I never understood the issue. You borrow money against your equity, but have to pay it back, with post tax dollars. Plus you pay interest on it anyway. So where it the loophole.
Simplified example, I have $100 worth of stock, I borrow $10 and pay 10% interest. I eventually have to come up with the $10 to pay it back, which will be post tax. And I'm paying interest on it anyway, which may or may not be tax deductible.
It would be the equivalent of me getting a home equity loan and having to pay taxes on the gains of my property when I took out the home equity loan.
Later you die, your stock is now worth $1000 of which your estate pays $0 tax on it (see: stepped up cost basis) and then they pay off the loan and pass the proceeds to your trust.
in the interim, you've been able to enjoy the $100 from your stock (which may have a cost basis if $0.0001 since you're a fonder) without paying any taxes.
---
Also your interest rate of 10% is a bit high but still basically lower than the appreciation of stock so it kinda doesn't matter.
So your saying that these loans never get paid back in the lifetime of the borrower? And they just keep taking out more and more loans during their life? X
> So your saying that these loans never get paid back in the lifetime of the borrower?
Yes.
> And they just keep taking out more and more loans during their life? X
Well, I'm not making any claims on that but probably.
If you took out a $200M loan and only needed to spend say $25M of that it's probably advantageous to re-invest $100M of that back into stocks and then if they appreciate (too much?) you'd want to do another loan again.
I don't believe anybody has suggested attacking anything (in this thread).
However, I would say the issue with attacking the stepped up cost basis is that it occurs ~50 years into the future.
By taking out a loan the value of the stock has been realized for all intents and purposes except for tax. That should be considered the loophole imo (see article).
Stock is a highly liquid asset, the exact opposite of a home. For starters, you don't give up the home (title, possession, or use) when you take out a home equity loan.
But when wealthy stockholders borrow against stock, they are realizing the economic value of the stock by using that stock as collateral (i.e., exchanging it in exchange for the loan) but are not being taxed on that realization of income. Also, it's quite uncommon for someone capable of utilizing this scheme to pay any significant amount of interest on the loan (and this was true even before the decade of ZIRP), as quite paradoxically the wealthy pay less interest on larger loans.
You have $1B in stock, and it represents 1% of your brokerage’s assets under management.
You periodically borrow $10M from the brokerage using the stock as collateral. They charge 0.25% (i.e., a few percent below inflation) and no minimum payments with the understanding that you will not move your assets.
Normal margin rates are 5%+, I could see a big account getting a big discount, but 0.25%?
At some point (well above 0.25%) it’s clear that a special rate is being offered that is no longer an arms length loan (IRS Part 1 Section 7872) and the imputed rate will be applied as if the difference is an interest payment from the bank to the customer.
But let’s say the client gets 4% instead of the normal 5.5%. If they never pay it back it only takes a few years before they pay more in interest than they would have paid in capital gains taxes.
It’s a “loophole” that nobody uses to avoid taxes for a lifetime.
Do they? I wouldn’t be surprised if their margin was 0.25% but they‘d still be charging it on top of the benchmark rate (~4.8% now) otherwise they’d be losing a lot of money overtime
There is no loophole. The interest is taxed completely. So the government is probably making more with all the spending. No one is borrowing money to sit in an account. They borrow to spend (immediately taxed as sales and also profit of the seller and interest)
Unless I've missed it, this analysis skipped over the flexibility of being able to declare which specific assets are functioning as collateral through adding new terms to loans. This would lower compliance costs further without being beholden to all the fixed rules they laid out (eg "FIFO").
For example if you're taking a huge loan above the thresholds, instead of just implicitly having that loan backed by everything you own, the terms can spell out which specific assets are functioning as collateral and that there is no recourse against you generally. Then only the gains on those recourse assets would be considered.
(Though this whole topic might be a moot point now that interest rates exist again, and if the ZIRP monster is allowed to come back then we're screwed anyway)
We already have laws for tax treatment of constructive sales of assets. Using an asset as collateral would be a logical extension of that principle. This seems more workable than unrealized gains taxes in general.
As I understand it, the "constructive sales" rules were developed in response to hedge funds structuring transactions with forward contracts (and other clever instruments) to avoid short term gains taxes.
Taxing someone for borrowing against something when they have not expressed a clear intention to sell doesn't really make sense.
What would be next, taxing proceeds from refinancing a multifamily property? Taxing the refinancing of your personal residence? Taxing when using equity from a property as collateral on a loan? All of those are the same thing as what you are trying to tax.
> This is just a silly plan grounded in the idea that we need to somehow punish those evil billionaires.
Or perhaps it's just a rather sensible plan grounded in the idea that billionaires also need to pay their fair share.
Talk like "silly", "punish", and "evil" seems rather inflammatory. Makes those who use it come off as shills.
> We can’t (and won’t) tax unrealized gains when there is no intent on selling.
When those "unrealized gains" look, walk, and quack in effect exactly like realizing the gains of a sale, then it seems the actual intent -- being able to benefit financially from those gains -- has been realized, whether in the form of an actual old-fashioned sale or not.
Doing it the fancy way, so as to effectively realize the same benefit, but not having to ever pay taxes because you're not calling it "a sale" is the very definition of a loophole. Why are you in favour of loopholes for billionaires?
Using your home as collateral for a home equity loan is not the same thing. For starters, you remain in possession of your home and continue to use it. When you put up stock as collateral for these HNW loans, you can't do anything with the stock.
I can’t speak for the billionaire class, but you absolutely can do whatever you want with your portfolio short of withdrawing funds when you take a margin loan out against it. There are other limitations but it’s pretty free rein for normal transactions like buying and selling standard securities.
I can sell any security I want in my portfolio account and leave it as cash and/or buy another so long as I don’t borrow above my margin limit. Most folks employed in the tech sector for any length of time can do the same if they so choose.
The only real loophole here is the step up basis on death. That needed closing decades ago it’s so obviously fraudulent.
I don’t see much of a difference between securing your loan against a bank account, stock portfolio, exotic car collection, or real estate holding. It’s all just loans secured by other relatively liquid assets. If you sold your home you’d have your loan called in just the same as if you sold your stocks and tried to transfer the money out of your portfolio account.
That said - I certainly wouldn’t be opposed to an all or nothing here. Anything to reduce real estate being primarily used as a financial asset over a place to live or do business is a good place to start in my book!
It t would be easier to explain if people on HN understood the difference between recourse loans and non-recourse loans, but based on these two responses people clearly don't.
Suffice to say, if you tried to do what Elon does with his stock, you would not be able to, because the type of loan he has is not a type of loan available to the general public.
No, the problem you're having here is that you're thinking of a house as being an asset in a way that stocks are not, and that's not correct it's just a 'things that matter to me in the "real world"' kind of bias (I'm sure there's a word for it).
I think the issue here is how these issues are presented in the "general reader" media (and to be clear this is not a "omg the media lies" dig, more a matter of these issues are more complex than an article can likely address).
So I'm going to try and describe at a high level what is happening, but remaining sufficiently low level that we can convert that to a scenario that us normal folk would experience, so we can see how it's difficult to make legislation that would only catch {m,b,tr}illionaires.
First off, the article starts off by saying "X, Y, and Z have become billions of dollars richer but haven't paid taxes on those billions". This is 100% accurate, but it carries an incorrect implication that they were paid billions of dollars. What has actually happened is stock/assets they already owned became much more valuable, and therefore their net worth sky rocketed. During this period they have also been paid (in money, stock grants, dividends, etc) and those incomes are taxed - presumably at an absurdly low rate due to real tax loophole abuse, the regressive us tax system, etc - but the bulk of their increased value comes from stock they already owned.
In steps this is what happens:
Step 1. Born! Assets = <statistically: vastly higher than average inherited wealth, but let's pretend nothing!>
Step 2. They Do/Start something that gives you stocks/equity/some asset class of some kind
a) get $X of stock
b) sell Y% of that stock to cover taxes (this is the standard American corp RSU model, but founders, billionaires, etc do this differently in a way that is technically more profitable but comes with higher risk profiles and other things that mean this is probably the best way for general folk)
c) keep the remain 100-Y%
Step 3. The economy has its turn, and the value of the assert (shares) goes up, potentially by a large amount.
Step 4. Repeat for say 5 years
Step 5. Assume the company is being successful, the stock price has gone up say 20x
a) Every year you've received $X of stock
b) Every year you've paid your Y% taxes on that stock
c) An article about your finances correctly reports that over the last 5 years your value has gone up by *more* than 20x but you've only paid taxes of a few percent. To put in perspective, if we assumed a 20% tax rate, the above scenario would mean your net worth would have increased by more than 20x and calculating your tax rate by saying "taxes paid/gain in net worth" would say you paid less than 5% I think?
Ok, so that's essentially how we get into the scenario that makes the start of this article on low taxes for the wealthy. This is a shame, as there are plenty of much grosser ways that billionaires do actually skip on taxation they pay to support the society that makes their billions possible, but let's continue addressing this.
The problem that these billionaires have is that while they have all of this net worth, it's not usable for anything. They could just sell stock, and there is an honest "morally justified" reason for not selling stock: if you started a business that was successful, then having to sell it/stocks (losing control of your own business" in order to realize that value would suck. Obviously however in many/most of the cases where discussing, it's super clear the only reason the stock is not being sold is to avoid the taxes, which is part of why everyone hates that billionaires do this.
To keep everything in line in this comment, the entire model being presented in the article as tax avoiding income is just this:
1) Person increases their net worth as their stock/investment/assets have increased in value
2) Person wants to actually buy something - converting their current "value" into cash
3) Selling their stock/investment/assets comes with significant costs - mostly taxes, but also the assets might be useful to own - so instead of selling the assets, they go to a bank and say "I have these assets, can I please have a low interest loan that is secured by my giant pile of other assets" and the bank goes "ok, because it's safe we'll give you a low interest rate, but if the value of your assets drops significantly we may call in your loan immediately before your assets drop below the value of your loan".
Now I think most people are on board with the "we don't like that billionaires do this" but I think it's clear that there's a lot of difference of opinion about whether it should be allowed. My view is that you can't disallow it without having a much more adverse impact on non-billionaires, because the above model covers large swathes of normal financing.
There are many problems, but the most obvious ones are:
* You can't ban borrowing against assets as that's what almost all long term loans are: mortgages, car loans, etc anything where the outcome of failing to repay the loan is the lender being able to seize the asset
* Banning loans against the increased book value of an asset - that just means that a home owner is not able to refinance, let alone home equity lines, unless they pay taxes on the increased value on their home. e.g say you've owned your home for a decade an it has doubled in value, but now to get a home equity loan or refinance you have to pay taxes on the increase in value on your home, that tax bill might be more than your entire home equity line.
It's very difficult to design a law that would not cover these for "normal people", in a way that can't be trivially circumvented by expensive accountants, or alternatively cause "normal people" to suddenly have massive tax bills (any X% or $Absolute limit runs the risk of impacting people who have owned a single property for many years), or restricting access to financing to people who already have huge amounts of money.
Those problems aside, we can make an even more direct equivalence: say you have a non-retirement investment account for savings, one day you need emergency money. Selling the stock from your savings fund means taking a taxation penalty on the current value of the stock, so you have to sell more stock than you needed cash originally - because you need money aside for taxes - and then you have to rebuild your savings fund while losing out on basic market gains on the stock you sold. That is why taking a loan out against your (non-retirement) investment accounts is a standard thing that most banks with investment branches offer. I think this last part is actually important - the kind of loan this article is calling "tax free billionaire income" is not rare, they're not expensive (think home equity line), they're not restricted to the extremely wealthy. It's just they're only discussed in the media in the context of billionaires.
I really think when discussing ideas like this that we recognize that the actual question may not be "is this fair?", "is this legal?", or "should this be legal?", but rather "is it possible to construct a law that describes these actions in a way that only applies to the extremely wealthy". In this case I don't believe that it's possible - it's not a matter of forbidding specific asset classes, because (1) normal folk use these, and (2) billionaires use these asset classes because they work for the purpose, if you restrict one asset class they can easily afford to move to a different one.
The same happens in reverse - one of the many arguments proponents put forward for CA's prop13 (which restricted changes in valuation for property taxes essentially to just property sales) was to prevent elderly home owners from getting astronomical increases in property taxes for houses they'd lived in for decades. What that actually did was mean that commercially owned properties essentially never have their property taxes raised because they never sell property - if a "property" is sold, what is actually sold is a business that owns the building. Which to my understanding was a large part of the actual goal for prop13.
We're much better off just fixing the existing loop holes and gaping gifts to the rich in the basic tax code before trying to deal with things that are actually hard (e.g commuting to work is not a tax deductible expense, a private jet across the country for an executive to get to the office is, etc)
I stopped reading the analysis after the first few "boo hoo billionaire" claims but you assume that billionaires can't exploit the value of their paper holdings, and that's a fundamental misunderstanding of the problem.
The problem is that these billionaires you're defending are able to exploit their stock, as if they had received cash for the stock, but were not taxed on this the same way the rest of us would be if we tried to do the same, and that is the loophole we are trying to close.
All the rest of your comment is entirely unrelated to what the original topic of discussion was.
No, I'm not defending them. I think billionaires behaving like this is garbage behavior, I personally think that if I were a billionaire I would not behave like this (and if any multi-billionaires out there are willing to fund it, I would happily consent to the experiment :D)
What I'm saying is that the specific things that this article are claiming should be taxable income, would not meaningfully impact billionaires - they can afford a much higher baseline cost to move to a different shelter.
But any law that attempted this kind of loans against assets that have increased in value, would disproportionately impact non billionaires. Because it would hit standard loan types used by ordinary people. It would hit people had created there own business that was successful, but not a billion $ multinational.
The billionaires meanwhile would be continuing to travel in their tax deductible private jets, while paying negligible tax on their explicit "real" earnings via a relentless stream of tax avoidance scams and tax cuts specifically reducing the tax of the already ultra wealthy.
Targeting something like loans against assets that have increased in value is a BS bandaid that literally falls off in the next tax cycle once their accountants work out a new trick.
The actual fix is real corporate tax rates, non regressive individual taxes (in most countries the % of your annual income only that goes to taxes tends towards the maximum tax rate as you income increases. In the US there comes a point where your tax rates start going down again. You still pay more than others in absolute terms but the % decreases).
Increasing corporate taxes also impacts the absurd wealth growth of billionaires, because a corporation can manufacture an increase in value in owner's stock by taking the excess cash they have due to low tax rates, and just buying back shares - effectively paying the various funds and billionaires without ever actually transferring any assets to them at all so there's not even rudimentary income tax. Increasing tax rates also means the relative value of cost cutting, deferred maintenance, etc decreases - a lot of modern US corporate behavior basically originates from the "fuck you I'm already rich" tax cuts of the 80s, which had the overwhelming impact of rewarding cost cutting over actual development, wealth transfer over wages, etc (Obviously this is a "complex issue", yada yada, but that's the fairly well documented impact of Reagan/trickle down economics).
So don't come at me like I'm defending billionaires just because I'm saying patching individual tax avoidance scams is not a solution, recognize that shit like this is not fixed by patching around the edges. America now has a tonne of billionaires, created/funded by shitty corporate liability law, massive tax cuts for decades, and generally garbage enforcement of what minimal tax evasion laws exist. Those billionaires have got there's and it not possible to undo that for them - the law is pretty clear on not being able to retroactively change tax polices. Any effective changes are going to be at the start of the trust fund baby->billionaire pipeline, and that means boring corporate and individual tax law changes and increases. Again, not band aids for whatever this years most popular tax-avoidance-for-billionaires scheme is.
Is it a loophole? There's only a very small cabal of high priests who actually understand how the tax system works and uncle Sam isn't paying as much as the billionaires and corporations. I assume it was all deliberate.
Ah yes, let's become even more dependent on the rich, this will fix our problems.
If you want to transfer their wealth, then just transfer their wealth and be done with it and declare nobody can ever be a billionaire or whatever. That's actually at least sane.
Otherwise this (and many like it) is a dumb plan because it will make you more dependent on them, when
1. it seems nobody wants them to really exist in the first place, and we want to eliminate them - see below.
2. If you don't eliminate them, you are becoming more and more dependent on a smaller and smaller group over time. Ignoring the totally obvious problems with this, it doesn't work anyway. People don't want them to have any more political or other power than anyone else, but this is totally unrealistic if the vast majority of your funding ends up depending on them. Like, good luck with that i guess?
It's also unreasonable anyway, the 5% partner in a 2 person small business does not get 50% of the say. It's only because of the amount of class warfare involved that anyone considers this position sane. If you don't want rich people to have power, stop depending on them. This is not different than anything else in the world (if you don't want Amazon to have power, stop depending on Amazon)
If you do eliminate billionaires, now your plan is basically:
1. Heavily tax billionaires to the point that majority of tax revenue is dependent on them
2. Get rid of billionaires at some point.
3. ????
Governments don't ever save enough money to make themselves self-sustaining without tax/etc revenue, and personally, i do not want a self-sustaining government anyway.
So how does this end well, exactly, except in a fairy tale?
?????
I was clear on the dependence - an ever increasing amount of the government's funding will come from these folks. You seem to believe that because they are required to do so, it somehow does not create dependence, but that seems very strange.
For example:
Your parents were required to feed you as a child, or they would go to jail.
You were still dependent on them.
Dependence and penalties for non-compliance are totally orthogonal.
Unless children can send their parents to jail where you live (as opposed to the authorities doing it) that analogy just doesn't work.
A more apt analogy would be children and household chores. In a functioning household with competent adults in charge, the parents aren't dependent on the children to do the chores. The parents can do them by themselves, or pay to have them done. They assign chores to children to instill in them a sense of duty and responsibility to the household (also to teach practical "adulting" skills, but that's beside the point). If the children shirk their chores, punishment is sure to follow.
That's a long-winded way of saying that having rich people pay more tax doesn't give them any more influence on politics than they currently have. If anything it might leave them a bit less money to spend on lobbying.
> If you want to transfer their wealth, then just transfer their wealth and be done with it
The exact mechanics of this, is what is being discussed.
> Heavily tax billionaires to the point that majority of tax revenue is dependent on them
Being able to target the wealth, as it moves around but is still accessible - ie "I'm not a Billionaire, I have a very nice consulting job where I get unlimited per diem from this unrelated foreign corporation over there", is what is being discussed. Some people are getting into the specifics of targeting inheritance.
Also need to eliminate the immediate tax benefits of deferred donations. The Silicon Valley Community Foundation is 99.9% a tax dodge that shouldn't exist because it does so little meaningful philanthropy compared to how much in tax advantages they launder for billionaires.
I never understood the issue. You borrow money against your equity, but have to pay it back, with post tax dollars. Plus you pay interest on it anyway. So where it the loophole.
Simplified example, I have $100 worth of stock, I borrow $10 and pay 10% interest. I eventually have to come up with the $10 to pay it back, which will be post tax. And I'm paying interest on it anyway, which may or may not be tax deductible.
It would be the equivalent of me getting a home equity loan and having to pay taxes on the gains of my property when I took out the home equity loan.
What am I missing?
The appreciation of the stock.
Later you die, your stock is now worth $1000 of which your estate pays $0 tax on it (see: stepped up cost basis) and then they pay off the loan and pass the proceeds to your trust.
in the interim, you've been able to enjoy the $100 from your stock (which may have a cost basis if $0.0001 since you're a fonder) without paying any taxes.
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Also your interest rate of 10% is a bit high but still basically lower than the appreciation of stock so it kinda doesn't matter.
https://tradethatswing.com/average-historical-stock-market-r...
So your saying that these loans never get paid back in the lifetime of the borrower? And they just keep taking out more and more loans during their life? X
> So your saying that these loans never get paid back in the lifetime of the borrower?
Yes.
> And they just keep taking out more and more loans during their life? X
Well, I'm not making any claims on that but probably.
If you took out a $200M loan and only needed to spend say $25M of that it's probably advantageous to re-invest $100M of that back into stocks and then if they appreciate (too much?) you'd want to do another loan again.
So if I am understanding this right, the inheritance gets its cost basis reset.
If that's true, then I think we should be attacking the stepped up cost basis instead.
I don't believe anybody has suggested attacking anything (in this thread).
However, I would say the issue with attacking the stepped up cost basis is that it occurs ~50 years into the future.
By taking out a loan the value of the stock has been realized for all intents and purposes except for tax. That should be considered the loophole imo (see article).
What am I missing?
Stock is a highly liquid asset, the exact opposite of a home. For starters, you don't give up the home (title, possession, or use) when you take out a home equity loan.
But when wealthy stockholders borrow against stock, they are realizing the economic value of the stock by using that stock as collateral (i.e., exchanging it in exchange for the loan) but are not being taxed on that realization of income. Also, it's quite uncommon for someone capable of utilizing this scheme to pay any significant amount of interest on the loan (and this was true even before the decade of ZIRP), as quite paradoxically the wealthy pay less interest on larger loans.
You have $1B in stock, and it represents 1% of your brokerage’s assets under management.
You periodically borrow $10M from the brokerage using the stock as collateral. They charge 0.25% (i.e., a few percent below inflation) and no minimum payments with the understanding that you will not move your assets.
Normal margin rates are 5%+, I could see a big account getting a big discount, but 0.25%?
At some point (well above 0.25%) it’s clear that a special rate is being offered that is no longer an arms length loan (IRS Part 1 Section 7872) and the imputed rate will be applied as if the difference is an interest payment from the bank to the customer.
But let’s say the client gets 4% instead of the normal 5.5%. If they never pay it back it only takes a few years before they pay more in interest than they would have paid in capital gains taxes.
It’s a “loophole” that nobody uses to avoid taxes for a lifetime.
> charge 0.25%
Do they? I wouldn’t be surprised if their margin was 0.25% but they‘d still be charging it on top of the benchmark rate (~4.8% now) otherwise they’d be losing a lot of money overtime
> I eventually have to come up with the $10
Or you never do that. When you die the cost basis is adjusted and you children don’t have to pay any taxes even if they sell.
But, yeah since it’s not actual income taxing it makes no sense. IMHO a wealth tax above a certain (high) threshold would be far more reasonable
There is no loophole. The interest is taxed completely. So the government is probably making more with all the spending. No one is borrowing money to sit in an account. They borrow to spend (immediately taxed as sales and also profit of the seller and interest)
The loophole is the cost basis of the equity resetting — untaxed — at death.
“Buy, Borrow, Die”
https://www.dcfpi.org/all/how-wealthy-households-use-a-buy-b...
The loophole appears to be the reduction/elimination of taxes at death, not the common equity loan that middle class folks take advantage of as well.
Unless I've missed it, this analysis skipped over the flexibility of being able to declare which specific assets are functioning as collateral through adding new terms to loans. This would lower compliance costs further without being beholden to all the fixed rules they laid out (eg "FIFO").
For example if you're taking a huge loan above the thresholds, instead of just implicitly having that loan backed by everything you own, the terms can spell out which specific assets are functioning as collateral and that there is no recourse against you generally. Then only the gains on those recourse assets would be considered.
(Though this whole topic might be a moot point now that interest rates exist again, and if the ZIRP monster is allowed to come back then we're screwed anyway)
This sounds like a great proposal. Another consideration is to means-test the step-up basis the estate up to a certain size.
It would certainly be harder to comply with but both together seem like a no-brainer. These people need to pay their fair share.
We already have laws for tax treatment of constructive sales of assets. Using an asset as collateral would be a logical extension of that principle. This seems more workable than unrealized gains taxes in general.
Not really the same thing.
As I understand it, the "constructive sales" rules were developed in response to hedge funds structuring transactions with forward contracts (and other clever instruments) to avoid short term gains taxes.
Taxing someone for borrowing against something when they have not expressed a clear intention to sell doesn't really make sense.
What would be next, taxing proceeds from refinancing a multifamily property? Taxing the refinancing of your personal residence? Taxing when using equity from a property as collateral on a loan? All of those are the same thing as what you are trying to tax.
It would be trivial to exclude one’s primary residence from any tax scheme otherwise involving capital assets
This is just a silly plan grounded in the idea that we need to somehow punish those evil billionaires.
We can’t (and won’t) tax unrealized gains when there is no intent on selling.
> This is just a silly plan grounded in the idea that we need to somehow punish those evil billionaires.
Or perhaps it's just a rather sensible plan grounded in the idea that billionaires also need to pay their fair share.
Talk like "silly", "punish", and "evil" seems rather inflammatory. Makes those who use it come off as shills.
> We can’t (and won’t) tax unrealized gains when there is no intent on selling.
When those "unrealized gains" look, walk, and quack in effect exactly like realizing the gains of a sale, then it seems the actual intent -- being able to benefit financially from those gains -- has been realized, whether in the form of an actual old-fashioned sale or not.
Doing it the fancy way, so as to effectively realize the same benefit, but not having to ever pay taxes because you're not calling it "a sale" is the very definition of a loophole. Why are you in favour of loopholes for billionaires?
They are still holding assets which are at risk of loss.
Unless they are using derivatives or something to fully hedge loss, it is absolutely not equivalent to a sale.
Home equity loan has entered the chat.
Using your home as collateral for a home equity loan is not the same thing. For starters, you remain in possession of your home and continue to use it. When you put up stock as collateral for these HNW loans, you can't do anything with the stock.
I can’t speak for the billionaire class, but you absolutely can do whatever you want with your portfolio short of withdrawing funds when you take a margin loan out against it. There are other limitations but it’s pretty free rein for normal transactions like buying and selling standard securities.
I can sell any security I want in my portfolio account and leave it as cash and/or buy another so long as I don’t borrow above my margin limit. Most folks employed in the tech sector for any length of time can do the same if they so choose.
The only real loophole here is the step up basis on death. That needed closing decades ago it’s so obviously fraudulent.
I don’t see much of a difference between securing your loan against a bank account, stock portfolio, exotic car collection, or real estate holding. It’s all just loans secured by other relatively liquid assets. If you sold your home you’d have your loan called in just the same as if you sold your stocks and tried to transfer the money out of your portfolio account.
That said - I certainly wouldn’t be opposed to an all or nothing here. Anything to reduce real estate being primarily used as a financial asset over a place to live or do business is a good place to start in my book!
It t would be easier to explain if people on HN understood the difference between recourse loans and non-recourse loans, but based on these two responses people clearly don't.
Suffice to say, if you tried to do what Elon does with his stock, you would not be able to, because the type of loan he has is not a type of loan available to the general public.
No, the problem you're having here is that you're thinking of a house as being an asset in a way that stocks are not, and that's not correct it's just a 'things that matter to me in the "real world"' kind of bias (I'm sure there's a word for it).
I think the issue here is how these issues are presented in the "general reader" media (and to be clear this is not a "omg the media lies" dig, more a matter of these issues are more complex than an article can likely address).
So I'm going to try and describe at a high level what is happening, but remaining sufficiently low level that we can convert that to a scenario that us normal folk would experience, so we can see how it's difficult to make legislation that would only catch {m,b,tr}illionaires.
First off, the article starts off by saying "X, Y, and Z have become billions of dollars richer but haven't paid taxes on those billions". This is 100% accurate, but it carries an incorrect implication that they were paid billions of dollars. What has actually happened is stock/assets they already owned became much more valuable, and therefore their net worth sky rocketed. During this period they have also been paid (in money, stock grants, dividends, etc) and those incomes are taxed - presumably at an absurdly low rate due to real tax loophole abuse, the regressive us tax system, etc - but the bulk of their increased value comes from stock they already owned.
In steps this is what happens:
Step 1. Born! Assets = <statistically: vastly higher than average inherited wealth, but let's pretend nothing!>
Step 2. They Do/Start something that gives you stocks/equity/some asset class of some kind
Step 3. The economy has its turn, and the value of the assert (shares) goes up, potentially by a large amount.Step 4. Repeat for say 5 years
Step 5. Assume the company is being successful, the stock price has gone up say 20x
Ok, so that's essentially how we get into the scenario that makes the start of this article on low taxes for the wealthy. This is a shame, as there are plenty of much grosser ways that billionaires do actually skip on taxation they pay to support the society that makes their billions possible, but let's continue addressing this.The problem that these billionaires have is that while they have all of this net worth, it's not usable for anything. They could just sell stock, and there is an honest "morally justified" reason for not selling stock: if you started a business that was successful, then having to sell it/stocks (losing control of your own business" in order to realize that value would suck. Obviously however in many/most of the cases where discussing, it's super clear the only reason the stock is not being sold is to avoid the taxes, which is part of why everyone hates that billionaires do this.
To keep everything in line in this comment, the entire model being presented in the article as tax avoiding income is just this:
1) Person increases their net worth as their stock/investment/assets have increased in value
2) Person wants to actually buy something - converting their current "value" into cash
3) Selling their stock/investment/assets comes with significant costs - mostly taxes, but also the assets might be useful to own - so instead of selling the assets, they go to a bank and say "I have these assets, can I please have a low interest loan that is secured by my giant pile of other assets" and the bank goes "ok, because it's safe we'll give you a low interest rate, but if the value of your assets drops significantly we may call in your loan immediately before your assets drop below the value of your loan".
Now I think most people are on board with the "we don't like that billionaires do this" but I think it's clear that there's a lot of difference of opinion about whether it should be allowed. My view is that you can't disallow it without having a much more adverse impact on non-billionaires, because the above model covers large swathes of normal financing.
There are many problems, but the most obvious ones are:
* You can't ban borrowing against assets as that's what almost all long term loans are: mortgages, car loans, etc anything where the outcome of failing to repay the loan is the lender being able to seize the asset
* Banning loans against the increased book value of an asset - that just means that a home owner is not able to refinance, let alone home equity lines, unless they pay taxes on the increased value on their home. e.g say you've owned your home for a decade an it has doubled in value, but now to get a home equity loan or refinance you have to pay taxes on the increase in value on your home, that tax bill might be more than your entire home equity line.
It's very difficult to design a law that would not cover these for "normal people", in a way that can't be trivially circumvented by expensive accountants, or alternatively cause "normal people" to suddenly have massive tax bills (any X% or $Absolute limit runs the risk of impacting people who have owned a single property for many years), or restricting access to financing to people who already have huge amounts of money.
Those problems aside, we can make an even more direct equivalence: say you have a non-retirement investment account for savings, one day you need emergency money. Selling the stock from your savings fund means taking a taxation penalty on the current value of the stock, so you have to sell more stock than you needed cash originally - because you need money aside for taxes - and then you have to rebuild your savings fund while losing out on basic market gains on the stock you sold. That is why taking a loan out against your (non-retirement) investment accounts is a standard thing that most banks with investment branches offer. I think this last part is actually important - the kind of loan this article is calling "tax free billionaire income" is not rare, they're not expensive (think home equity line), they're not restricted to the extremely wealthy. It's just they're only discussed in the media in the context of billionaires.
I really think when discussing ideas like this that we recognize that the actual question may not be "is this fair?", "is this legal?", or "should this be legal?", but rather "is it possible to construct a law that describes these actions in a way that only applies to the extremely wealthy". In this case I don't believe that it's possible - it's not a matter of forbidding specific asset classes, because (1) normal folk use these, and (2) billionaires use these asset classes because they work for the purpose, if you restrict one asset class they can easily afford to move to a different one.
The same happens in reverse - one of the many arguments proponents put forward for CA's prop13 (which restricted changes in valuation for property taxes essentially to just property sales) was to prevent elderly home owners from getting astronomical increases in property taxes for houses they'd lived in for decades. What that actually did was mean that commercially owned properties essentially never have their property taxes raised because they never sell property - if a "property" is sold, what is actually sold is a business that owns the building. Which to my understanding was a large part of the actual goal for prop13.
We're much better off just fixing the existing loop holes and gaping gifts to the rich in the basic tax code before trying to deal with things that are actually hard (e.g commuting to work is not a tax deductible expense, a private jet across the country for an executive to get to the office is, etc)
I stopped reading the analysis after the first few "boo hoo billionaire" claims but you assume that billionaires can't exploit the value of their paper holdings, and that's a fundamental misunderstanding of the problem.
The problem is that these billionaires you're defending are able to exploit their stock, as if they had received cash for the stock, but were not taxed on this the same way the rest of us would be if we tried to do the same, and that is the loophole we are trying to close.
All the rest of your comment is entirely unrelated to what the original topic of discussion was.
No, I'm not defending them. I think billionaires behaving like this is garbage behavior, I personally think that if I were a billionaire I would not behave like this (and if any multi-billionaires out there are willing to fund it, I would happily consent to the experiment :D)
What I'm saying is that the specific things that this article are claiming should be taxable income, would not meaningfully impact billionaires - they can afford a much higher baseline cost to move to a different shelter.
But any law that attempted this kind of loans against assets that have increased in value, would disproportionately impact non billionaires. Because it would hit standard loan types used by ordinary people. It would hit people had created there own business that was successful, but not a billion $ multinational.
The billionaires meanwhile would be continuing to travel in their tax deductible private jets, while paying negligible tax on their explicit "real" earnings via a relentless stream of tax avoidance scams and tax cuts specifically reducing the tax of the already ultra wealthy.
Targeting something like loans against assets that have increased in value is a BS bandaid that literally falls off in the next tax cycle once their accountants work out a new trick.
The actual fix is real corporate tax rates, non regressive individual taxes (in most countries the % of your annual income only that goes to taxes tends towards the maximum tax rate as you income increases. In the US there comes a point where your tax rates start going down again. You still pay more than others in absolute terms but the % decreases).
Increasing corporate taxes also impacts the absurd wealth growth of billionaires, because a corporation can manufacture an increase in value in owner's stock by taking the excess cash they have due to low tax rates, and just buying back shares - effectively paying the various funds and billionaires without ever actually transferring any assets to them at all so there's not even rudimentary income tax. Increasing tax rates also means the relative value of cost cutting, deferred maintenance, etc decreases - a lot of modern US corporate behavior basically originates from the "fuck you I'm already rich" tax cuts of the 80s, which had the overwhelming impact of rewarding cost cutting over actual development, wealth transfer over wages, etc (Obviously this is a "complex issue", yada yada, but that's the fairly well documented impact of Reagan/trickle down economics).
So don't come at me like I'm defending billionaires just because I'm saying patching individual tax avoidance scams is not a solution, recognize that shit like this is not fixed by patching around the edges. America now has a tonne of billionaires, created/funded by shitty corporate liability law, massive tax cuts for decades, and generally garbage enforcement of what minimal tax evasion laws exist. Those billionaires have got there's and it not possible to undo that for them - the law is pretty clear on not being able to retroactively change tax polices. Any effective changes are going to be at the start of the trust fund baby->billionaire pipeline, and that means boring corporate and individual tax law changes and increases. Again, not band aids for whatever this years most popular tax-avoidance-for-billionaires scheme is.
Why don't we just tax land (and land like monopolies - utility rights, taxi medallions, etc)?
Probably because land has pretty much fuck-all to do with anything nowadays.
It has a lot to do with the housing crisis.
A Georgist land value tax would fix the housing crisis by encouraging building up (tax the land, not the building).
Is it a loophole? There's only a very small cabal of high priests who actually understand how the tax system works and uncle Sam isn't paying as much as the billionaires and corporations. I assume it was all deliberate.
Ah yes, let's become even more dependent on the rich, this will fix our problems.
If you want to transfer their wealth, then just transfer their wealth and be done with it and declare nobody can ever be a billionaire or whatever. That's actually at least sane.
Otherwise this (and many like it) is a dumb plan because it will make you more dependent on them, when
1. it seems nobody wants them to really exist in the first place, and we want to eliminate them - see below.
2. If you don't eliminate them, you are becoming more and more dependent on a smaller and smaller group over time. Ignoring the totally obvious problems with this, it doesn't work anyway. People don't want them to have any more political or other power than anyone else, but this is totally unrealistic if the vast majority of your funding ends up depending on them. Like, good luck with that i guess?
It's also unreasonable anyway, the 5% partner in a 2 person small business does not get 50% of the say. It's only because of the amount of class warfare involved that anyone considers this position sane. If you don't want rich people to have power, stop depending on them. This is not different than anything else in the world (if you don't want Amazon to have power, stop depending on Amazon)
If you do eliminate billionaires, now your plan is basically:
1. Heavily tax billionaires to the point that majority of tax revenue is dependent on them
2. Get rid of billionaires at some point.
3. ????
Governments don't ever save enough money to make themselves self-sustaining without tax/etc revenue, and personally, i do not want a self-sustaining government anyway.
So how does this end well, exactly, except in a fairy tale?
It's especially silly, given that the sudden taxation of unrealized gains from the superrich would net the Treasury...100 billion dollars.
Which sounds like a lot; until you look at the scope of Federal spending. A few weeks of funding the USG at the most. And then what?
> this is totally unrealistic if the vast majority of your funding ends up depending on them.
Donors give money to buy influence. Taxpayers pay money to stay out of jail. There is no "dependence" here.
????? I was clear on the dependence - an ever increasing amount of the government's funding will come from these folks. You seem to believe that because they are required to do so, it somehow does not create dependence, but that seems very strange.
For example: Your parents were required to feed you as a child, or they would go to jail. You were still dependent on them.
Dependence and penalties for non-compliance are totally orthogonal.
Unless children can send their parents to jail where you live (as opposed to the authorities doing it) that analogy just doesn't work.
A more apt analogy would be children and household chores. In a functioning household with competent adults in charge, the parents aren't dependent on the children to do the chores. The parents can do them by themselves, or pay to have them done. They assign chores to children to instill in them a sense of duty and responsibility to the household (also to teach practical "adulting" skills, but that's beside the point). If the children shirk their chores, punishment is sure to follow.
That's a long-winded way of saying that having rich people pay more tax doesn't give them any more influence on politics than they currently have. If anything it might leave them a bit less money to spend on lobbying.
> If you want to transfer their wealth, then just transfer their wealth and be done with it
The exact mechanics of this, is what is being discussed.
> Heavily tax billionaires to the point that majority of tax revenue is dependent on them
Being able to target the wealth, as it moves around but is still accessible - ie "I'm not a Billionaire, I have a very nice consulting job where I get unlimited per diem from this unrelated foreign corporation over there", is what is being discussed. Some people are getting into the specifics of targeting inheritance.
This is so dumb. Normal people use this too
Also need to eliminate the immediate tax benefits of deferred donations. The Silicon Valley Community Foundation is 99.9% a tax dodge that shouldn't exist because it does so little meaningful philanthropy compared to how much in tax advantages they launder for billionaires.
Damn, I'm a billionaire and I can't borrow now against my stock. That's a shame. Maybe I should borrow in Ireland? Or Barbados? Just a thought.
the IRS and HMRC have very long arms.