it all along while owning it has nothing to do with that.
The fact is though if you live in America are paying property taxes on your home, you are NOT hiding from the IRS the fact that you do - you are not saying "sorry, I don't really own this home and I won't be paying anything to you until such later time when my ownership will be revealed at the grand sale at which point I'll pay some taxes"
With "unrealized" stock gains you are doing just that - hiding ownership so you don't have to pay taxes while enjoying the perks of the ownership when it suits you
> if you live in America are paying property taxes on your home
I own in Wyoming. My property's assessed value is like 1/10th the market rate. My neighbour--just checked!--who owns a property like ten times my size, across two plots, and far more lavish than my own has an assessed value similar to mine. The real estate records even have a line item for "actual value" separate from assessed value.
Not familiar with the specifics, but I know California and New York similarly have assessed values that are entirely unmoored from what the property is actually worth.
This is most states, because the increases are capped for existing property owners especially for first homes - the homestead exemption. If you own a house you live in for a long time in a hot market your assessed value can be very low relative to market.
You do not pay property taxes to the IRS, or report the value of your property to them unless you sell it. Federal property tax is unconstitutional. It took an amendment for the feds to be able to do income tax, which has been broadly interpreted to include things like capital gains and income taxes.
Because of the definition of what realized income is. Borrowing is not income.
You mention below that you own a Washingtonian condo and a Virginian home. Let’s imagine that they are both $100,000 and that you have no other money or debts. Your net worth is thus $200,000.
You go to your bank and say ‘I would like to borrow against the value of my assets please,’ and they say, ‘certainly, here is $90,000.’ Your bank account now goes up $90,000, your condo is still worth $100,000 and your home is still worth $100,000. Your net worth is still $200,000 (not $290,000) because you also now have $90,000 of debt. You did not realise any income, even though your bank account is now full of money, because your debt account is now negative.
‘But I am paying property taxes!’ you might say. Sure, property taxes are a form of wealth tax, and there is no similar tax on stocks — but that is irrelevant to this discussion (although it could be relevant in a different one).
To illustrate why, let’s use another example. You still have the Washingtonian condo and the Virginian home, and they are both still worth $100,000 apiece. This time, you only borrow $45,000 against the value of the condo. That money moves from a bank on Washington to your bank account in Virginia. Do you owe Virginia income tax on that money? No, because it’s not income. But Virginia is not getting paid any property taxes for the property backing that loan! Irrelevant, again because a loan is not income.
Likewise, you can imagine owning another property in some state or country without property taxes at all. You borrow against it, is that loan income? Nope.
Now, let’s imagine the counterfactual, where loans count as income. You go to buy your $100,000 condo, put down $20,000, borrow $80,000, spend all $100,000 on the condo — and now you would owe income taxes on that $80,000. Gosh, that doesn’t seem fair. You had $20,000, spent it all borrowed the rest, and now you own a condo, owe property taxes and owe income taxes on $80,000, even though you have no money.
Does any of this help you understand? Owning an asset is not fictitious, it’s just not income. An income tax is levied on income, so an asset is not relevant to an income tax (relevant to an asset tax, of course!).
Well, taxing borrowing as income is not what is being discussed here though.
It would be workable to make borrowing against an asset at a certain value equivalent to crystallizing any gain on that asset, pro-rated on the amount borrowed: you own a 2M house, that you paid 1M. You borrow 500k against it, it would be as if you sold 1/4th of it and you would pay CGT immediately on the 1/4th of (2M-1M); the basis would be adjusted so that when eventually you sell the house you pay CGT only on the yet-unrealized gain.
> as soon as you try to use it as realized in ANY way you should be taxed immediately
You're trying to define a rule based on intent. That's doable. We do it all the time. But it tends to get messy, fast. How do you differentiate investment leverage from realizing gains through borrowing? If you track distributions, does a commensurate reduction in contributions count? What if the borrowing is done against the portfolio at large, or unsecured?
It is not messy at all if you use KISS. You do not differentiate ever - ANY usage of unrealized gains makes them realized. Very simple to implement but of course won't ever happen :)
> ANY usage of unrealized gains makes them realized
What does "usage" mean? If you write a covered call, did you "use" the asset? If your broker lends your shares out, are they being used? What about presenting your brokerage statement as proof of assets to a mortgage banker? What about--I've done this--showing your brokerage statements to American Express to get a better rate?
I'm still only talking about publicly-traded common stock, mind you.
> simple to implement but of course won't ever happen
Possible, but stupid. You'd raise taxes on the middle class who can't afford advice (or personal attention from lenders) while doing little to those who can dance in the ambiguity offered by what seems simple from a distance but is devilishly complex up close. Because at the end of the day, what you're trying to differentiate is intent. And intent is easy to hide and expensive to uncover.
The core problem in this scheme isn't so much the deferred taxes as much as the eliminated ones: capping the step-up basis to e.g. $10mm, the EPA's statistical value of a human life, would do the trick. Unlike ascertaining "usage," whether or not someone has died is generally simple to determine.
I think this is the core issue for me in these discussion - it is not complex at all. If you sell your securities - you pay a tax - that part is simple. Until they it is "unrealized" - right?
> If you write a covered call, did you "use" the asset?
Yes
> If your broker lends your shares out, are they being used?
Yes
> What about presenting your brokerage statement as proof of assets to a mortgage banker?
Of course not
> What about--I've done this--showing your brokerage statements to American Express to get a better rate?
Of course not
> You'd raise taxes on the middle class who can't afford advice
This is always funny to me, middle class :) For sure it would not affect the middle class and there.is not need to "afford advice" when there is nothing complex about this that needs an advice of anyone.
> Because at the end of the day, what you're trying to differentiate is intent
Not at all, it is not "intent" at all - it is just very, very simple... You can own stock and keep it there - no problems. You want to use it for ANYTHING, you pay taxes on it.
> What about--I've done this--showing your brokerage statements to American Express to get a better rate? Of course not
You say "there is nothing complex about this" after conceding this loophole the size of a planet.
For starters: loan with a covenant that governs further borrowing and requires you to instruct the lender if your marketable assets fall below a certain value. Not technically secured. But not relevant if you're lending tens of millions to a billionaire--plenty of firms will provide this. Next up: loan to heirs. Next up: unsecured loans at preferential rates if you store your securities with the lender. (This is already a thing.)
> want to use it for ANYTHING, you pay taxes on it
Swapping "use" for "usage" doesn't address the fundamental issue.
First, you are making lots of great points in your posts. Thanks for your comments.
You wrote:
> Not technically secured.
This raises a very interesting question. When institutional clients use a "repo" trading desk to pledge liquid assets for cash (or vice versa), from a legal perspective, it is not treated as a secured loan. (Yes, it is bizarre. Truly, looks like a duck, walks like a duck, quacks like a duck... but not a duck!)
For these private bank-style loans backed by liquid equity stocks, are they considered secured or unsecured? Honestly, I don't know.
> from a legal perspective, it is not treated as a secured loan
Repos are collateralized and thus secured [1]. Legally, they don’t need to be because if the borrower defaults they just don’t buy back the asset; the seller has no further obligation to sell it to them and carries on their merry way.
Repos do however, require special exemptions to avoid being traded as purchases and sales by the IRS, so this is unlikely a valid workaround to a continuous step-up basis czar.
I see where you are going with this but you are changing parameters here.
> For starters: loan with a covenant that governs further borrowing and requires you to instruct the lender if your marketable assets fall below a certain value.
You did not say anything like this, you said "What about presenting your brokerage statement as proof of assets to a mortgage banker?" - this is like me showing my bank account balance during speed dating to flex a bit :) Your example would be 1000000% taxed as you are obviously using it as realized gain.
> Next up: loan to heirs.
If you are using real money, loan all you want. If you are using "money" you are telling Uncle Sam you do not have then you pay tax before you borrow that.
> Next up: unsecured loans at preferential rates if you store your securities with the lender. (This is already a thing.)
This is up to the lender... If they want to use my skin color or my gender or my zipcode (all of which they do) they can also use other stuff as well
I get that I am oversimplifying this but surely a system can be put into place that prevents current madness :)
> Your example would be 1000000% taxed as you are obviously using it as realized gain
How? There is nothing different from the Amex example.
In both cases I'm showing assets held elsewhere as proof that I'm rich. In neither case am I pledging anything. In both cases the letter of the contract requires me to notify the lender of material changes in my financial condition, and in both cases I get a favourable rate--sometimes equal to the pledged asset rate.
> is up to the lender
Yes, and they'd rationally replace secured loans to anyone with unsecured loans to the very rich which automatically accelerate on the borrower's death and carry on as usual. In the end, the behaviour stays the same: the rich let their stock appreciate while they borrow, personally, to fund spending, all the way until they die when the bases step up, they cover the loans and then the heirs get to do the same thing.
> you are saying to Uncle Sam that you are not rich
No I'm not. I'm reporting all of those assets as held. They've gained in value, and if and when I sell them I'll pay tax on those gains. In the meantime, they're just sitting there. Appreciating unrealized. And making me look rich to potential lenders.
> exactly what needs to be stopped except of course it won't be cause you know
No, I don't.
I see an analogy with the corporate death penalty. It's an appealing but ultimately stupid concept. Yet it serves a rhetorical purpose: it distracts us from debating massive, debilitating fines. Divide and conqueer. Similarly, we eliminated the step-up basis partly in 1976 and completely in 1980, and then repealed the estate tax in 2010. Those--restoring either the estate tax or, at the very least, the carryover basis in some form--are the real policy wins.
> ANY usage of unrealized gains makes them realized
I don't feel like you're thinking this through.
Can you define (precisely enough to write into the tax code) what is "usage"?
For example, let's say I go to get a second loan for a vacation home. The Uniform Residential Loan Application asks me to list all significant assets. Such as my first house.
Am I "using" the value of my primary home? The second loan is not a lien against the first home, I'm not borrowing anything against it. They are unrelated. But the lender will probably consider my equity there as additional net worth which can be a factor in approving that second loan.
So if you take out a small business loan and use any type of collateral you now have to pay taxes on it?
Significantly increasing the cost of borrowing for most non large companies is certainly a great idea.. it obviously won’t lead to less competition and more concentration.
> It is not messy at all
If you ignore the consequences and implications (or can’t grasp them at all) then sure..
No offense, but I don't believe you understand the nuance of the thing you're talking about.
It is very easy to say 'any attempt by a murderer to flee the state, and he should be thrown back into the jail' for someone with limited education about western law and order.
This is exactly what the billionaires have been able to convince the masses :) It would be "very hard, impossible" to implement a system in which you cannot for the purposes of paying taxes claim you do not have some sht while turning around and heading over to the bank to get a boatload of money borrowing against that same sht - need a genius to figure that out...
No, the fact that your proposal isn’t thought through at all and is entirely impractical doesn’t mean that solving this problem is "very hard, impossible". That seems entirely unrelated..
The key difference here is whether your investment remains at risk. As long as the value of your investment is at risk, then the investment is considered unrealized.
Once you cash in your chips (sell) then the investment becomes realized.
Someone getting a loan against their stock portfolio is still at risk of loss of value of their holdings, therefore the investment gains remain unrealized.
>This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it."
Do you think the same should apply to HELOC loans? It's basically the same thing but with your home rather than stocks.
Yes why not, in the general case. With an exception when the loan funds are being reinvested in the property itself. But in the general case where home equity from appreciation is being turned into cash that's then used for other purposes, that looks an awful lot like realizing a gain to me.
In fact this might even be advantageous to certain homeowners who live in a property as their primary residence and then convert it to wholly rental use. Before you move out, take a loan to easily realize of 250k/500k gains which you can then deduct before it's no longer your primary residence.
Your home gains are being taxed already via ever-rising assessments on property taxes. So you are not hiding that and pretending that it is unrealized. You additionally do not pay real estate gains taxes on first 250k as well as...
>Your home gains are being taxed already via ever-rising assessments on property taxes.
it's a separate tax that's on the value, not the gains. Moreover, if we're allowed to bring in other taxes as offsetting factors, do capital gains on companies get a pass because corporations pay corporate taxes as well?
If you don't want to be banned, you're welcome to email hn@ycombinator.com and give us reason to believe that you'll follow the rules in the future. They're here: https://news.ycombinator.com/newsguidelines.html.
> Millions of Americans sit on appreciated home asset. Should they be taxed?
You live in China and you do not pay property taxes on your home? If you live in America baby, you are not allowed to own anything - especially not homes. For that "right" you have to pay these things called property taxes and you have to pay them all the time...
Once we get some same thing going for securities maybe we can do some comparisons like that - until then ... :) you are too funny mate, I needed this laugh
One could argue stocks be handled differently than homes. Or, to better capture the spirit of the proposal, one would progressively tax unrealized gains used for collateral.
Duh. They need never pay income nor capital gains taxes, as long as their stock valuations keep going up, or as long as they retain enough stock, either way they can always borrow against more stock to service the loans that they took out against their stock, never ever selling any stock nor taking anything more than nominal income.
Please stop counting taxes of super-rich in absolute terms. It simply doesn't matter. We need percentage-based taxes to get the real picture. Because those numbers seems a rounding error given their wealth.
I think it does matter. Let's assume Musk paid $12B. How much have you paid? Isn't it then actually reasonable to say that he contributed more than you to the country, even if his tax percentage is lower than yours?
What do you gain by talking about absolute numbers? They are meaningless. By this logic, Musk could pay only $1 million in tax and still would've "contributed more to the country" than most individuals.
If you talk about taxes percentage-wise, you make clear that the super-rich do not pay their fair share, that they will get richer faster than everybody else and, the most important fact, that long-term stability might suffer, because the bigger the divide between rich and poor, the more civil unrest follows.
> If you talk about taxes percentage-wise, you make clear that the super-rich do not pay their fair share
Well, this is partisan / ideological stuff at this point. I'm only pointing out that the super rich can get away with paying very little in income and capital gains taxes. What's a fair share for the super-rich really depends a great deal on how they got rich (with corporate welfare?) and how much value they have added to the country and the world. And what the tax code should do about it is yet another story. I'm not even remotely advocating for some unrealized capital gains tax or, really, anything of the sort. If anything I think what's unfair and unwise here is that dividends get taxed as income twice (once at the corporation, once where received), which incentivizes reinvesting so as to grow a company's valuation [so as to grow its owners' net worth]. We might have more rich-but-much-less-rich people if we didn't double-tax dividends, and that would [probably] ameliorate the balance of power in the country.
What is "fair share"? What in life is always "fair"? Why are tax rates lower in the lower income brackets, instead of a flat rate - that doesn't seem fair.
Lots of citizens pay zero in income taxes (because their income is low), are they also not paying a "fair share?"
Fairness here usually refers to the inequality left over after tax, not the tax amount itself. When the US is the 127th most unequal country out of 168 measured (by the Gini Coefficient), along with still having abject poverty around, it's not overly ideological to say more distribution needs to happen.
This is the kind of extreme internet Libertarianism that's dangerous in the real world. Not practical or concerned with extreme poverty through inequality, but preferring to fight on first principles, like all tax being theft (not your claim, but equatable).
I'm less concerned about the definition of fairness and more concerned about real human suffering.
Then your priorities are misdirected. The US Govt grabbing a few extra percent of billionaires' income would not reduce human suffering in any way.
If anything, the ultra-rich have been far more effective than governments at improving impoverished human lives by setting up charities and using them to directly send money to poor regions around the world, enabling clean water and food and basic health services.
That’s not even important, though. They pay the same taxes everyone else does when they sell their assets. Selling large amounts of shares comes with its own problems as well, and often it’s not a rational thing to do.
I'd have to look at the specifics, but unless they did things like sell stock to buy social media companies, they shouldn't have to pay a dime in taxes if they only borrow to cover their normal expenditures.
For once the date of the article is rather relevant. But even then the simpler mechanisms are useful to be aware of if financial planning is a concern for you. And the most complex mechanisms completely irrelevant to the common mortal.
The fact that we can tax houses, the main form of wealth for most people, proves that wealth taxes (levied on other forms of wealth) would be just fine.
What alternatives are there to owning a home or renting one from someone who owns it?
All you can do is economize on how much home you use, and where it is (where fewer people want to be), which we have seen happen over the past 2-3 decades. So I think we are feeling the pressure of this wealth tax, along with inflation, global competition, and other factors in the real estate market.
This is a pretty complicated matter. In principle, a government could do this. There would then be an invisible tax in the form of high inflation.
High inflation causes practical and psychological problems and undermines the appearance of stability of a currency. For one thing, it would be terrible to save any money. So fungible assets like stocks or foreign currency would see a disproportionate demand. You'd be buying and selling stocks just to buy some groceries or a car. Any event like COVID that creates more demand on savings would send the stock market crashing.
Another aspect is that the government would lose the ability to manipulate tax policy. Charity would have no special status, strategic industry would have to be directly subsidized, etc. Government would lose an important lever.
There also would be little reason to accept payment in this government's currency. Why accept the government's rapidly inflating currency when you have no taxes to pay in that currency and would prefer to transact in a stable currency? Why accept a government contract denominated in their own inflationary currency?
With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it and you are paying HEFTY property taxes on your current home worth each and every year. Very poor analogy...
> and you are paying HEFTY property taxes on your current home worth each and every year
Is there any jurisdiction where the assessed value of a home is anywhere close to its market value? (You're still correct. But OP's observation, that this is the stock equivalent of a reverse mortgage, is moreso.)
Pretty close in British Columbia. When you adjust for month to month shifts in the market (aka everyone's homes have appreciated X% since the last annual property tax assessment) the vast majority of sales occur within 5% of the adjusted assessed value. (And many of the ones which aren't within that range are wildly different because e.g. the property assessment was on an empty lot and the property is now being sold with a house on it.)
I have a rental condo in DC and a house in Northern VA, both are assessed within 10% of what the current market value, DC condo slightly over-assessed, house in Northern VA slightly under-assessed
> do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now)
Absent a few exceptions, at least in the US you very much do have to pay capitol gains on the increase in value of your house when you sell it. And those exceptions typically amount to a deferral of the tax rather than a "tax free" gain.
The one sure way to not pay capital gains on one's house is to hold it until you die, and then your heirs get the 'step-up' basis and they don't have to pay tax on your gains, but will have to pay tax on the gain they accrue while they hold it.
Yea, you do if you make over 250k in profit but you can roll that over with 1031. Still cannot see how home equity can be compared to borrowing against securities - there are a TON of taxes that we pay for owning a home and none for owning a security...
> Still cannot see how home equity can be compared to borrowing against securities
Home equity: borrow money with the home used as collateral - if you default on the loan the bank takes your house to make themselves whole again.
Borrow against securities: borrow money with the securities used as collateral - if you default on the loan the bank takes your securities to make themselves whole again.
The fact that the house also comes with an attached "ownership tax" that the securities do not include does not change the fact that it is the exact same type of "borrowing".
I would agree with this statement 100% if I was also hiding from the government the fact that I own a home when they came to collect property taxes. Since I am not this argument does not hold water.
>With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it
There's ways around that through 1031 exchange but yea, only first 250k come home free. my argument still stands though that comparing HELOC to borrowing against stock is a poor analogy
Only if the properties are both used for "trade, business or investment" (https://en.wikipedia.org/wiki/Internal_Revenue_Code_section_...). Since your primary residence is not classified as "investment" by the IRS, you can't use a 1031 exchange to defer gains on your primary residence.
And a 1031 is a deferral (see cite above), not a "tax free" swap. If you eventually sell without going through yet another 1031 exchange, all the deferred gains become taxable at that point.
> you can't use a 1031 exchange to defer gains on your primary residence
who says it would be my primary residence when I am about to sell... you never sell your primary residence unless it is an emergency, you move first and make it an investment property and then sell and roll over ...
> If you eventually sell without going through yet another 1031 exchange
You don't of course ever do that. And all this should be in a trust of course...
"In addition, a special punitive rule applies to convert gain otherwise taxable as capital gain to ordinary income. If the property sold or exchanged (a liquidation is treated as a sale) between related parties is depreciable by the buyer (regardless of whether the property was depreciable by the seller), § 1239 requires any gain recognized on the sale or exchange to be treated as ordinary income."
I borrow against my measly investment portfolio through my local banks "Loan against Securities" account. Interest rate is about 10%.
My father was using this feature for past 15 or so years from same bank. We are solidly middle class in India.
The only difference between what we do and what rich folk get is probably lower interest rates and higher percentage of loans against the securities value.
How is this used by the middle class in India? To fund day to day living expenses? to buy or build a house? for further investment? Do people tend to repay the debt now and then, or make it flow into their estate? how does succession / estate law treat that? Is this seen as prudent management? etc...
I know these ways of thinking are very different between the US and western Europe (where for example a home mortgage is very cheap, and considered normal and indispensable investing, and stock investing can be crazy conservative - all the way to considered reckless, and estate law and tax is downright brutal). I wonder about India.
Just about right for a different country than the US. Mortgage rates in India 8.3-9.5% right now, inflation 5-6%, benchmark rate 6.5% - and this may or may not be tax deductible in India, perhaps depending on the usage. And 25-44% yoy stock market gains. It's about the same as a 15-year fixed rate mortgage - same as in the US.
There was a story from days of the first dotcom boom when Larry Ellison got a call from his banker complaining that he was overdrawn on his personal account by a billion dollars.
Which in my opinion is a transaction freely entered into by both parties, and is a taxable event. You have gained income from your capital at this point.
Wealth taxes do not need to have someone guess a value of someone’s wealth. The wealthy can tell the government what they think it is at each point.
> The wealthy can tell the government what they think it is at each point.
This will need to be audited by the government, at least occasionally. With all the issues that come from estimating the value of a domain names and other unusual assets someone holds.
I think restricting the tax deductibility of charitable donations is a better way to start. These transactions are already usually included in tax filings.
Sorry I mean “tell” as in make a freely entered into contract
It’s next to impossible to gauge a person wealth at any point in time so any generic “wealth tax” is a non starter, but that does not mean we should not make efforts to ensure that wealth is taxed at equal amounts as income. I find it hard to see why Warren Buffet should pay 10% on his increase in wealth for one year while his maid pays 40%
If Jeff Bezos borrows 500 million against some shares he is saying that the shares are worth 500m and that he has now realised some of the gains from those shares.
It’s pretty easy to avoid complicating the mortgage market by putting a floor on the amount governments will tax (ie borrow 5 million or less in a fiscal year we don’t care)
> You have gained income from your capital at this point.
No, one has moved money from a debt account into a cash account. For every dollar the cash account increases, the debt account decreases. Income, on the other hand, is final and not paid back.
Imagine that I am born with $100,000 in stock:
Assets
Stocks
XYZ 100 shares @ $1,000/share = $100,000
Bank account $0
Liabilities $0
Income $0
Expenses $0
Equity -$100,000
My net worth is $100,000.
If I borrow $50,000 against my stock, here are my accounts:
I borrowed $50,000 and worked for $50,000, and so my bank account went up $100,000, but my net worth didn’t go up $100,000 — because I owe $50,000, too.
(Probably a bit late to the conversation but whatever)
> You have gained income from your capital at this point.
Let’s say Jeff Bezos wants to buy a yacht. He has 1 million amazon shares worth
1 cent when he started and now worth 100 dollars. So he can sell the shares to get 100 million dollars and buy the yacht. But he has to pay 10% capital gains.
Or he can borrow 100 million from any bank and they will accept the shares as collateral. He does not pay capital gains at this point
My take on this is that is a freely entered into contract at which Bezos values his shares at 100 million. And he gains use of the wealth of 100Million (debt balance is not relevant here)
Think of it as like the Duke of SomethingShire. He can rent out his land to farmers etc and get an income. That’s fine.
But if he then borrows a 100 million against the land of the shire, and buys a yacht with it, then he has gained from a chnage of the capital - I just don’t see this as a private shielded from tax decision.
I think there is a further issue in that Amazonnshares do not generate much income (not much in way of dividends). This leads to the general problem of tech shares in that it’s always a greater fool valuation. But warren buffet talks much better about dangers of valuing shares without income streams than I do.
> Or he can borrow 100 million from any bank and they will accept the shares as collateral. He does not pay capital gains at this point
Nope, but when he does sell those shares, he will (except for the step-up in basis rule on death).
And he has to make payments on the loan, which has to come either from income (which is taxed), sales of capital (which is taxed) or other loans (which will then be paid off with money which will ultimately be taxed in some way). Remember that the loan is a liability.
The only issue here is the step-up in basis. Everyone gets distracted by the big loan, but ignores the actual step where taxes can be avoided. If we eliminate the step-up in basis then there is no non-taxable issue.
If I understand “step up in basis” this is where Jeff Bezos never sells his shares, dies and leaves his shares to his son for example. The (US) tax law then “steps up” the value of shares - so instead of saying the shares were orignally worth 1 cent each and now with 100 dollars each, they are treated as being worth 100 dollars when the son gets them and so he has to pay no capital gains. I think I over simplify.
And you suggest eliminating that is a good idea.
I agree - but suggest we don’t have to wait till Jeff dies - there are other taxable “liquidity events” that are freely entered into and do not rely on third party valuations, and that achieve the goal of (the Modern Monetary Theory goal) of taxing and so eliminating money.
And yes the loan is a liability - but under current tax law (which is some version of buy, borrow, die) the wealth remains untaxed or under-taxed, kind of defeating the point of governments printing the money.
In short we want wealth to circulate not congregate.
Ok firstly how do you do the pre/ styling - been here years not worked that one out.
Not answering you at first, I suggest you chnage this to be 1000x-
>>> Imagine that I am born with $100,000,000 in stock
That’s more the level “wealth tax” campaigns are about.
Because wealth belongs eventually to all human society. Getting off this rock and surviving for another thousand years as a species is something 100% of humanity does or 0%
And wealth concentrated in the hands of a few, is wealth that is not put to optimal use. Not educating the pooorest of the planet, not stopping disease and providing nutrition to the growing.
This is not about borrowing and lending money. This is how do we circulate the actual wealth, the doctors and nurses and engineers and road sweepers, the excess energy and the excess knowledge of 8 billion apes.
Musk is right we need to get off the planet, but is wrong if that’s something just a few of us can do. Whitey went to the moon, but he did not stay. Fix down here, else we won’t make it up there.
You don't even need to be that rich. Schwab, for example, has a SBLOC (their "Pledged Asset Line") that requires enough assets to pledge for a loan value of $100k. Certainly out of reach for a lot of people, but way lower than Musk-level borrowing. And I expect there are other brokerages with lower minimums.
Of course, the interest rates are pegged to SOFR plus a spread, so they're not great right now, though a little better since the Fed lowered rates. IIRC Interactive Brokers offers lower rates.
I’ve been trying to model using a SBLOC in a FIRE simulator to cover the gap between retirement below 65 and when 401k/social security kicks in versus selling and paying capital gains, and it looks like you come out ahead of selling stock like 90% of the time, but 10% of the time it’s much riskier and you go broke.
How is this different in principle from software developers using the RSUs in their brokerage accounts to get a loan for a vacation home or a boat? BTW the step-up in basis applies for when regular people die.
If you’re talking about someone with enough RSUs to collateralize a home loan, you’re almost certainly talking about someone in the top 1% of wealth in the US
I was able to get away with only 10% down payment on my home loan precisely because of the holdings in my brokerage account. The rest is on 3.25% / year loan for 30 years. Very similar to the mechanism described in the article. And thus my question.
Wealthy people of course do all sorts of financial optimization. The framing of this as being primarily a way to avoid CGT is imho just uninformed populist rhetoric. The main reason this is done is for leverage e.g. Elon wants to buy Twitter but he does not want to reduce his stake in Tesla (ignoring whether he could actually liquidate that much TSLA stock in the first place).
I'd disagree as due to the incredibly low amount of tax paid by the ultra wealthy it looks like CGT avoidance and Buy Borrow Die is a primary use case for borrowing against assets.
You still have to pay interest. At 5% interest rates compounded after 4 years it’s cheaper to just pay CGT.
The wealthy pay the vast majority of taxes. You might not think it’s enough, but let’s be realistic here. The biggest government expenditures don’t scale with someone’s wealth. So wealthy people aren’t consuming more government services yet they pay a much larger absolute sum.
Anyone can borrow against their own assets: house, car, stocks, cash holdings, 401k, even their expected earnings (e.g., college loans). They can even borrow against nothing as far as they're trusted (e.g., credit cards).
None of this is special to any class or income level.
I'd figure if you're a billionaire, with multi-millions in collateral, the rate is probably significantly lower, but they still need to pay down the interest.
Well, if you are worth billions and only spending millions, then you can borrow for a very, very long time before the interest payments get hard to pay. If you do end up in that position, you can always borrow more to pay the interest(the US govt does this).
It's nothing magic here, you even get to deduct the interest you end up paying on your taxes usually.
The rates probably not that much lower, the lenders still have to make money and they really don't like to get stuck holding the bag. They have risk departments who (hopefully) carefully analyze how much borrowing they are doing and making sure they are the ones holding all the cards if it ever comes crashing down.
By borrowing against their holdings. The framing is deceptive. You can do this too: there is no requirement to have billions in collateral. If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth.
The gotcha is market risk. If there's another crash akin to the housing crisis - and there will be - the bank will liquidate your holdings and possibly leave you on the hook for more. The difference is that Elon may be diversified enough to survive, while less savvy margin-surfers might not.
I disagree the framing is deceptive. A big reason this is done is to avoid paying taxes altogether - borrow against your equity, and then when you die your heirs receive a step-up in basis, so the gains are never taxed. To make it worth while you need to have a crap ton of money, such that the interest on your loans is less than the estate taxes you'd pay. Only very, very rich people pay any estate taxes in the first place because a couple's estate tax exemption is currently over $27 million.
The issue is the step-up in basis, not borrowing against assets. The step-up in basis really is a giveaway. I think that it would make a ton of sense to transfer the basis rather than step it up.
Or the issue is the money printing that tends to be going on. This strategy should be too risky to work. They'd be losing interest on the money each month and they'd go bankrupt in the long term due to eventually borrowing money into a market downturn.
If interest rates are too low though then they wouldn't pay interest each month and the market will keep inflating - so the strategy will work.
Basically, this looks like a tax-effective strategy to stand in front of the money hose. If the money hose wasn't there it would be a tax-effective path to near certain ruin and much less attractive.
One of the best things when you are rich, you can buy when everyone wants to sell, and sell when everyone wants to buy.
At one level of money you are not impacted by a market downturn or crisis.
Many very rich people in Germany became very rich during or after WW2 - but they already were rich. Normal people just get poor in a crisis or market downturn.
And many very rich people in Germany got very very rich in ww2 by stealing Jewish assets and businesses.
You don't need to be rich to do that, just wise enough to keep savings and live below your means.
No you need to be really long term liquid and thats what poor people really don't have ( liquid assets to throw at buying stock)
Most people are between poor and rich, he said not rich not that the poor could do it.
You can't buy cheap houses when everyone wants to sell and there are loans. But if you are rich, you buy when everyone sells.
Piketty's point in a nutshell, wasn't it? Only he talked about it in terms of insurance.
> One of the best things when you are rich, you can buy when everyone wants to sell, and sell when everyone wants to buy.
Generally untrue, since most rich people hold their assets in what's being sold. There are a handful value investors left, who bother holding cash equivalents when PE ratios get absurd, but they are few and far between. Tech billionaires, in particular, are very unlikely to be sitting on much cash.
"Generally untrue"
I know several people who bought vast amount of real estate during the financial crisis.
You don't need to "sit on cash" to buy things.
transfer the basis to whom? better not inherit anything
If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k.
It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
In my country (Sweden) if you don't know the purchase price, you can use an approximate purchasing price (e.g. for equities you are allowed to assume that it was acquired for 20% of the current value, so you'd be taxed on 80%).
> If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k.
There’s nothing “obvious” about tax policy. It’s an arbitrary determination of what’s in and what’s out.
Taxing capital gains at all is not “obvious”.
Taxing transfers of assets to your children, whether it’s while you’re alive or after you die is not “obvious”.
> It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.
Getting rid of the stepped up basis doesn’t require that we realize the gain at death. Just transfer the basis to the heirs, and if/when they sell, then realize the gain.
Yes. As a Swede, I don't even think of individual ownership of assets.
I see a line of descent as the unit which holds property, rather than individuals from that line, and from that PoV inheritance tax of course makes no sense, but similarly, disinheriting somebody, and some other notions, don't make sense either, so it's a different perspective.
I think the Swedish state actually takes my perspective on this, because in Swedish inheritance law you can't disinherit somebody, and we don't have inheritance tax.
I think you've misunderstood what they're suggesting - they're considering the transfer from parent to child to not be a realization, so there's no taxes, and no change in basis.
The child who sells the house, then has to pay gains from when the house was first purchase, rather than against the value when they inherited it
> The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.
Well, "homestead" exemptions are usually already a thing in most countries' inheritance laws. There is no need to draw stocks into the mix.
> Taxing transfers of assets to your children, whether it’s while you’re alive or after you die is not “obvious”.
It actually is obvious, at least if you want to prevent a return of feudalist eras.
Most parents don’t want meritocracy. They want their children to have an advantage over the children of others. They just have not squared this instinct with political ideology.
This is a kind of odd framing. I have children and I don’t see it as zero sum, as in your description. I want my children to do well. I don’t want other children to do worse, necessarily. I don’t care about other people’s children because I don’t know them and I’m not raising them. I want my kids to do well because I have put huge amounts of labor and love into them. The great beauty of most western systems is that they don’t have to be zero sum and they empower individuals and families.
Certainly some parents are proponents of the estate tax. I did not say that all parents are opposed to it.
You have projected your bias onto my comment. I do not advocate for an estate tax and don't necessarily support it. And claiming that opposition to an estate tax is an opposition to the success of other people's children is also definitely not anything I believe or claim. Our economy is not zero sum. Everyone can win. Also, redistributive policies almost always fail and waste vast sums while failing.
I did not argue in favor of redistributive policies. If I am arguing anything, it is against people lying to themselves about their ideology.
> Most parents don’t want meritocracy. They want their children to have an advantage over the children of others.
Thing is, "meritocracy" doesn't exist on its own either. Even if a poor person's child is among the more intellectually gifted in school, it's hard to compete against the children of those who are blessed in money. And that extends to adult life as well: those born to academic parents are much more likely to go into higher education themselves and have an easier time there (both due to connections as well as the simple opportunity of having parents to ask how to best format a paper or to proofread one), those born to rich parents can simply afford to "try themselves out" - for someone with millions to burn, they can easily afford to seed-fund whatever scheme their kid comes up while most other potential founders depend on sheer luck meeting someone in a random elevator.
And the importance of children being "advantaged" ruthlessly is a recent trend too. Up until 30, 40 years ago, most kids worked in farms or the trades and they were happy with it. But ever since employers demanded higher education and everything else became decried as "something for immigrants" aka low economic lifetime perspective, that shifted... funny, cities would drown in garbage in a matter of weeks when there would be no garbage haulers, but they would continue to be livable if Wall Street went up in flames.
> The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.
So make an exception for a single home the inheritor personally lives in and tax everything else.
We have this in Canada, but it also means the richer you are, the bigger the subsidy you get.
Also means people over-invest in their homes and remain in homes that are larger than necessary for themselves instead of downsizing.
And renters get squat.
Is it obvious that we should have roads, running water, someone that builds up the basics of society?
> It's utterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
Who do you think writes the laws and the tax code?
Yup, here in Japan inheritors have to pay 10-55% (progressive based on the amount) of the value of all inherited property globally within 10 months.
As an American, knowing that I could have gotten away without this tax had I decided not to live in Japan long-term, and knowing that I will have considerable inheritance when my parents pass is a bit of a downer; but logically speaking, the step-up basis loophole is BS and it probably ought to be this way, or some variant of it, everywhere.
If you exceed the inheritance tax exemption then you are taxed on the $10k so LTCG would be double taxing. You could argue that the inheritance tax should have a much lower exemption but double taxation is harder to justify.
> double taxation is harder to justify
Bullshit. "Double taxation" is such a weak argument to me.
When I buy gas at the pump it's taxed multiple times. State sales tax. City sales tax. Federal gas taxes. State gas taxes. Quadruple tax on me there.
My wage income has several taxes. FICA taxes. Payroll taxes. Federal income taxes. Potentially state income taxes. Potentially city income taxes.
When I pay for a hotel there's often a bevy of different taxes on that. When I pay my phone bill there's a bunch of different taxes on that. Even getting a drink at a bar there's a sales tax and a liquor tax.
And all of that is on money I've already paid all those several income taxes on, so it's really all just stacking there.
Oh but boo hoo ultra wealthy get their massive inheritance "double taxed". Get bent crying over your "double taxed", I'm quadruple taxed and more all the damn time. Weak argument.
> Quadruple tax on me there.
We have a problem with that, too.
But like, why? It's a worthless point. If there were five taxes of one percent each versus one tax of 20% how is the one tax somehow better? Which one would you choose, getting taxed five times or once?
It doesn't really matter that there's a FICA and an income tax and a payroll tax in the end, what really matters is the overall tax rate and if that's fair given some moral decision of fairness of sharing costs of society.
If a city chooses to levy sales taxes and hotel taxes to capture more revenue from visitors because their town is a tourist destination and want to collect from tourists more than locals that's fine. I won't weep a tear for those getting "double taxed" on their vacations.
> how is the one tax somehow better?
Local and state taxes generally actually help you. Your local infrastructure is maintained, and your kids go to schools funded by your taxes.
Federal taxes, however, are largely transfer payments from the productive to the unproductive, as well as funding wars in areas that have absolutely nothing to do with you.
It's pretty easy to make the distinction between "good" and "bad" taxes.
Completely ignoring the actual question.
>> If there were five taxes of one percent each versus one tax of 20% how is the one tax somehow better?
Would you rather pay five different tax authorities a 1% tax each or a single tax authority 20%? Not asking about the morality of those five tax authorities, in this example they're all the same.
The argument is against this idea "double taxation" is something inherently wrong. In the end it's not a matter of how many different taxes actually apply to a given transaction, what matters is the tax amounts and where those taxes are going to.
I'm generally helped by my federal taxes going to help feed students in poor areas. Both from a feel good standpoint and that those students have a better chance at becoming more productive, which means they can buy stuff from me.
I also benefit from those foreign wars because they keep the US empire of cheap shipping open, so I can buy stuff for cheap from countries who've specialized in manufacturing
Payroll tax is a problem because it’s not accounted for in your overall tax rate, it’s accounted for via lower wages. So you have no idea what your actual income would be if not for all the taxes your employer is paying.
> So you have no idea what your actual income would be
Payroll taxes aren't some secret things which are impossible for an employee to calculate on their own. You're right, it's not usually directly shown to an employee on their paystub, but it's pretty trivial to do the math and see what your employer paid (or was at least originally liable before any weird tax handouts, but typically rare) for your salary.
I do think payroll taxes should be required to include on paystubs if even just as an informational aspect to people. People should have a real understanding of how much labor is taxed compared to capital. People see "capital gains is 15%? Gosh that seems high..." without realizing how much of their W2 income was taxed. Most people I talk to can't even ballpark what their effective income tax rate was, I often hear "oh I had to pay like $800 in taxes this year, that sucked!" No, you paid a lot more than that, you just didn't pay attention.
What is "double taxing" and why is it bad?
So much stuff has several layers of taxes on it but "double taxation" is really only used when discussing inheritance taxes.
It's a term wealthy people made up to trick poor people into feeling sorry for ultra wealthy actually paying taxes on things.
> "double taxation" is really only used when discussing inheritance taxes
It’s a common concept, e.g. in the double taxation of corporate earnings and dividends.
You're right, its pretty common for the wealthy to try and trick poor people into feeling sorry for the wealthy actually paying taxes on things.
As my other post pointed out, tons of things have multiple layers of taxes. But the things people suddenly have some big moral issue with "double taxation" are things like estate taxes and corporate earnings and dividends and capital gains.
Few people bat an eye at us double taxing the low income nicotine addict. Everyone seems to want me to shed tears for the billionaire having to pay "double taxation" on their third vacation mansion they're inheriting.
Argue the rates are too low or too high for a given transaction. I can get behind that. But just crying because there's two different taxes being applied to a given transaction? Really?
> people suddenly have some big moral issue with "double taxation" are things like estate taxes and corporate earnings and dividends and capital gains
People get plenty mad about sales taxes double taxing taxed income, too. Nobody likes paying taxes.
This isn’t a localised term.
> People get plenty mad about sales taxes double taxing taxed income, too.
Yeah, and it's a dumb position to take. Like what, we can only apply one tax from one source to a given dollar bill's serial number after it leaves the fed, and after that point that dollar can never be taxed again? Otherwise, gasp, double taxation!
The company shouldn't pay payroll taxes, they charged sales taxes to get that income to pay the salaries. I shouldn't pay any income taxes, the company paid payroll taxes on the money that had sales taxes on it. I shouldn't pay sales taxes, I paid income taxes on the money that had already had payroll taxes that had already had sales taxes that had...
Suddenly nobody pays any taxes anywhere because somewhere up the chain someone else already paid taxes on that dollar!
Why should you be taxed on it at all?tax is policy. You tax things you want people to consume less of.
Inflation makes nominal values to up.
More inflation more capital gains. Gov is now incengltivized to inflate to pull tax out of realized assets that have not even gained real value
What you tax is not really relevant as long as it doesn't disrupt some activity you want to continue happening. If it was up to me I'd tax spending not income. Regardless of what you are spending on. Bread? Sure! Employee? Yes! 10% of Tesla? Same!
> If it was up to me I'd tax spending not income. Regardless of what you are spending on
Under this system the poor who spend the majority of their income just to survive pay the highest effective tax rate while the wealthier who save most of their income have the smallest effective tax rate. That sounds like a fair and equitable system to you?
Sure, you can have transfers back to the poor.
You're just moving the point a little along the scale though. So now instead of the super poor paying a higher rate, now it's the slightly less poor. And the slightly less poor as you keep moving that transfer cutoff point. You're still going to have some point where the wealthier are paying a significantly lower rate than those who make a good bit less than them.
At appropriate level of transfers the cutoff point is at millionaires you no longer can call poor in good conscience.
And people below cutoff point thanks to transfer effectively pay negative tax.
I absolutely agree on this point, and that curve adjustment would just continue into people we'd definitely agree are wealthy. But in the end those millionaires are paying a higher tax rate than those wealthier than them. Is that fair?
It's fairer than what we have today. Nothing is absolutely fair.
And yet the rich spend vastly more money than poor. You can see it trivially by noticing that the poor have all their money from the work that they do for the rich.
Taxing spending would be way more equitable than whatever we are now doing.
We are already doing some taxation of spending. VAT, sales tax, social security fees. All of those are paid by buyers of goods, services and labor. If we did the same for investments government would have so much more money to deal with the problems instead of borrowing it from commercial banks at interest.
> And yet the rich spend vastly more money than poor
You're just totally ignoring the effect of effective tax rates.
Sure, the billionaire spent way more money than the poor person. But who spent a higher percentage of their income? And who had vastly more opportunity to spend that in a place outside of that sales tax jurisdiction? Are the poor people flying to other countries to buy their luxury goods?
To you, is society fairer for poor person and the billionaire to pay the same nominal amount or the same tax rate? Is it even fair/good for the poor and the wealthy to pay the same for either of these values?
> But who spent a higher percentage of their income?
Everybody knows. That's because we tax income. And income, unlike spending is easier to muddle. You can always fabricate a loss or at least a temporary loss to avoid paying taxes on your income. It's harder to hide spending.
> And who had vastly more opportunity to spend that in a place outside of that sales tax jurisdiction?
It's just as easy today to move your profits to another country if you are rich.
If you tax spending, you can just tax money transfers to other countries as spending. Rich can fly wherever they like but they still had to pay taxes on the plane they bought, fuel they put in and all the money they spent on their trip.They could buy crypto, but guess what, on crypto purchase, also a spending tax. They can even move to live in another country till they die, but still their money transfered outside of their home country into their new one, taxed on exit.
You brought the money into the country because you are in the business of exports? Great, here's a tax credit. You may deduct it from the tax you pay on your excursions abroad.
The problem is not what is the moral thing to tax. The problem is how to do it efficiently with no loopholes without affecting desirable behaviors negatively and promoting undesirable ones.
Taxing spending would also help with vast empires that cosist of inherited money. Income was already done, century ago so there's nothing to tax. If you try to tax wealth, so many people would equate it to theft. But if you tax spending ...
> Taxing spending would also help with vast empires that cosist of inherited money
Or we just finally actually tax inherited wealth like other kinds of income instead of giving wealthy many many millions of handouts and tax subsidies.
> with no loopholes
We've both shared examples of lots of ways one can have loopholes on spending money. If the standard is to find a way of "no loopholes", well, spending money outside of the tax jurisdiction away from the knowledge of the tax jurisdiction is a loophole. One wealthier people will have a far easier time exploiting than the poor. Expecting the wealthy are going to report their sales taxes on goods purchased overseas is as hopeful as back in the day states hoping people would report their online purchases. We both agree there's countless ways to obscure your income, if they can obscure their income why is it now impossible for them to obscure their purchases?
> You brought the money into the country because you are in the business of exports? Great, here's a tax credit. You may deduct it from the tax you pay on your excursions abroad.
So those who make money on exports pay even lower tax rates than those working domestically, by design? And who in that "business of exports" actually gets that benefit? The shift worker in the factory making the widgets, the marketing director making the campaign for the widget overseas, the salesperson making the actual sale to the foreign distributor, or the owner of the corporation? Me thinks that benefit isn't going to the shift worker or the marketing person or the salesperson. Cool, even more handouts for the wealthy here. Great ideas. They'll get a tax break on their expensive foreign vacation while us plebs here pay full tax rates.
I'm not trying to make the argument that what we have today is good. There's so much wrong with it. But thinking that throwing it all away and just taxing spending is somehow itself a good and just way of doing it also doesn't make much sense to me. Having poorer people pay more effective tax rates than wealthier people doesn't strike me as fair.
> spending money outside of the tax jurisdiction away from the knowledge of the tax jurisdiction is a loophole.
Yeah, but how? How do you carry it or send it across the border? Cash? Gold? Good luck with that. You'd basically have to set up a smuggling operation for cash like people now do for drugs. With the risk of cash going missing and every step of the road. Becasue it's not hot and whoever steals it can use it as they please immediately.
> Expecting the wealthy are going to report their sales taxes on goods purchased overseas is as hopeful as back in the day states hoping people would report their online purchases.
I'm not expecting anyone to report that they bought something abroad. I expect their bank to to report they made a transfer abroad and deduct spending tax automatically.
> So those who make money on exports pay even lower tax rates than those working domestically, by design?
Yes, because exports are desirable for building wealth of a country. There's a single country on Earth that benefits from exporting not goods or services but dollars. That's because they are printing them for free and the world for one reason or another wants them. Any other country benefits from exports and it's an activity every government tries hard to promote to get purchasing power in the global economy for the stuff the country can't make themselves.
> And who in that "business of exports" actually gets that benefit?
That's the question. In case of VAT burden is transferred along the chain. In spending tax, tax credit could be similarily propagated. Everyone could have tax credit on their sales and tax to pay on their purchases. This already works for companies for purposes of VAT. All transactions between companies are tracked so purchases could be taxed and sellers can be taxcredited (the opposite of VAT). In case of individual people, they make many transactions that are not specifically linked to them (and we want to keep it that way for privacy). Their spending tax can be collected and paid by the companies that sell stuff directly to consumers. The tax credit for individuals could take a form of direct cash transfer from the governement budget to supplement their salary. There's of course incentive for this companies to not report their sales to customers and not pass the tax paid them by the consumers to the country budget. But that's the same thing as we have now that companies have incentive to hide sales income to not pay income tax on it so exisitng solutions to combat that should perform no worse than they do now (mystery customers, recipt lottery, comparing income+financing with spending).
Tax credit wouldn't be 100% of sales (because companies on average earn more than spend so they would never pay tax while operating normally) and transfers to individuals could be shaped freely. They could be associated with their salaries or not or a mixture of two. This way governement could very effectively promote specific economic activities with tax credits to companies and keep the poorest out of poverty with direct money transfers but also promote job seeking and career advancement by paying some addtional money to workers, less as their salary level approaches societally desired "middle class".
I don't have all the kinks ironed out. It's just an idea that I had about a month ago. I haven't written my own tax code. Yet. ;-)
> They'll get a tax break on their expensive foreign vacation while us plebs here pay full tax rates.
Well, if somebody operates a successful company, especially an exporter they should be rewarded. But the reward should be transparent and controlled and not up to their weaseling, tax dodging tax and fabricalting fictional losses. As you know they are already getting the handouts. If the system is tight and clean we can decide how much of a reward they actually deserve through a political process. I am aware that our political system is terrible for that, but it's terrible for what we have now too so that's beside the point.
The point of my idea is mostly to introduce transparency and control and vastly simplify and integrate the myriad of tax systems we use in parallel in one country. Income taxes, VAT, duty, social security, health premiums, captial gains tax, fuel tax, excise. All of that could be replaced with one framework of taxes on spending. This would also be good for migrating to economy that's not reliant on infinite growth because doing more with less would be promoted by the tax structure. You are taxed on what you use, you are 100% taxed on what you waste or consume.
> Having poorer people pay more effective tax rates than wealthier people doesn't strike me as fair.
That's not at all what I'm advocating for. Poor people mostly don't matter from tax perspective. If tax credit for them is set up in a way that they pay effectively very little or zero tax or even get money for nothing it wouldn't matter for the govermenet budget and there would be strong, popular opposition to lowering their tax credit as that would be direct hard cash on their accounts recieved every month. In modern system it's vastly easier to give tax cuts for the rich than for the poor and nearly impossible to give anything to the totally destitute.
> I expect their bank to to report they made a transfer abroad and deduct spending tax automatically
So we're not taxing spending, we're taxing bank transfers as well. Maybe they just put it in a savings account overseas. Maybe they're paying off a loan for money sitting elsewhere. Who says it was a sale? Prove they bought something.
>> Having poorer people pay more effective tax rates than wealthier people doesn't strike me as fair.
> That's not at all what I'm advocating for.
But that is what you're advocating for, by pushing it to just an extremely complicated sales tax and complicated system of fractically more complicated credits for exports and subsidies for the poor to hopefully reduce their tax burdern and what not. Inherently the wealthy will spend a smaller percentage of their income. The wealthiest practically can't spend it as fast as they get it even flying private jets around the world, but tons of middle-class people seem to barely have anything in savings. You just keep ignoring it and offering half measures to address it.
> So we're not taxing spending, we're taxing bank transfers as well
No. We are taxing spending. Transfering money abroad counts as speding. Transfering within the country doesn't.
> Maybe they just put it in a savings account overseas.
Doesn't matter. Once it leaves the system it's treated as spending.
> Maybe they're paying off a loan for money sitting elsewhere.
Paying off a loan is spending. Both abroad (as everything else abroad) and within the country too.
> Prove they bought something.
No need. Spending is something defined not something natural that needs proving. What I'm proposing is defining spending as reduction in amount of owned currency due to either transfer abroad or due to any agreements between companies or companies and customers.
> But that is what you're advocating for, by pushing it to just an extremely complicated sales tax and complicated system of fractically more complicated credits for exports
If you think that's complicated don't ever read on current taxes, fees and procedures.
My idea is comparably simple. General rule is that spending gets taxed. Tax credits are awarded to promote certain activities (like exporting or living). Nothing else. No need for income tax, corporate tax, VAT, sales tax, social security fees, health premiums, import tariffs, excise taxes and so on.
> Inherently the wealthy will spend a smaller percentage of their income.
At this point I don't think you can imagine it being any other way. I think you are fixating that we all have same stomachs and since poor people earn less feeding ones stomach will always be a larger percentage of money that available for them to spend (so higher percentage of tax).
But the rich don't spend money on what they eat alone. They spend it on cars, yahts, luxury, and what's way more impactful real estate, companies, assets, investments in general, even lobbying ... things that they must do because those are the things that bring them money ... those are the things purchasing which made rich rich in the first place and make them keep getting richer ... all of those would be taxed. I don't think you can say the same for any other proposed or real system for taxing the rich that relies on accounting for income or wealth.
Musk buying Twitter would be taxed on this purchase.
If giving the poor tax credits so that they have negative tax doesn't solve the conundrum for you I don't think anything ever will.
> Paying off a loan is spending.
Talk about "double taxation" and wealthy being able to avoid taxes. I need a loan to buy a car. Taxes at the purchase, taxes as I pay back the loan. I take out a mortgage. Taxes on the sale, taxes on the mortgage payment. Meanwhile someone able to drop several hundred thousand in cash pay taxes once.
Paying back a loan is spending but taking a loan is income and taken as individual might award you tax credit.
But yes, if you use a service, you pay for tax. Even a service of renting some capital.
Again, as a poor person you can get tax credits on your income or just because you are alive that offsets that if the government thinks poor people buying things with loans is societally beneficial or not. Today government does this by raising or lowering the rates which affect so many other things in the economy.
Fine grained control is better.
And what's wrong with double taxation? If you earn money today, you pay income tax, and use it to buy fuel then you also pay VAT and excuse tax. That's triple tax on the same money. Spend your money in societally undesired ways and you are getting it taxed multiple times even today. But just with a myriad opaque systems that don't play nice with each other and are full of loopholes.
You still need income to pay the interest.
Moreover, unless you are nearly dead, it doesn’t make sense to optimize for far off estate tax avoidance since (a) you will be dead anyway, (b) tax laws change all the time, and (c) it would have to be discounted appropriately so it may not even be a win.
Personally I think we shouldn’t have capital gains taxes at all so this avoidance method doesn’t bother me.
>>Moreover, unless you are nearly dead, it doesn’t make sense to optimize for far off estate tax avoidance since
It's the other way around. This strategy allows you to not pay any taxes during your lifetime, so you have more money to play with and enjoy. Your inheritors might not have to pay tax on this money, but that's not your concern because like you said - you're dead at this point.
> avoid paying taxes altogether
At some stage in wealth, perhaps, and not avoid but postpone. More important probably are cases where actually selling the shares means giving up control over a business, or having to settle things with the rest of the family whose "destiny" it is to hold these shares in common.
Not postpone -- avoid. The base price of the asset is adjusted at the time of your death, so if bank sells the asset immediately, they pay no taxes.
https://www.reddit.com/r/BuyBorrowDieExplained/comments/1f26...
There is confusion between capital gains tax and estate tax (and estate planning devices like trust law). And that matters.
Is the problem capital gains tax as some people claim or is it elsewhere?
In the process described, capital gains tax is not even postponed (and that write up does not provide for Peter's major expenses during life). That write up works (when it does) because of bypassing estate tax.
The need for realizing capital gains is eliminated through trust, estate planning and other estate tax law (seems to me). The whole of the procedure is in that side of the equation. Not in capital gains tax law.
So the question: Does this all call for a change in capital gains tax law or changes in estate planning (trusts) and estate tax law?
When you use margin loan or pledged assets lines of credit, you are postponing. Which you can potentially kick all the way into estate tax (which your estate may pay if it's large enough). That write up is different still and describes working around even that estate tax. And then the question does matter of which law you are asking to change. (Besides the traditional method of making a law, any random law, thereby solving all problems for eternity - or at least gaining some voter satisfaction.)
No.
This sounds like a great idea but really fails the sniff test:
- you’d need to borrow for decades, where, even at low interest rates were burn through significant capital (more than taxes would)
- you’d need low interest rates to exists for decades which we know doesn’t happen
- finally, all these Uber rich (Bezos, Musk) have all sold significant portions of their equity and paid taxes on it
This seems like nothing more than a hypothetical idea.
The article goes into great detail and gives several example of several CEOs borrowing for actual decades, so it passes the sniff test because it does actually happen.
The article gives examples of CEOs borrowing against their shares. The article provides no examples of CEOs rolling those loans over until their death.
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> Only very, very rich people pay any estate taxes in the first place because a couple's estate tax exemption is currently over $27 million.
That's federal estate tax. State tax can be different. Massachusetts, for example, has estate taxes on over $2M ($4M for a couple who manages their estate plan wisely).
State estate tax is just a tax on people who are ignorant of it, unwilling to plan for it or who's relationship with their heir(s) is too dysfunctional to dodge it. The rich almost always avoid it. The poor are never subject to it.
It's like greasing a couple rungs in the middle of the economic ladder IMO. I'm not a fan.
Massachusetts requires estates worth $1M+ to report for estate taxes. There's something like a $60k exemption and then it's a progressive rate system.
Based on what I'm seeing, a $2M Massachusetts estate would have $50k of estate taxes to pay, a 2.5% effective tax rate.
In the end though only 12 states have an estate tax, and Massachusetts has the lowest threshold and highest rates.
Borrowing against the current value of your stocks should automatically cause any gains to become realized for tax purposes.
Funny that you’d take this route. I’d just lower capital gains tax rates.
At the time the estate tax is being considered isn't that usually down to a single surviving individual? I imagine it's uncommon for a couple to die at once to qualify for the 27m exemption.
You don’t have to die at the same time. If you leave everything to your surviving spouse, it’s also possible to transfer the benefit of your remaining estate tax exclusion.
Search for "estate tax exemption portability".
Yes but that is because taxes are incoherent and abhorrent
Why do we tax realized capital gains at all and why based on the ruler of fiat which is controlled by those who tax (they keep making the ruler shorter)
If the goal is to creat drag on multiplicative dynamics then do so coherently
Tax should make sense at least in core targets. Yet there are no core targets.
Because realized capital gains are income and we tax income.
This explanation never made sense to me. Say someone gives you a $1M loan. Holy cow, it's not taxed, what a loophole!
But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income? So you still end up paying taxes on $1M either way? How in the world does this bypass taxes?
Edit: To people bringing back the "buy, borrow, die" story:
(a) Yes, I saw that a couple months ago too. It was very hand-wavy in some crucial places. And there were quite a few people pointing out flaws with the reasoning. [1] [2]
(b) If dying is part of the the strategy then why is it omitted so often? (My whole point with the comment here is that the aforementioned explanation is inadequate.)
(c) If having enough money to pay off your collateral-secured debts until your death is a requirement for this to work then why do so many people claim "you can do it too"? Who has that kind of money sitting around? The "Buy, Borrow, Die" post explicitly said you can't get that kind of loan until you have $300M in assets.
[1] https://news.ycombinator.com/item?id=41411737
[2] https://news.ycombinator.com/item?id=41410808
You just delay selling the stocks until death.
At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. So the capital gains tax on your assets are $0 as their cost basis is the same as the price so the appreciate is $0. If _you_ sold the stocks before your death then likely there would be a large gap between the cost-basis (price you bought the stock) and the current price resulting in a large capital gains tax.
So, when your estate sells the stocks to pay back the loan they pay the applicable taxes on the $0 and then uses the remaining proceeds to pay back the loan.
> At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price.
Is this a special provision that kicks in only on death (and not before)? How long has that been in place?
It’s called the stepped up basis and yes, only applies to your estate.
A married couple who bought a house in Palo Alto for $250k that’s now worth $5.25M and who bought $250k of Apple stock that’s now worth $20.25M would have a Federal tax bill of ~$5 million if they sold those assets and gave the cash to their kids. If however they were hit by a bus on the way to their accountants office, and the kids inherited the assets and sold them the next day, they would owe zero tax.
There’s a popular myth that estate taxes are a second tax on income but many assets for the very wealthy are never taxed..
This is because for a long time, the USA does not tax assets other than real estate.
Our tax system is structured around the fundamental idea of taxation occuring on transactions, whether that's income in exchange for labor, income resulting from the sale on (non-real-property) assets etc.
I'm not sure if this is a good thing (it might be, it might not) but it's the way it is.
The reverse approach has issues as well, primarily for assets that aren't easily divisible.
The obvious example is family farms, or indeed the family house. Capital taxing the asset on death means a (potentially large) tax bill happens in many cases this can't be paid without selling the asset.
If the sale was to another family looking for a farm, then that could be argued is neutral. But it won't be. It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms.
This doesn't just apply to property. The family silver collection, the family business, the list goes on.
Inheritance tax is tricky. Just passing money down entrenches an aristocratic class. Taxing it though destroys value in all kinds of areas.
> in many cases this can't be paid without selling the asset.
Ok. And?
Why should someone get $5m for doing bugger all. If they were paid $5m for cleaning a car they would lose a fortune in tax.
They're not getting 5m, that's the point. They're inheriting an asset which may be valued at 5m. Like a farm, or a house, or a painting or whatever.
Forcing the sale of family property or assets does not serve any good in the long term.
> Forcing the sale of family property or assets does not serve any good in the long term.
How is carrying the cost basis forward without stepping it up "forcing a sale"?
It is under a system where ownership transfers are treated as taxable events. The recipient needs to pay the taxes, but cannot afford to without liquidating the inherited asset.
I think you just need to propose a set of related rules changes. Replace the inheritance basis step-up with a similarly scoped rule that says this inheritance does not count as a taxable ownership transfer, so taxes are not due at that point.
You may also need new rules for estimating the basis when records are lost across multiple inheritance events?
The current system is a bit like a tax foregiveness jubilee, but dribbled out to individual families rather than synchronized across the whole economy. It resets things so that regular people can function in this system, without requiring all the family accounting and records keeping of some aristocratic dynasty.
Forcing people to "Sell the family Farm" has been used by estate-tax detractors for so long that there are multiple special programs in place to ensure it never happens (interest-free loans, etc). Given that the current limits are over $13M per person or $26M/couple where zero tax is owed, I don't think this "woe is us" routine resonates any more.
That's exactly my point. The current system is working. We explicitly don't want to go to the place where inheritance forces a sale.
idk, maybe because their parents liked them? Do you really want to incentivize against people working hard to make sure their offspring, has a good life? Also a family-home might have sentimental value, and this really doesn't only apply to rich people, quite the contrary actually.
> Do you really want to incentivize against people working hard...
You mean by taxing labour and taxing commerce?
Sorry for the snark, but come on...
The Roman empire was built on never taxing labour, because that was seen as an atrocity (never mind the slavery). Instead they taxed luxury goods and debased their currency. The United States was built on never taxing labour, because that was seen as an atrocity (never mind the slavery). Instead they taxed importations and debased their currency.
Since all land was created by God and everything else was created by people's labour, the really unjust thing is to tax labour instead of taxing land. But "territory" is an instinct so deeply ingrained that it's probably been with us for millions of years. However, which other mammals allow members of the same species living on their territory which are not family? As in renting.
> You mean by taxing labour and taxing commerce?
> Sorry for the snark, but come on...
> The Roman empire was built on never taxing labour, because that was seen as an atrocity (never mind the slavery). Instead they taxed luxury goods and debased their currency. The United States was built on never taxing labour, because that was seen as an atrocity (never mind the slavery). Instead they taxed importations and debased their currency.
Interesting, even though I don't see if you are for or against taxing labour, commerce or inheritance.
Inheritance tax is a way for the establishment to take land from small landowners. The state isn't a good counterbalance to "greedy" corporations, the state is there to support big business.
> It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms.
Please see Bruce511's comment above, he explains it better than me.
The thing is that with an inheritance tax, you make it impossible for someone to live with little or no money, and caring for their off-spring, by giving them a place to stay.
> Since all land was created by God...
Aha, but in the commandments it says that you shouldn't steal, so having property doesn't seem to be forbidden?
> But "territory" is an instinct so deeply ingrained that it's probably been with us for millions of years
So, is caring for your off-spring, kindness and brotherhood. What is your point?
> Inheritance tax is a way for the establishment to take land from small landowners
In the USA, you must have a net worth of at least US$13M per person to be subject to the inheritance tax.
That's interesting, I know that other countries do the same, however, but I was thinking about it as a general principle.
That's exactly the point. We don't want to change anything that leads to these inheritance tax problems.
My employer likes me and gives me $100k and I have to pay tax.
It's mostly practical, I think. Not all assets can be valued, or are liquid. Once a transaction occurs though you have both a price to tax on and the money to pay the tax.
It’s awfully convenient that this ambiguity in asset prices leads to a massive an unprecedented tax break to the richest people in the country — many of whom are literal experts in valuation.
^^^ This is the real loophole, the rest is a distraction.
> Is this a special provision that kicks in only on death
To my knowledge, yes [1].
[1] https://en.wikipedia.org/wiki/Stepped-up_basis
> How long has that been in place?
Since 1921 [1]. When the estate tax was in force, it was meant to avoid double taxation. In 1976, the Congress replaced the step-up basis with a carryover basis (you don't pay taxes on death but neither do you step up the basis). In 1980, it repealed the carryover basis "due to the record-keeping problems associated with reconstructing what a long-deceased relative might have paid for properties that had been held for generations," but didn't re-instate the step-up basis. In 2010, the estate tax was repealed. (EDIT: It was reinstated in 2011 in a neutered form [3].)
[1] https://en.wikipedia.org/wiki/Stepped-up_basis
[2] https://greenleaftrust.com/missives/stepped-up-basis-a-short...
[3] https://itep.org/federal-estate-tax-historic-lows-2023/
The Wikipedia article does a poor job of explaining that it is not "step up basis", it is "basis adjustment to fair market value", which may be up or down. They do have a paragraph further down about "stepped down basis", but it still doesn't make the point clear.
The USA still has an estate tax.
> USA still has an estate tax
You're correct. Fixed. Would note that it's famously flouted, though usually not in entirety [1].
[1] https://www.bloomberg.com/view/articles/2014-01-30/only-idio...
That Bloomberg article is provocatively named.
You need to have assets about US$13M per person to be subject to the estate tax. So if "only idiots pay" the tax, they are rich idiots.
Yes. It's been part of the tax code since 1921.
https://www.fidelity.com/learning-center/personal-finance/wh...
https://greenleaftrust.com/missives/stepped-up-basis-a-short...
> the current price resulting in a large capital gains tax.
There's nothing special about the capital gains tax rate on such a sale. It's likely to be the long term one, and compared to income tax and taxes in most other parts of the world, it's low.
> But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income?
No, you just borrow against yet more stock. You need never sell any, much less pay yourself any significant income, provided you have enough stock. Since you don't sell the stock, you need not pay capital gains taxes. Since you have no real taxable income, you need not pay much in income taxes either.
Pay taxes once vs pay interest forever? At what point it'll break even and go negative?
Let's say you're worth $100bn. You don't need to spend $1bn a year, just even a few tens of $ millions will be plenty, so you're borrowing a minute portion of your net worth. And your stocks will be going up in value, typically, so... you'll never run out of money. Plus you'll be a great customer for the banks that lend you money, so you'll get preferential interest rates. You'll never run out of money. You'll die and still have the lion's share of your wealth, only now it will pass to your heirs and charitable foundations.
> You'll die and still have the lion's share of your wealth
and i don't see anything wrong with that at all.
It seems, recently at least, that a lot of people believe they're somehow entitled to the wealth that these high networth individuals have managed to accumulate.
> and i don't see anything wrong with that at all.
Read my comments on that post. I never said there was anything wrong with that.
IMO we should stop double taxing dividend income.
> a lot of people believe they're somehow entitled to the wealth that
Do not count me among those.
Let's say every year your portfolio goes up 10%. Every year you borrow 3%. You never pay down the principal, and I think you can just let the interest payment get added to the principal. Also, the interest is tax-deductible.
Buy, Borrow, Die FTW - https://equifund.com/blog/buy-borrow-die
The "loophole" that people often complain about is specific to the "buy, borrow, die" tax exemption opportunity. And it's mostly about the VERY wealthy who can really use this until they die.
(1.1) Different parts of America have additional taxes on estate - eg. MA is $2M not $13M, - about 10% of the state has $1M today.
(1.2) Estate tax rate and capital gains rates are different.
(1.3) You can take a tax-deduction on the interest of the loan - if you use it to buy investments. Which is something the ultra-wealthy can easily do.
(1.4) Different assets (eg. Real Estate) have vastly different loans compared to Margin/Portfolio lines of credit
(2) Because the people in question are alive. If you complain about a billionaire not paying taxes because they live off loans, presumably you want that to change. No one complains that Vanderbilt isn't taxed anymore.
(3.1) You definitely don't need 300M to do it, but if you're actually part of the bottom 95%, you'd probably need to liquidate some funds to make it to death, so you can only do this with a small amount of money or you risk margin calls.
(3.2) The "big portfolio" benefit is termed loans instead of margin - banks are way more likely to give you a huge chunk of cash for a fixed time/life if you have a lot more assets.
what you’re missing is that its not controversial or a loophole
sometimes they pay it off, they just dont have to do that every year
yes, you can do it too, but you would need income to pay it
they already have other assets post tax to pay with, if it ever comes down to that
It's leverage. That is all. And tax efficient.
There is another difference that is related to risk.
Larger loans allow access to lower risk opportunities.
If I had many millions in stocks, and I was greedy for more, I would borrow against it to develop residential real estate in a high rent neighborhood. Yes, there's some risk, but it's as close as you can get to buying a money fountain. I'd be very confident that the rents from the building would pay back the money I borrowed and then some.
Even if I borrow against all my holdings, I can't afford to make that kind of investment. The only options I have are much higher risk. And as you said, I won't survive a failure. Therefore, while the bank would let me do it, I would be very foolish to try.
I've owned property to rent in the past. I feel it's worth pointing out to folks keen on this route that, while profitable, it's a Lot of work.
Owning stocks is zero effort. You might glance at your results from time to time. Your fund manager does the heavy lifting (and gets a small % fee for it.)
Owning a property is a pretty constant stream of work. Organizing maintainence. Dealing with complaints. Occasionally evicting non-payers. Finding new tenants. Filtering applicants to filter out the non-payers.
It's so much work you'll likely offload this onto someone rise to do. The cost is not insignificant. (Neither is maintainence.)
The returns may be good, but its not "passive income".
I agree with most of your comments. However, most tax authorities in highly advanced countries view income earned from rental property as passive income, regardless of how much work you need to do. This might be some minor deductions if you act as a real estate agent, but that is a lot of work in most jurisdictions, as real estate agency is normally a highly regulated area of work.
Indeed. Passive income is taxed at a much lower rate than working income in the U.K, and that includes property rents (after paying expenses like a managing agent) and dividends
Capital gains is taxed even lower than that.
> Passive income is taxed at a much lower rate than working income in the U.K, and that includes property rents (after paying expenses like a managing agent)
Is that right? I thought that income from property rents (after paying expenses like a managing income) had income tax levied like any other income.
But honest day’s work income has an additional payroll tax which totals about 20% marginal for the majority of people (plot about 60/40 between employer and employee).
Far better to be paid in shares.
Oh yes National Insurance Contributions. They’re a bit messed up imho.
The employee pays 8% to NICS on earnings between 12.5 and 50k. For income over 50k, it’s 2%.
The employer pays 13.8%, and some people assert the employee ultimately pays the cost through a lower salary.
Well at my company it comes from the same budget. Doesn’t matter how you hide it.
For many reasons, including tax and liability, any serious property owner will have a company structure to own the building, collect rent, pay bills etc. Doing it in your personal capacity is pretty insane.
So yeah, you have all the paperwork to run the business as well.
Or you just pay a property management company, which comes off pre tax.
I had a friend that bought a second house as a rental.
One day he described what happened when his renter left. They had money troubles, so they quit paying bills (including the rent). When they were evicted, he found that they had been throwing their garbage down the stairs into the basement so they didn't have to pay the trash service. The stench was unbearable, and the mess horrendous.
It is not easy money to be a landlord, I figured.
Wanna go halfsies on some residential real estate in a high rent neighborhood?
Everything that I read about real estate investing says you should aim for middle class housing, as the return-on-investment from rental cashflow is (normally) higher that more expensive housing. To be clear: My statement is only looking at rental cashflow, not capital appreciation. To me, there are both important, but separate concerns.
Sure, but we'll have to go thousandsies, or at least hundredsies.
Rich people having more options, and being more insulated from risk, is not news.
It's not news to the world, but it's news to many.
I don’t think so. Stronger and attractive people have more options and opportunity too! This is the kind of thing you can’t lose sleep over.
Keep in mind that the bench mark rate is almost always something akin to bills so is a very short time horizon. That may be great or not so great compared to what rate you might get on say a 5/10/15 yr collaterlized loan.
ref: https://www.interactivebrokers.com/en/trading/margin-rates.p...
Nice link. Thank you to share. This notice bothers me a bit:
I wonder what exactly "prearranged with IBKR" means. Call them up... "I need to borrow 50M USD, and pledge my Meta stock." Them: "Hang on. <muzak> Yeah, sure."My guess, if the loan is large enough, the want to coordinate with their internal stock-borrow lending (SBL) desk to ensure proper liquidity.
<<(Not A) Shill Warning>> I am continuously blown away by the institutional-like level of services (and prices) available to plebs like me. IB is really built to grow with you: From the first 10K USD saved as a 25 year old, to a 50 year old with millions in liquid assets. I still cannot believe they don't have any minimum balance for individual account. Ref: https://www.interactivebrokers.com/en/accounts/required-mini... To be clear for other readers, that cost cannot be zero on their end. I don't know how it works, other than crazy levels of automation.
For many things, IB is great. Certainly if you are a futures trader it is very good, same for most equity/option trading. But for bond trading, expect a complete nightmare at tax time. Their "tax department" has no clue how to properly and consistently amortize bond premiums and quite honestly (personal experience) does not give a rats.
I think it's probably more about hedge funds etc where they will negotiate bespoke terms/pricing across the board (including assessing risk which at that level might partly be based on track record, identity of the underlying investors, strategy etc).
Once the amounts get lumpy there needs to be complete assessment of counterparty risk (you). IB can't assume that you are only borrowing from them and that the collateral in your account won't first be liened by another party, etc.
> The framing is deceptive.
Indeed the framing is very deceptive.
Yes, it helps to have a relationship with a private bank. But as pointed out, some brokerages will let you do it too if you are too poor to be allowed to enter through the door of a private bank.
BUT
The main thing that is skirted around in the article is that it still needs to go through the financial institution's credit committee.
So, for example, you cannot just rock-up with a million in Tesla shares and expect a loan against them, or at least not at a sensible LTV ratio.
The financial institution will want a boring portfolio with government bonds and low-risk corporate shares.
Any bank that would be willing to lend against a high-risk portfolio is probably not the sort of bank you want to do business with anyway.
This is not true: "very low rate." My brokerage starts at 12+% which I would not call low. It never even reaches prime at millions of borrowing, and I do not have remotely enough to get much better a rate.
Wrong brokerage. Interactive Brokers lends at 5% on large amounts and around 6% on small amounts.
You can also lend money from the options market with a box spread for around 4-5%. See e.g. boxtrades.com
options are a whole different box of worms, and playing that game has a lot more risk.
"but uh its a box trade it can't go wrong because bla bla bla bla" -- then things proceed to go wrong
you need to look at the Lombard landing products offered by banks, not margin loans on brokerage or personal loans
Interesting... https://en.wikipedia.org/wiki/Lombard_banking
It's not at all simple what they do.
https://reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/...
Important quote:
> this type of planning is generally not economically feasible unless the taxpayer has a net worth exceeding around $300M.
To be fair, there are very accessible options like margin loan or pledged assets which you can also keep going indefinitely - possibly all the way into estate tax which - as a "little guy" - you wouldn't owe. They are higher interest rates (to the point of not being all that interesting - depending on what you want to do.) And they don't have the same features.
But if you are high assets and low income, they might still allow you to buy a house with a loan - if it's what you want.
I used this when Chase closed my bank account because of a typo. Just borrowed cash from Fidelity to float for a month until everything got sorted.
You can also buy art.
Now you have money to invest, as long as you make more than the low interest loan, you're making profit.But then you have X money tied up in some presumably illiquid art with questionable value. Seems better to just invest the X money from the start.
Art is like Schrödinger's cat, its value is only determined when it changes owner.
If someone pays 1M€ for a piece of art, it is "valued at $1M" and you can use it for collateral for a loan at some percentage of its valuation.
Will it actually be 1M€ if it needs to be liquidated? Nobody knows. It can be worthless or it can be worth 10M€ - it all depends on what the next person is willing to pay for it. But until that point it's "worth" 1M€.
---
This is why there are so many empty (commercial) properties, they were valued at a specific €/m2 price and were used to take loans based on that value.
Until they're rented/leased again, that is their worth and value. Could the owner get someone in the property by lowering the price? Definitely.
Would that also cause a rolling cascade of loans not having enough collateral to back them up? Yup.
but then you do not get the tax benefits discussed above.
The market for "investment art" I huge and everyone involved has an upside by art appreciating in value.
> The artist may get more money (since the artist only gets paid in the initial transaction the artist may only get a fraction of the value as it increases. The artist may find that later work will become more valuable as other investors want more of his art.
>The gallery gets more money, and it may attract more art investors
> and the auction house gets more money if it ends up there.
How much art is worth is difficult to estimate on its own. I mean a white canvas painted uniformly white is worh a lot of money if a famous artist does it.
It is worth entirely nothing if I do it.
I expect then that the market decides the value. All investors want art to get more valuable and are in on it.
As an art lover, this is such a tragic scheme. Unknown amount of art that will never been seen by the public. Locked up inside a storage facility in a big box Often the investor has no interest in the art at all, just an investment made by some form of a broker.
>> 3) put it in storage or a tax loophole between countries
I think some of the Swiss Freeports would be up there with some of the world's best museums: https://medium.com/@girivasishta07/switzerlands-freeports-se...
there was a loophole that allowed wealthy people to donate to museums works of arts in exchange of a write off on the value of the artwork. to limit abuses they patched it so that you can writeoff only the purchase price not the market value. I heard a workaround is having living artist create a artwork directly for you and getting it appraised to a crazy amount for writeoffs.
> your brokerage will lend you money at a very low rate, secured by the equity
I have not found one that will offer a very low rate, have you?
For example here are Schwab's rates for a loan against equity:
https://www.schwab.com/pledged-asset-line/rates
For 500K-1M rate is SOFR + 3.4%, so about 8.2%
For multimillionaires it gets better at SOFT + 2.4%, or about 7.2%
Not bad in this market but not one I'd call "very low"
Possibly there's an unpublished rate for billionaires, there usually is.
Switch to a different broker? e.g. it’s just +0.5%
https://www.interactivebrokers.com/en/trading/margin-rates.p...
The linked page is margin, not equity backed loans.
Is there a difference?
Yes. In a margin loan, the "things of value" never leave the institution handing out the loan. The borrower buys stock, for example. And the institution giving out the loan has the right to sell whatever you bought to prevent losses on the loan, without your permission if certain conditions are triggered.
In a loan backed by collateral, all the money can leave into some external account controlled by the borrower. To get some or all of it back requires an expensive and lengthy process that doesn't guarantee success.
IBKR claims that you can establish a margin loan by:
“Withdrawing funds in excess of settled cash in the denomination of the currency being withdrawn;”
So as long as you have enough collateral it’s effectively the same?
Sounds like the GP is saying that there are additional protections with the equity loan. Such as portfolio liquidation prevention if you move assets to another bank.
I think Adam Neumann and a couple of others notably got zero interest loans from banks from the bank wanting to court their business income too.
My bank in Hong Kong (where I live) lends in USD against bonds or stock at around SOFR. If they lend in JPY it's around 0.8%
Your brokerage will likely lend you money but you will be disappointed by the rate. It is not "very low". Not even "low". At least not where we are now in the interest rates cycle.
Interactive Brokers is 6%. Not low, but not bad.
5.8 - 5.6% above 100k now indeed, and that's for margin (which you can live on OR re-invest)! Not low but improving yes!
Roughly in line with a 15 yr fixed rate mortgage but not tax deductible at least if you live on it. Might be tax deductible if you re-invest.
For very large stakes, the terms tend to be much more bespoke though - an automatic sale of collateral amounting to a large % stake is probably not in either borrower or lender's interest.
If I have 1 million in some stock can I go get a 1 million loan from the bank with this as collateral? If so can I reinvest this million in the same stock again and then goto the bank again etc?
Usually they will not give you the full value. Depending on how "safe" they deem the security, they might only allow you to borrow 50%-70% against it.
And most (probably all) of these forbid you from using the loan proceeds to buy more securities.
There is usually a margin requirement (25 to 75% depending on type of equity). And yes, you can.
No. You are not allowed to use these loans for investments, you would need a different type of loan for margin trading.
Your broker isn't letting you withdraw margin lending. You cant use it for consumptive purchases.
But its true, you can find a real lender for your stocks. You dont have to be rich.
Its not controversial, you have to pay it back. There are other quirks the rich have:
Already post-tax assets to pay something off
They are in control of the stock, they can issue more new shares for themselves or cause the corporation to do a stock buyback to pump their holdings more if market conditions are favorable.
Borrow more against the increased value or just sell something and pay the taxes that year.
Purchases of primary issuances are taxed differently than secondary market purchases.
But who cares when you can be a neocolonialist for a year in Puerto Rico too, 0% capital gain for new positions and prorated against old ones
> broker isn't letting you withdraw margin lending. You cant use it for consumptive purchases.
There is no rule prohibiting the withdrawal of margin cash. Or, for that matter, short selling and withdrawing that cash. As long as you're Reg T compliant, the Feds don't care. (If you're a family office, even better--you might get to be treated as an institution.)
right, it just hampers the broker’s collection efforts and economic viability if things leave their walled garden
good to know there is no statutory road block
Yes, margin can be dangerous at times and is not that cheap. About 6% over fed rates, or 11-13% right now. Over $500k you'll probably get a better deal.
What taxman22 says makes me wish I kept my holdings in my Schwab account. (I guess there is nothing stopping me from doing an asset transfer.)
But I agree with you about margin borrowing's interest rate not being that amazing, although it is of course cheaper than most credit cards. Vanguard is, as you said, 11-13%. <https://investor.vanguard.com/client-benefits/margin?msockid...> By contrast, my Amex line of credit charges 6%, and I am preapproved for an Amex personal loan for 8.98%. I presume others on HN can get comparable or better.
It’s like people complaining about savings accounts with 0.5% interest rates. Just switch to a different broker…
IBKR is +0.5% at >$200k (It starts at +1.5%)
Schwab Pledge Asset Line (PAL) is SOFR + (2.40% to 4.4%). SOFR today is 4.81%.
Is Schwab known for being unusually low with its rate for this product? Vanguard is 11-13%, consistent with what mixmastamyk said. <https://investor.vanguard.com/client-benefits/margin?msockid...>
In any case, my Amex line of credit charges 6%, and I am preapproved for an Amex personal loan for 8.98%. I presume others on HN can get comparable or better.
> Is Schwab known for being unusually low with its rate for this product?
The Schwab rate sounds high. Fidelity, for instance, charges SOFR + 190 to 310bps [1]. I haven't had an SBLOC for a few years, but I remember Stifel charging no more than 200 bps over Libor.
[1] https://www.fidelity.com/lending/securities-backed-line-of-c...
8ish percent is good but not fantastic, after years of mortgages lower than that.
Ok, we've replacing accessing billions by borrowing against stock in the title above. Thanks!
> If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth.
This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it."
Unrealized gains should never be taxed. However, as soon as you try to use it as realized in ANY way you should be taxed immediately.
That does not track for me. If someone has $20k in Schwab and chooses to use their credit card instead of selling stock and paying cash, I don't think they should have to pay taxes on that or suffer a criminal penalty. Same for taking on a car loan or a mortgage.
If that's what was happening you'd be right but it isn't. Credit cards have high rates and low limits for a reason: they are unsecured credit. Loans with collateral are secured by the collateral, and it makes some sense that should be considered a realized gain for that collateral (or loss for that matter).
My bank will give me a 6 figure line of credit at prime+0.5% because they see all the assets I have (savings, cash, investments, mortgage). The line of credit is indirectly secured against all of the assets my bank can see.
Should I be taxed when I use the line of credit my bank extends to me?
What OP is missing is the role of collateral. It becomes more important the more perilous the borrower is or might be.
Apple borrows for 20 years unsecured at 31 bps above the U.S. [1][2]. That wouldn't contract much if they offered collateral, because the difference in relative risk is modest to the point of immateriality. Similarly, someone with a century of living expenses in marketable securities really only needs to be restricted from blowing their stockpile--other risks are absorbed by that wealth.
TL; DR The rich don't need collateral as much as the middle class and poor. Penalise the use of collateralised loans like that, and you just make collaterised lending go away or become much more expensive.
[1] https://www.bondsupermart.com/bsm/bond-factsheet/US037833AT7...
[2] https://home.treasury.gov/resource-center/data-chart-center/...
> TL; DR The rich don't need collateral as much as the middle class and poor.
You really buy this? Elon could just go fetch $44bn from a bank to buy Twitter without anything to back it?
Yes, I would imagine it would be much easier for Elon to get 44bn as opposed to someone who is homeless.
> Elon could just go fetch $44bn from a bank to buy Twitter without anything to back it?
Collateral "becomes more important the more perilous the borrower is or might be." It's immaterial to "someone with a century of living expenses."
Elon Musk could probably have borrowed even $100mm unsecured on terms damn close if not identical to that which he could get on a secured loan, ceteris paribus. But Elon is uniquely leveraged. That makes him a more perilous borrower. And $44bn isn't lifestyle borrowing, either.
Nevertheless, he could still probably get a hundred million lent unsecured on terms quite close to his secured rates--there are groups who would do that for relationship building alone.
No difference if secured. You could add to my list of examples a home equity loan. Should that be taxed as a partial sale of the house? No.
Ask your credit union about the variety of loans they offer to regular people.
It gets more complicated. If you remortgage an house, should you pay CGT on any unrealized increase in value?
Why should it be illegal? It’s not a realised gain. It has to be paid off … with money which has to come from somewhere (and be taxed as income or realised gains or whatever).
What reason do you have for wanting it to be illegal, other than not liking it?
How is it not realized? When I can use it as "realized" to borrow against it? When it comes to paying taxes I go "sorry Uncle Sam, this is fictitious, I don't really have this" but then I head over to the bank and go "look at my brokerage accounts, I have ALL THIS MONEY, lemme borrow against this now all-of-sudden realized money..."
Home equity loans also taxed as realized gains?
You are paying property tax on that money you are using for that HELOC.
If I bought a house at $300k, I owe $250k and house is now worth $750k the County will be slapping me with $10k/year property taxes whereas before I was paying like $3k. My gains are realized each year via property tax assessments :)
> My gains are realized each year via property tax assessments :)
You are confusing two very different things. You'll realize the gains (and have to pay taxes on) your house value increase only when you sell it. The fact that you were paying property taxes on it all along while owning it has nothing to do with that.
> My gains are realized each year via property tax assessments
This strongly depends on jurisdiction. In many (today I learned, not all) assessed value is explicitly different from market value.
The fact is though if you live in America are paying property taxes on your home, you are NOT hiding from the IRS the fact that you do - you are not saying "sorry, I don't really own this home and I won't be paying anything to you until such later time when my ownership will be revealed at the grand sale at which point I'll pay some taxes"
With "unrealized" stock gains you are doing just that - hiding ownership so you don't have to pay taxes while enjoying the perks of the ownership when it suits you
> if you live in America are paying property taxes on your home
I own in Wyoming. My property's assessed value is like 1/10th the market rate. My neighbour--just checked!--who owns a property like ten times my size, across two plots, and far more lavish than my own has an assessed value similar to mine. The real estate records even have a line item for "actual value" separate from assessed value.
Not familiar with the specifics, but I know California and New York similarly have assessed values that are entirely unmoored from what the property is actually worth.
This is most states, because the increases are capped for existing property owners especially for first homes - the homestead exemption. If you own a house you live in for a long time in a hot market your assessed value can be very low relative to market.
You do not pay property taxes to the IRS, or report the value of your property to them unless you sell it. Federal property tax is unconstitutional. It took an amendment for the feds to be able to do income tax, which has been broadly interpreted to include things like capital gains and income taxes.
Property tax raises are capped in CA by Prop 13.
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Also, totally irrelevant to the capital gains tax you may owe the federal govt when you sell you house.
> How is it not realized?
Because of the definition of what realized income is. Borrowing is not income.
You mention below that you own a Washingtonian condo and a Virginian home. Let’s imagine that they are both $100,000 and that you have no other money or debts. Your net worth is thus $200,000.
You go to your bank and say ‘I would like to borrow against the value of my assets please,’ and they say, ‘certainly, here is $90,000.’ Your bank account now goes up $90,000, your condo is still worth $100,000 and your home is still worth $100,000. Your net worth is still $200,000 (not $290,000) because you also now have $90,000 of debt. You did not realise any income, even though your bank account is now full of money, because your debt account is now negative.
‘But I am paying property taxes!’ you might say. Sure, property taxes are a form of wealth tax, and there is no similar tax on stocks — but that is irrelevant to this discussion (although it could be relevant in a different one).
To illustrate why, let’s use another example. You still have the Washingtonian condo and the Virginian home, and they are both still worth $100,000 apiece. This time, you only borrow $45,000 against the value of the condo. That money moves from a bank on Washington to your bank account in Virginia. Do you owe Virginia income tax on that money? No, because it’s not income. But Virginia is not getting paid any property taxes for the property backing that loan! Irrelevant, again because a loan is not income.
Likewise, you can imagine owning another property in some state or country without property taxes at all. You borrow against it, is that loan income? Nope.
Now, let’s imagine the counterfactual, where loans count as income. You go to buy your $100,000 condo, put down $20,000, borrow $80,000, spend all $100,000 on the condo — and now you would owe income taxes on that $80,000. Gosh, that doesn’t seem fair. You had $20,000, spent it all borrowed the rest, and now you own a condo, owe property taxes and owe income taxes on $80,000, even though you have no money.
Does any of this help you understand? Owning an asset is not fictitious, it’s just not income. An income tax is levied on income, so an asset is not relevant to an income tax (relevant to an asset tax, of course!).
Well, taxing borrowing as income is not what is being discussed here though.
It would be workable to make borrowing against an asset at a certain value equivalent to crystallizing any gain on that asset, pro-rated on the amount borrowed: you own a 2M house, that you paid 1M. You borrow 500k against it, it would be as if you sold 1/4th of it and you would pay CGT immediately on the 1/4th of (2M-1M); the basis would be adjusted so that when eventually you sell the house you pay CGT only on the yet-unrealized gain.
> as soon as you try to use it as realized in ANY way you should be taxed immediately
You're trying to define a rule based on intent. That's doable. We do it all the time. But it tends to get messy, fast. How do you differentiate investment leverage from realizing gains through borrowing? If you track distributions, does a commensurate reduction in contributions count? What if the borrowing is done against the portfolio at large, or unsecured?
It is not messy at all if you use KISS. You do not differentiate ever - ANY usage of unrealized gains makes them realized. Very simple to implement but of course won't ever happen :)
> ANY usage of unrealized gains makes them realized
What does "usage" mean? If you write a covered call, did you "use" the asset? If your broker lends your shares out, are they being used? What about presenting your brokerage statement as proof of assets to a mortgage banker? What about--I've done this--showing your brokerage statements to American Express to get a better rate?
I'm still only talking about publicly-traded common stock, mind you.
> simple to implement but of course won't ever happen
Possible, but stupid. You'd raise taxes on the middle class who can't afford advice (or personal attention from lenders) while doing little to those who can dance in the ambiguity offered by what seems simple from a distance but is devilishly complex up close. Because at the end of the day, what you're trying to differentiate is intent. And intent is easy to hide and expensive to uncover.
The core problem in this scheme isn't so much the deferred taxes as much as the eliminated ones: capping the step-up basis to e.g. $10mm, the EPA's statistical value of a human life, would do the trick. Unlike ascertaining "usage," whether or not someone has died is generally simple to determine.
I think this is the core issue for me in these discussion - it is not complex at all. If you sell your securities - you pay a tax - that part is simple. Until they it is "unrealized" - right?
> If you write a covered call, did you "use" the asset? Yes
> If your broker lends your shares out, are they being used? Yes
> What about presenting your brokerage statement as proof of assets to a mortgage banker? Of course not
> What about--I've done this--showing your brokerage statements to American Express to get a better rate? Of course not
> You'd raise taxes on the middle class who can't afford advice This is always funny to me, middle class :) For sure it would not affect the middle class and there.is not need to "afford advice" when there is nothing complex about this that needs an advice of anyone.
> Because at the end of the day, what you're trying to differentiate is intent Not at all, it is not "intent" at all - it is just very, very simple... You can own stock and keep it there - no problems. You want to use it for ANYTHING, you pay taxes on it.
> If you write a covered call, did you "use" the asset? Yes
This wouldn't make any sense, you didn't use it (unless the call gets exercised).
So you have 200 shares and write 1 call, you'd pay tax on the appreciation of just 100 shares? Then sell another call next week, pay taxes again?
> What about presenting your brokerage statement as proof of assets to a mortgage banker? Of course not
I though it was simple. Now the loopholes start to appear.
> What about--I've done this--showing your brokerage statements to American Express to get a better rate? Of course not
You say "there is nothing complex about this" after conceding this loophole the size of a planet.
For starters: loan with a covenant that governs further borrowing and requires you to instruct the lender if your marketable assets fall below a certain value. Not technically secured. But not relevant if you're lending tens of millions to a billionaire--plenty of firms will provide this. Next up: loan to heirs. Next up: unsecured loans at preferential rates if you store your securities with the lender. (This is already a thing.)
> want to use it for ANYTHING, you pay taxes on it
Swapping "use" for "usage" doesn't address the fundamental issue.
First, you are making lots of great points in your posts. Thanks for your comments.
You wrote:
This raises a very interesting question. When institutional clients use a "repo" trading desk to pledge liquid assets for cash (or vice versa), from a legal perspective, it is not treated as a secured loan. (Yes, it is bizarre. Truly, looks like a duck, walks like a duck, quacks like a duck... but not a duck!)For these private bank-style loans backed by liquid equity stocks, are they considered secured or unsecured? Honestly, I don't know.
> from a legal perspective, it is not treated as a secured loan
Repos are collateralized and thus secured [1]. Legally, they don’t need to be because if the borrower defaults they just don’t buy back the asset; the seller has no further obligation to sell it to them and carries on their merry way.
Repos do however, require special exemptions to avoid being traded as purchases and sales by the IRS, so this is unlikely a valid workaround to a continuous step-up basis czar.
[1] https://www.icmagroup.org/market-practice-and-regulatory-pol...
I see where you are going with this but you are changing parameters here. > For starters: loan with a covenant that governs further borrowing and requires you to instruct the lender if your marketable assets fall below a certain value.
You did not say anything like this, you said "What about presenting your brokerage statement as proof of assets to a mortgage banker?" - this is like me showing my bank account balance during speed dating to flex a bit :) Your example would be 1000000% taxed as you are obviously using it as realized gain.
> Next up: loan to heirs.
If you are using real money, loan all you want. If you are using "money" you are telling Uncle Sam you do not have then you pay tax before you borrow that.
> Next up: unsecured loans at preferential rates if you store your securities with the lender. (This is already a thing.)
This is up to the lender... If they want to use my skin color or my gender or my zipcode (all of which they do) they can also use other stuff as well
I get that I am oversimplifying this but surely a system can be put into place that prevents current madness :)
> Your example would be 1000000% taxed as you are obviously using it as realized gain
How? There is nothing different from the Amex example.
In both cases I'm showing assets held elsewhere as proof that I'm rich. In neither case am I pledging anything. In both cases the letter of the contract requires me to notify the lender of material changes in my financial condition, and in both cases I get a favourable rate--sometimes equal to the pledged asset rate.
> is up to the lender
Yes, and they'd rationally replace secured loans to anyone with unsecured loans to the very rich which automatically accelerate on the borrower's death and carry on as usual. In the end, the behaviour stays the same: the rich let their stock appreciate while they borrow, personally, to fund spending, all the way until they die when the bases step up, they cover the loans and then the heirs get to do the same thing.
You are very convincing and have swayed my opinion on this issue for sure. I do not agree with a lot of it but good disagreements :)
> How? There is nothing different from the Amex example... In both cases I'm showing assets held elsewhere as proof that I'm rich.
but you are saying to Uncle Sam that you are not rich... so you are just a big fat liar here and your punishment should be cap gains taxation!!!!
> In the end, the behaviour stays the same: the rich let their stock appreciate while they borrow...
This is exactly what needs to be stopped except of course it won't be cause you know...
> you are saying to Uncle Sam that you are not rich
No I'm not. I'm reporting all of those assets as held. They've gained in value, and if and when I sell them I'll pay tax on those gains. In the meantime, they're just sitting there. Appreciating unrealized. And making me look rich to potential lenders.
> exactly what needs to be stopped except of course it won't be cause you know
No, I don't.
I see an analogy with the corporate death penalty. It's an appealing but ultimately stupid concept. Yet it serves a rhetorical purpose: it distracts us from debating massive, debilitating fines. Divide and conqueer. Similarly, we eliminated the step-up basis partly in 1976 and completely in 1980, and then repealed the estate tax in 2010. Those--restoring either the estate tax or, at the very least, the carryover basis in some form--are the real policy wins.
(Likewise appreciated the discussion.)
>Divide and conqueer.
Heh.
> ANY usage of unrealized gains makes them realized
I don't feel like you're thinking this through.
Can you define (precisely enough to write into the tax code) what is "usage"?
For example, let's say I go to get a second loan for a vacation home. The Uniform Residential Loan Application asks me to list all significant assets. Such as my first house.
Am I "using" the value of my primary home? The second loan is not a lien against the first home, I'm not borrowing anything against it. They are unrelated. But the lender will probably consider my equity there as additional net worth which can be a factor in approving that second loan.
So if you take out a small business loan and use any type of collateral you now have to pay taxes on it?
Significantly increasing the cost of borrowing for most non large companies is certainly a great idea.. it obviously won’t lead to less competition and more concentration.
> It is not messy at all
If you ignore the consequences and implications (or can’t grasp them at all) then sure..
No offense, but I don't believe you understand the nuance of the thing you're talking about.
It is very easy to say 'any attempt by a murderer to flee the state, and he should be thrown back into the jail' for someone with limited education about western law and order.
This is exactly how you sound.
This is exactly what the billionaires have been able to convince the masses :) It would be "very hard, impossible" to implement a system in which you cannot for the purposes of paying taxes claim you do not have some sht while turning around and heading over to the bank to get a boatload of money borrowing against that same sht - need a genius to figure that out...
No, the fact that your proposal isn’t thought through at all and is entirely impractical doesn’t mean that solving this problem is "very hard, impossible". That seems entirely unrelated..
The key difference here is whether your investment remains at risk. As long as the value of your investment is at risk, then the investment is considered unrealized.
Once you cash in your chips (sell) then the investment becomes realized.
Someone getting a loan against their stock portfolio is still at risk of loss of value of their holdings, therefore the investment gains remain unrealized.
What about reverse mortgages or any type of loan with any collateral? It’s more or less exactly the same..
What's your take than on HELOC?
Capital gains on a primary residence is not taxes in most the cases anyways, so HELOC changes nothing tax wise.
>This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it."
Do you think the same should apply to HELOC loans? It's basically the same thing but with your home rather than stocks.
Yes why not, in the general case. With an exception when the loan funds are being reinvested in the property itself. But in the general case where home equity from appreciation is being turned into cash that's then used for other purposes, that looks an awful lot like realizing a gain to me.
In fact this might even be advantageous to certain homeowners who live in a property as their primary residence and then convert it to wholly rental use. Before you move out, take a loan to easily realize of 250k/500k gains which you can then deduct before it's no longer your primary residence.
Your home gains are being taxed already via ever-rising assessments on property taxes. So you are not hiding that and pretending that it is unrealized. You additionally do not pay real estate gains taxes on first 250k as well as...
>Your home gains are being taxed already via ever-rising assessments on property taxes.
it's a separate tax that's on the value, not the gains. Moreover, if we're allowed to bring in other taxes as offsetting factors, do capital gains on companies get a pass because corporations pay corporate taxes as well?
From the point of view of the IRS you aren’t paying any taxes on your home’s appreciation until you sell.
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> Millions of Americans sit on appreciated home asset. Should they be taxed?
You live in China and you do not pay property taxes on your home? If you live in America baby, you are not allowed to own anything - especially not homes. For that "right" you have to pay these things called property taxes and you have to pay them all the time...
Once we get some same thing going for securities maybe we can do some comparisons like that - until then ... :) you are too funny mate, I needed this laugh
One could argue stocks be handled differently than homes. Or, to better capture the spirit of the proposal, one would progressively tax unrealized gains used for collateral.
Even if there’s risk, this is still clearly realizing market gains
Duh. They need never pay income nor capital gains taxes, as long as their stock valuations keep going up, or as long as they retain enough stock, either way they can always borrow against more stock to service the loans that they took out against their stock, never ever selling any stock nor taking anything more than nominal income.
Bezos has paid $1.5B and Musk over $12B in taxes according to Google.
Please stop counting taxes of super-rich in absolute terms. It simply doesn't matter. We need percentage-based taxes to get the real picture. Because those numbers seems a rounding error given their wealth.
I think it does matter. Let's assume Musk paid $12B. How much have you paid? Isn't it then actually reasonable to say that he contributed more than you to the country, even if his tax percentage is lower than yours?
What do you gain by talking about absolute numbers? They are meaningless. By this logic, Musk could pay only $1 million in tax and still would've "contributed more to the country" than most individuals.
If you talk about taxes percentage-wise, you make clear that the super-rich do not pay their fair share, that they will get richer faster than everybody else and, the most important fact, that long-term stability might suffer, because the bigger the divide between rich and poor, the more civil unrest follows.
> If you talk about taxes percentage-wise, you make clear that the super-rich do not pay their fair share
Well, this is partisan / ideological stuff at this point. I'm only pointing out that the super rich can get away with paying very little in income and capital gains taxes. What's a fair share for the super-rich really depends a great deal on how they got rich (with corporate welfare?) and how much value they have added to the country and the world. And what the tax code should do about it is yet another story. I'm not even remotely advocating for some unrealized capital gains tax or, really, anything of the sort. If anything I think what's unfair and unwise here is that dividends get taxed as income twice (once at the corporation, once where received), which incentivizes reinvesting so as to grow a company's valuation [so as to grow its owners' net worth]. We might have more rich-but-much-less-rich people if we didn't double-tax dividends, and that would [probably] ameliorate the balance of power in the country.
What is "fair share"? What in life is always "fair"? Why are tax rates lower in the lower income brackets, instead of a flat rate - that doesn't seem fair.
Lots of citizens pay zero in income taxes (because their income is low), are they also not paying a "fair share?"
Fairness here usually refers to the inequality left over after tax, not the tax amount itself. When the US is the 127th most unequal country out of 168 measured (by the Gini Coefficient), along with still having abject poverty around, it's not overly ideological to say more distribution needs to happen.
There is no objective definition of fairness.
That’s your definition
By your definition if someone works 40 hours, after taxes they should have the same amount as someone who worked 20 hours.
That doesn’t seem fair to me
This is the kind of extreme internet Libertarianism that's dangerous in the real world. Not practical or concerned with extreme poverty through inequality, but preferring to fight on first principles, like all tax being theft (not your claim, but equatable).
I'm less concerned about the definition of fairness and more concerned about real human suffering.
> more concerned about real human suffering.
Then your priorities are misdirected. The US Govt grabbing a few extra percent of billionaires' income would not reduce human suffering in any way.
If anything, the ultra-rich have been far more effective than governments at improving impoverished human lives by setting up charities and using them to directly send money to poor regions around the world, enabling clean water and food and basic health services.
> This is the kind of extreme internet Libertarianism that's dangerous in the real world.
Saying there is no objective definition of fairness and then calling out the unfairness in your idea is "extreme internet Libertarianism"?
No, it's just common sense.
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That's such a weird comment. You're phrasing it like if Musk didn't get this money, no one would, and taxes wouldn't be paid at all. So weird.
If I scam you out of $100 and give $40 to charity, what have I "contributed"?
How much subsidy did he get for his companies? Trump said Musk wouldn’t survive without those. I don’t think Musk would say Trump is a liar.
https://truthsocial.com/@realDonaldTrump/posts/1086367432957...
>percentage-based taxes
Why is percentage better than absolute or vice versa?
You’re wrong, it matters.
That’s not even important, though. They pay the same taxes everyone else does when they sell their assets. Selling large amounts of shares comes with its own problems as well, and often it’s not a rational thing to do.
I replied to the comment “they never pay taxes”.
I made no claim as to the absolute amount, just that billions doesn’t seem like “never paid taxes”
I'd have to look at the specifics, but unless they did things like sell stock to buy social media companies, they shouldn't have to pay a dime in taxes if they only borrow to cover their normal expenditures.
(2021)
This worked a lot better when interest rates were near zero.
For once the date of the article is rather relevant. But even then the simpler mechanisms are useful to be aware of if financial planning is a concern for you. And the most complex mechanisms completely irrelevant to the common mortal.
Spoiler: the same way you can access your home equity without selling your house.
The fact that we can tax houses, the main form of wealth for most people, proves that wealth taxes (levied on other forms of wealth) would be just fine.
What alternatives are there to owning a home or renting one from someone who owns it?
All you can do is economize on how much home you use, and where it is (where fewer people want to be), which we have seen happen over the past 2-3 decades. So I think we are feeling the pressure of this wealth tax, along with inflation, global competition, and other factors in the real estate market.
Why have taxes at all if the government can just print money?
This is a pretty complicated matter. In principle, a government could do this. There would then be an invisible tax in the form of high inflation.
High inflation causes practical and psychological problems and undermines the appearance of stability of a currency. For one thing, it would be terrible to save any money. So fungible assets like stocks or foreign currency would see a disproportionate demand. You'd be buying and selling stocks just to buy some groceries or a car. Any event like COVID that creates more demand on savings would send the stock market crashing.
Another aspect is that the government would lose the ability to manipulate tax policy. Charity would have no special status, strategic industry would have to be directly subsidized, etc. Government would lose an important lever.
There also would be little reason to accept payment in this government's currency. Why accept the government's rapidly inflating currency when you have no taxes to pay in that currency and would prefer to transact in a stable currency? Why accept a government contract denominated in their own inflationary currency?
Taxes remove money from the economy to prevent demand-pull inflation.
It gives the appearance that the government is doing something useful. If the government just printed money the peasants would start revolting.
With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it and you are paying HEFTY property taxes on your current home worth each and every year. Very poor analogy...
> and you are paying HEFTY property taxes on your current home worth each and every year
Is there any jurisdiction where the assessed value of a home is anywhere close to its market value? (You're still correct. But OP's observation, that this is the stock equivalent of a reverse mortgage, is moreso.)
Pretty close in British Columbia. When you adjust for month to month shifts in the market (aka everyone's homes have appreciated X% since the last annual property tax assessment) the vast majority of sales occur within 5% of the adjusted assessed value. (And many of the ones which aren't within that range are wildly different because e.g. the property assessment was on an empty lot and the property is now being sold with a house on it.)
I have a rental condo in DC and a house in Northern VA, both are assessed within 10% of what the current market value, DC condo slightly over-assessed, house in Northern VA slightly under-assessed
> do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now)
Absent a few exceptions, at least in the US you very much do have to pay capitol gains on the increase in value of your house when you sell it. And those exceptions typically amount to a deferral of the tax rather than a "tax free" gain.
The one sure way to not pay capital gains on one's house is to hold it until you die, and then your heirs get the 'step-up' basis and they don't have to pay tax on your gains, but will have to pay tax on the gain they accrue while they hold it.
Yea, you do if you make over 250k in profit but you can roll that over with 1031. Still cannot see how home equity can be compared to borrowing against securities - there are a TON of taxes that we pay for owning a home and none for owning a security...
> Still cannot see how home equity can be compared to borrowing against securities
Home equity: borrow money with the home used as collateral - if you default on the loan the bank takes your house to make themselves whole again.
Borrow against securities: borrow money with the securities used as collateral - if you default on the loan the bank takes your securities to make themselves whole again.
The fact that the house also comes with an attached "ownership tax" that the securities do not include does not change the fact that it is the exact same type of "borrowing".
I would agree with this statement 100% if I was also hiding from the government the fact that I own a home when they came to collect property taxes. Since I am not this argument does not hold water.
In the same way you are also paying corporate taxes in the stocks you own…
>With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it
...only up to 250k if you're in the US.
https://www.irs.gov/taxtopics/tc701
There's ways around that through 1031 exchange but yea, only first 250k come home free. my argument still stands though that comparing HELOC to borrowing against stock is a poor analogy
> There's ways around that through 1031 exchange
Only if the properties are both used for "trade, business or investment" (https://en.wikipedia.org/wiki/Internal_Revenue_Code_section_...). Since your primary residence is not classified as "investment" by the IRS, you can't use a 1031 exchange to defer gains on your primary residence.
And a 1031 is a deferral (see cite above), not a "tax free" swap. If you eventually sell without going through yet another 1031 exchange, all the deferred gains become taxable at that point.
> you can't use a 1031 exchange to defer gains on your primary residence
who says it would be my primary residence when I am about to sell... you never sell your primary residence unless it is an emergency, you move first and make it an investment property and then sell and roll over ...
> If you eventually sell without going through yet another 1031 exchange
You don't of course ever do that. And all this should be in a trust of course...
Is that 250k over your lifetime or 250k per sale? Can you sell your house back and forth to your spouse every year to multiply the exemption?
https://en.wikipedia.org/wiki/Wash_sale
You can only take it every 2 years. But also this would likely fall under the “step transaction doctrine” and so would be illegal tax evasion.
> Can you sell your house back and forth to your spouse every year to multiply the exemption?
If you try you'll likely find yourself being charged with tax evasion once the IRS recognizes what you are doing.
> If you try you'll likely find yourself being charged with tax evasion once the IRS recognizes what you are doing.
Under what law exactly would this "tax evasion" charge be filled (I.MAKE.S.UP(b)(ii)? :)
https://www.wipfli.com/insights/articles/110727-tax-conseque...
"In addition, a special punitive rule applies to convert gain otherwise taxable as capital gain to ordinary income. If the property sold or exchanged (a liquidation is treated as a sale) between related parties is depreciable by the buyer (regardless of whether the property was depreciable by the seller), § 1239 requires any gain recognized on the sale or exchange to be treated as ordinary income."
I borrow against my measly investment portfolio through my local banks "Loan against Securities" account. Interest rate is about 10%.
My father was using this feature for past 15 or so years from same bank. We are solidly middle class in India.
The only difference between what we do and what rich folk get is probably lower interest rates and higher percentage of loans against the securities value.
How is this used by the middle class in India? To fund day to day living expenses? to buy or build a house? for further investment? Do people tend to repay the debt now and then, or make it flow into their estate? how does succession / estate law treat that? Is this seen as prudent management? etc...
I know these ways of thinking are very different between the US and western Europe (where for example a home mortgage is very cheap, and considered normal and indispensable investing, and stock investing can be crazy conservative - all the way to considered reckless, and estate law and tax is downright brutal). I wonder about India.
Interactive Brokers gives you around 5% right now.
10% seem very high for a that kind of loan.
Just about right for a different country than the US. Mortgage rates in India 8.3-9.5% right now, inflation 5-6%, benchmark rate 6.5% - and this may or may not be tax deductible in India, perhaps depending on the usage. And 25-44% yoy stock market gains. It's about the same as a 15-year fixed rate mortgage - same as in the US.
There was a story from days of the first dotcom boom when Larry Ellison got a call from his banker complaining that he was overdrawn on his personal account by a billion dollars.
sounds frightening (for the bank)
These are called lombard loans e.g. https://www.credit-suisse.com/ch/en/private-clients/investme...
Which in my opinion is a transaction freely entered into by both parties, and is a taxable event. You have gained income from your capital at this point.
Wealth taxes do not need to have someone guess a value of someone’s wealth. The wealthy can tell the government what they think it is at each point.
> The wealthy can tell the government what they think it is at each point.
This will need to be audited by the government, at least occasionally. With all the issues that come from estimating the value of a domain names and other unusual assets someone holds.
I think restricting the tax deductibility of charitable donations is a better way to start. These transactions are already usually included in tax filings.
Sorry I mean “tell” as in make a freely entered into contract
It’s next to impossible to gauge a person wealth at any point in time so any generic “wealth tax” is a non starter, but that does not mean we should not make efforts to ensure that wealth is taxed at equal amounts as income. I find it hard to see why Warren Buffet should pay 10% on his increase in wealth for one year while his maid pays 40%
If Jeff Bezos borrows 500 million against some shares he is saying that the shares are worth 500m and that he has now realised some of the gains from those shares.
It’s pretty easy to avoid complicating the mortgage market by putting a floor on the amount governments will tax (ie borrow 5 million or less in a fiscal year we don’t care)
> You have gained income from your capital at this point.
No, one has moved money from a debt account into a cash account. For every dollar the cash account increases, the debt account decreases. Income, on the other hand, is final and not paid back.
Imagine that I am born with $100,000 in stock:
My net worth is $100,000.If I borrow $50,000 against my stock, here are my accounts:
As you can see, my net worth is still $100,000. I have $50,000 more in cash, but $50,000 less in loan.On the other hand, if worked a job instead and didn’t take out a loan, this might be the situation:
My net worth is now $150,000. I actually had income. Same $50,000 in my bank account, but now it’s income and my net worth has increased.What if I worked the job and took out the loan? Then it would look like this:
I borrowed $50,000 and worked for $50,000, and so my bank account went up $100,000, but my net worth didn’t go up $100,000 — because I owe $50,000, too.(Probably a bit late to the conversation but whatever)
> You have gained income from your capital at this point.
Let’s say Jeff Bezos wants to buy a yacht. He has 1 million amazon shares worth 1 cent when he started and now worth 100 dollars. So he can sell the shares to get 100 million dollars and buy the yacht. But he has to pay 10% capital gains.
Or he can borrow 100 million from any bank and they will accept the shares as collateral. He does not pay capital gains at this point
My take on this is that is a freely entered into contract at which Bezos values his shares at 100 million. And he gains use of the wealth of 100Million (debt balance is not relevant here)
Think of it as like the Duke of SomethingShire. He can rent out his land to farmers etc and get an income. That’s fine. But if he then borrows a 100 million against the land of the shire, and buys a yacht with it, then he has gained from a chnage of the capital - I just don’t see this as a private shielded from tax decision.
I think there is a further issue in that Amazonnshares do not generate much income (not much in way of dividends). This leads to the general problem of tech shares in that it’s always a greater fool valuation. But warren buffet talks much better about dangers of valuing shares without income streams than I do.
> Or he can borrow 100 million from any bank and they will accept the shares as collateral. He does not pay capital gains at this point
Nope, but when he does sell those shares, he will (except for the step-up in basis rule on death).
And he has to make payments on the loan, which has to come either from income (which is taxed), sales of capital (which is taxed) or other loans (which will then be paid off with money which will ultimately be taxed in some way). Remember that the loan is a liability.
The only issue here is the step-up in basis. Everyone gets distracted by the big loan, but ignores the actual step where taxes can be avoided. If we eliminate the step-up in basis then there is no non-taxable issue.
If I understand “step up in basis” this is where Jeff Bezos never sells his shares, dies and leaves his shares to his son for example. The (US) tax law then “steps up” the value of shares - so instead of saying the shares were orignally worth 1 cent each and now with 100 dollars each, they are treated as being worth 100 dollars when the son gets them and so he has to pay no capital gains. I think I over simplify.
And you suggest eliminating that is a good idea.
I agree - but suggest we don’t have to wait till Jeff dies - there are other taxable “liquidity events” that are freely entered into and do not rely on third party valuations, and that achieve the goal of (the Modern Monetary Theory goal) of taxing and so eliminating money.
And yes the loan is a liability - but under current tax law (which is some version of buy, borrow, die) the wealth remains untaxed or under-taxed, kind of defeating the point of governments printing the money.
In short we want wealth to circulate not congregate.
Ok firstly how do you do the pre/ styling - been here years not worked that one out.
Not answering you at first, I suggest you chnage this to be 1000x-
>>> Imagine that I am born with $100,000,000 in stock
That’s more the level “wealth tax” campaigns are about.
Because wealth belongs eventually to all human society. Getting off this rock and surviving for another thousand years as a species is something 100% of humanity does or 0%
And wealth concentrated in the hands of a few, is wealth that is not put to optimal use. Not educating the pooorest of the planet, not stopping disease and providing nutrition to the growing.
This is not about borrowing and lending money. This is how do we circulate the actual wealth, the doctors and nurses and engineers and road sweepers, the excess energy and the excess knowledge of 8 billion apes.
Musk is right we need to get off the planet, but is wrong if that’s something just a few of us can do. Whitey went to the moon, but he did not stay. Fix down here, else we won’t make it up there.
This needs to be seen more
You don't even need to be that rich. Schwab, for example, has a SBLOC (their "Pledged Asset Line") that requires enough assets to pledge for a loan value of $100k. Certainly out of reach for a lot of people, but way lower than Musk-level borrowing. And I expect there are other brokerages with lower minimums.
Of course, the interest rates are pegged to SOFR plus a spread, so they're not great right now, though a little better since the Fed lowered rates. IIRC Interactive Brokers offers lower rates.
I’ve been trying to model using a SBLOC in a FIRE simulator to cover the gap between retirement below 65 and when 401k/social security kicks in versus selling and paying capital gains, and it looks like you come out ahead of selling stock like 90% of the time, but 10% of the time it’s much riskier and you go broke.
A better very through explanation is at https://reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/...
Borrowing money in exchange for interest is a fair transaction. Taxes on the interest are paid by the company that lent the money.
Suggesting anything else would be interfering with the market which is dangerous territory.
How is this different in principle from software developers using the RSUs in their brokerage accounts to get a loan for a vacation home or a boat? BTW the step-up in basis applies for when regular people die.
If you’re talking about someone with enough RSUs to collateralize a home loan, you’re almost certainly talking about someone in the top 1% of wealth in the US
So, uh… it’s not different, no
I was able to get away with only 10% down payment on my home loan precisely because of the holdings in my brokerage account. The rest is on 3.25% / year loan for 30 years. Very similar to the mechanism described in the article. And thus my question.
You could get a sub-3% loan with anywhere from a 5-15% down payment without any holdings in the ballpark that is being discussed.
Top 1% wealth in the US is around 13 million. So I would say you are very far off.
Wealthy people of course do all sorts of financial optimization. The framing of this as being primarily a way to avoid CGT is imho just uninformed populist rhetoric. The main reason this is done is for leverage e.g. Elon wants to buy Twitter but he does not want to reduce his stake in Tesla (ignoring whether he could actually liquidate that much TSLA stock in the first place).
I'd disagree as due to the incredibly low amount of tax paid by the ultra wealthy it looks like CGT avoidance and Buy Borrow Die is a primary use case for borrowing against assets.
You still have to pay interest. At 5% interest rates compounded after 4 years it’s cheaper to just pay CGT.
The wealthy pay the vast majority of taxes. You might not think it’s enough, but let’s be realistic here. The biggest government expenditures don’t scale with someone’s wealth. So wealthy people aren’t consuming more government services yet they pay a much larger absolute sum.
> the incredibly low amount of tax paid by the ultra wealthy
According to IRS data, the top 1% of earners pay roughly 40% of all federal income taxes.
If a houses can have property taxes then why can't shares?
Because that would negatively impact the economy and no political party has the chutzpah to pass a law that would make their benefactors mad at them.
"Of the people (with money), by the people (with money) for the people (with money)"
Anyone can borrow against their own assets: house, car, stocks, cash holdings, 401k, even their expected earnings (e.g., college loans). They can even borrow against nothing as far as they're trusted (e.g., credit cards).
None of this is special to any class or income level.
News at 11.
They're loans so where do they get the income to pay off the interest?
If I attempt something like this via Interactive Brokers (which generally has the best rates), it would cost me 5-6%:
https://www.interactivebrokers.com/en/trading/margin-rates.p...
I'd figure if you're a billionaire, with multi-millions in collateral, the rate is probably significantly lower, but they still need to pay down the interest.
Well, if you are worth billions and only spending millions, then you can borrow for a very, very long time before the interest payments get hard to pay. If you do end up in that position, you can always borrow more to pay the interest(the US govt does this).
It's nothing magic here, you even get to deduct the interest you end up paying on your taxes usually.
The rates probably not that much lower, the lenders still have to make money and they really don't like to get stuck holding the bag. They have risk departments who (hopefully) carefully analyze how much borrowing they are doing and making sure they are the ones holding all the cards if it ever comes crashing down.
> They're loans so where do they get the income to pay off the interest?
They borrow more, against other stock. Works as long as you have enough stock.
> the rate is probably significantly lower
IBKR is charging Fed Funds rate + 0.5% at >$200k.
Why would they ever offer anyone significantly less than that rewardless if they are billionaires or not? They be losing money on those loans..