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Comment by drdec | Hacker News Reader

> Capital Gain taxes are delayed until you actually sell the stock. > Squabbling over a wealth tax is not useful.

I agree that a wealth tax is not the way to go. But there are other ways to skin this cat. The big takeaway I got from the article missing in your summary is that the wealthy take loans secured by unrealized gains in order to finance their lifestyle.

So what if we found a way to make a rule that using unrealized gains as collateral for a loan was, for tax purposes, the same as realizing the gains? (You might need to tweak the rule for fairness but the basic point remains.)

I think aggressively closing loopholes in the current code could go a long way (you mentioned a couple, like charitable donations and tax havens).

View on HN

Capital gains being delayed is not a direction we want to pursue. There are huge problems with unsellable stock in venture-backed start-ups and other situations where you can end up owning a massively valued asset that you can't sell to pay the taxes on. Said asset could go to zero without you ever realizing money. I don't think people should lose their start-up stock over taxes, or face putting their entire wealth on the line on a gamble the company pays off. Keep in mind it's not unheard of to have stock worth $2+ million for an early employee in a company that goes to zero. Even more relatable to the average person: If your house price goes up too quickly you can be forced to sell to afford paying the capital gains on it.

No different than me selling stock A, paying capital gains and then buying stock B, which could go to zero.

You can handle your hypo the same way the tax system handles mine. You can deduct the capital loss from future gains.

Sure it’s different. You might not have cash to pay those taxes. When you sold and bought, you had an opportunity to set aside the $$ to pay taxes

If you are borrowing money, you have the opportunity to set that money aside to pay taxes. It's really no different.

It's not easy to get a loan against illiquid assets in many cases. And even if you get a loan, if the asset goes to zero you still owe the loan balance, which could be huge compared to your normal finances. And you pay interest on that loan.

It could work in some cases but I don't see how it's the same as selling stock A and buying stock B.

You may never have future gains to match the loss.

Why would we want a system that taxes people on an unrealized gain and then (maybe) gives it back to them over coming years?

> You may never have future gains to match the loss.

C'est la vie. That's how Capital Loss deductions, Electric Vehicle credits and other non-refundable tax credits currently work: individuals may not have enough upside to maximize their benefits, That's just how the system works as it is impossible to balance everyone's competing scenarios. If you are eligible for a $7500 EV credit but only paid $3000 in taxes, you'll only get that $3000 back, and not the full $7500.

Most American's live in that system, it's called being an employee...

I think we'd want that tax income because a dollar today is more valuable than a dollar tomorrow - making sure we increase cash flow in the short term and stabilize expected cash flow allows us to more accurately set the budget.

I'd be happy if I could give a percentage of the shares themselves to the government as a tax payment (paying tax on the shares specifically), so I don't have to worry about the risk that they're overvalued by the tax agency.

You might be OK with being taxed in the form of some of your stocks, but would you want to be taxed partial ownership of your real estate based on increase in its market value? What about private high-risk equity in a venture you started by risking all of your own money? It could go to zero (or millions) in a decade, but for now the government becomes an increasing shareholder because of its current YoY volatility...

Taxing non-income wealth increases by any means incentivizes the government to manipulate the prices of those assets -- and more than any other entity, the government possesses the power to do so through regulation and legislation.

It also makes the government the eventual largest capital owner, which could create all sorts of unintended consequences. It could sit on those assets indefinitely (like it does its liabilities) instead of selling and using the money to fund itself. There's a special kind of poverty that exists when the government owns almost everything.

Also, there's a big difference between legal worth at a given time and fungible value at that time. The difference (or lack thereof) between the two could itself create all sorts of opportunities for gaming the system when fungible value becomes a basis for being taxed.

OK. You seem to be agreeing that this would be a fine system with those caveats.

So: Exemptions specifically covering residency already exist in finance law. If you go bankrupt, you can still live in your house (only if you owned it, mind).

The government, as soon as practical, can auction the stock it receives. Thus identifying its value and releasing the funds.

> You seem to be agreeing that this would be a fine system with those caveats.

I'm not advocating anything in particular. I'm only pointing out some potentially serious issues with the proposed system.

Sure, primary residence could be excluded. But that doesn't change anything about what I said, except perhaps blunt the initial impact on the middle class.

> The government, as soon as practical, can auction the stock it receives. Thus identifying its value and releasing the funds.

Perhaps that could be part of the tax law. I doubt it would stay that way... once the government can own stocks and portions of real estate, I'm sure it will seek to incrementally increase its benefit from doing so. I shudder to imagine politician-beaurocrats as the most powerful hedge fund managers of tomorrow.

> once the government can own stocks and portions of real estate, I'm sure it will seek to incrementally increase its benefit from doing so.

There's nothing stopping the government from owning these things already (governments own plenty of real estate, in particular), so this seems like undue cynicism.

There's a big difference between agencies owning buildings within which to do business (or the BLM owning vast swaths of land for environmental preservation) and the IRS maintaining a real estate asset class.

In fact there's almost no comparison to be made between the two.

Regarding the government's ownership of real estate, I suggest you are simply mistaken, e.g.:

https://www.forbes.com/sites/bisnow/2017/04/11/solving-the-m...

That article is talking about local governments, not the federal government.

Ctrl-F "federal government" suggests otherwise.

This is now really a bad faith argument.

You've moved the goalposts (again), and declared that your new goal wasn't met (when, in fact, you just ignored that part).

It's OK to admit you were wrong <3

I don't think I've moved goalposts -- maybe just failed to articulate my concern precisely. (And only skimmed the article you linked.)

If the government purchases real estate with its own money and later sells it--fine by me. They have business to take care of and need places to do it.

What bothers me specifically would be a growing federal or state government stake in assets owned by others by virtue of a tax law that grants them such ownership.

I imagine whole swaths of businesses, apartments, and other buildings in cities across the US that are >50% owned by the government 40 years from now.

It would push us a lot closer to a world where people don't own anything anymore besides their own houses (maybe not even that) and the government owns everything.

> It would push us a lot closer to a world where people don't own anything anymore besides their own houses (maybe not even that) and the government owns everything.

I'm really struggling to understand this point of view, given the article that you couldn't be bothered to read says the US government owns 15% of all real estate already.

In my country, the reason that a lot of people own their houses is because the government sold its housing stock to residents in the 1980s and 1990s. That created a majority of homeowners, for the first time.

The fact that the government didn't replace this housing stock has been the cause of a massive generational rift, with a reduction in owner-occupancy from that peak, down to the point that a plurality of people (the vast majority of people under 45 - almost all young families) are now private renters in insecure housing situations.

While that same housing stock - originally built by the people, for the people - is increasingly dominated by exploitative for-profit landlords.

It would be OK with me as long as I could buy back the government's stake in my house from the government by paying the tax in dollars.

Huh? The government owns a percentage. The asset doesn't really matter. It would be a lein, to pay back at exit, not a voting share or whatever.

How is that different from capital gains tax?

Unless you mean a series of leins incurred once a year based on price increases. But then an asset with high YoY volatility but no long-term gain would cause the lein sum to approach the value of the asset over many years, despite no material increase in price at exit. That makes no sense - the government profiting off of volatility alone.

If that's not what you mean, how is what you mean different from standard capital gains tax?

This would be a very interesting way to handle percentage taxation on assets like that.

Either pay %x in cash value or give %x percent of the item to the government.

Of course likely the government would just want to liquidate immediately but you could perhaps set it up as a "lien" on the stock/bond/property that gets satisfied at final sale.

They'd want to liquidate as soon as possible, but they might have to wait for a liquidity event like an IPO to do so.

I'm not sure the lien would really be any different than how capital gains taxes work today. Assuming you stayed in the same tax bracket every year.

For many situations it’s the same but there are cases where you have to pay tax on vesting Stock but have no way of selling the stock to pay the tax. It’s rare but it can occur.

It’s supposed to work out in the end as you have a higher basis at that point but you still have a liquidity issue.

No, you wouldn't. Unrealized gains being taxed would eventually make you declare bankruptcy or live on the street. The government wouldn't let you pay in stock but sell stock yourself.

So, unless I miss what you're saying, is that you propose that the government own a share in every business that is created by way of "taxation". Is that not what you're proposing in this statement?

Do they also get to leverage these shares to have a vote as to the business decisions, like any other share holder does? (assuming they have enough shares in this hypothetical share tax)

Not my idea, nor one I think is perfect, but I assume they are saying this would no be every company, just those where they would rather give shares than pay tax.

No doubt they would be loads of ways to scam this though, setting up supposedly valuable companies to 'pay' a big tax bill, then rinse the company or allow it to fail while diverting profit elsewhere.

I was just saying, it sounds an awful lot like forced communism through taxation. A share in a company is a portion and a vote in a company, however small.

I can't think of a way to scam it, as long as they only allow this method of payment for taxes assessed on the asset itself, rather than as a substitute method of payment for other taxes owed.

It would be an interesting idea to explore and could potentially be a massive boon to risky startups by allowing them to hand out equity more freely as incentives without worrying about the accompanying tax burden.

The government is taxing you anyway. I'm not proposing a new tax, I'm proposing more flexibility on how they accept payment. Right now, they only accept the taxes to be remitted in dollars.

For simple income tax, where you're paid in dollars and hand the government a percentage, that's fine.

But what if you're paying a tax on, say, some equity you were given in a startup?

This can cause huge trouble for people who have illiquid assets, like equity in a private company. You have to pay tax in dollars based on a guess of the value of that equity, even though you can't trade the equity for dollars (it's not liquid). When you eventually can sell the asset, like at an IPO, its assessed value could have decreased and it might be worth even less than the taxes you already had to pay on it.

That's the kind of gift you don't want to receive.

I'm suggesting that, for those who are worried about that risk, the government allow you the option of handing over a percentage of the asset instead. If it ends up being worthless paper, then the government gets nothing, but on the other hand that's also the correct amount for them to get because the tax on $0 should also be $0.

Most likely, the government would choose to (or perhaps by legislation could be compelled to) sell the asset at an IPO, but that's a detail. Perhaps they could also have an agency for managing and directing such assets in the public interest.

So the government would then be partial owner to your restaurant or mechanic shop? The government would then be partial owner to your catering business or flower store?

I cannot think of a more complicated mess as the government being part-owner of half the small businesses in America.

It's called a lien, payable at liquidation, and it's a simple accounting object.

In your house example. this is only if the homeowner takes out a loan against the new increased value of the house, and then pays tax on a portion of that loan. If your house appreciates and you don't play financial games with it, the only increase in costs would come from a local tax reassessment.

I think it is assumed a wealth tax would not require taking out a loan. You can assume that your home would be exempt, but more likely it will just be a standard allowance deductable.

This isn't a new thing. Property taxes are the wealth tax that already exists, at large.

That is... You're point on a tax reassessment is exactly what is being discussed. And if the tax on your wealth is increased as a form of capital wealth, expect the rates to be higher that most property taxes.

Edit: I see I missed that this was a hypothetical on touching collateral. Not sure how I feel on that one. In large because I know so many folks are essentially tricked by marketing to refinance all the time.

So if you decide to refinance your mortgage that would subject you to a tax? What is wrong with just paying increased property taxes?

Or, perhaps, stop accepting payment that may be valueless when you try to access it. And stop trying to get paid in a way that hides your income from the tax system.

To me, the parent wasn’t saying an asset holder would need to pay taxes on the asset unless they used it as collateral. To me, this makes a lot of sense. If someone owns a startup and worries tax implications would overextend them if the value was taxed, they shouldn’t use it as collateral on a loan.

I may be missing your point though.

But you basically always do use your house as collateral on the mortgage loan. I think this is a more radical change than you have realized.

You could pin it to when loans are issued rather than their existence.

That would only affect home refinancing, which will still be a considerable number of people.

That's different, because the house is collateral for itself, effectively a "rent to own", not for money that can be spent elsewhere.

I agree, I don’t see why income tax couldn’t be levied on any amount greater than $X borrowed/secured by an asset as collateral.

For all intents and purposes, it is income and should be taxed as such.

I don't see why we care that they're using an asset as collateral for a loan. They still need to pay back that loan with post-tax money.

Maybe they're kicking the can down the road, but that's their choice.

The real issue here is that super rich are, at the end of that road, donating shares to their non-profits, tax free. ...and that their children then have access to that non-profit and all of its assets, again without income or estate tax.

The big hole here isn't the unrealized gains - it's the "charitable Foundations" that are a complete scam.

In the UK at least, the 'trick' is that the load is never actually repaid, or is continually deferred.

> and that their children then have access to that non-profit and all of its assets, again without income or estate tax

That shouldn't matter as long as they don't start to enjoy the benefit of those assets.

This means tax rules should separate the estate as a business/investment from the personal use of the funds/wealth.

Sure, at some point it becomes neigh impossible, like let's say Bill and Melinda went to Africa on their marriage anniversary, was that business or personal? (And yes, at that level of wealth, influence, income it's always both.)

When an owner (or close relative or friend of an owner) of a family trusts/foundations/estates/NGOs/church/non-profit conducts business through said entity, that entity should pay some tax corresponding to said expense as if some part of that expense were income to the owner/relative/friend.

> Maybe they're kicking the can down the road, but that's their choice.

I can't just say "Oh, I'm investing 30% of my income, tax that part when I sell later", I don't have that choice of kicking the can down the road.

tldr; The rich, there kids and grandkids will never pay taxes under the current structure.

The problem is you're not kicking the can down the road, you are delaying it forever. Your entire 'Lifestyle' can be funded tax free. Instead of things being your assets, that you spent money on you could have a company plane, car, boat, house. Lavish dinners can be put on the company card as 'business meetings' and travel as 'Business Travel'. This is all taken out of your business profits and the best tax structure for a business is at a loss or barly profitable. Add that to the point OP made about taxing collateral loans is it would semi-eliminate the 'loophole' of never having to pay taxs.

Edit: One more point. Should a $1m donation to scientology be considered a tax writeoff?

> They still need to pay back that loan with post-tax money.

Unless they pay back said loan with another loan. Given the massive amount of wealth accumulated, you can rinse and repeat indefinitely. Basically you have a free cash flow machine, without ever having to convert that income as proceeds (unless you want to convert between asset types).

Having said I agree with your main point: we need to close the loopholes, and the charitable foundations is the biggest of all, and sadly the article missed the point entirely.

The annoying point is that those foundations are not at all charitable.

Collateral for a loan is a completely separate point. The issue was taxing unrealized capital gains. Effectively if your house goes up $100,000 you'd owe the government the capital gains tax on $100,000 immediately, not when you sold. If you don't have the money to pay for the capital gains you're looking at selling the asset. Finding the money to pay capital gains while paying down a mortgage isn't a direction I'd want to go in.

Of course, in the USA, outside of California, this is essentially what we do.

We can argue about whether or not it's good, but its not unthinkable. Property taxes in most places (in the USA, the subject of the article) are linked to the current market value of real estate. Sometimes property values rise, taxes follow, and people have to move.

Property taxes are such a small portion of property value that they seldom force a move. Capital gains can be anywhere from 20-50% depending on country. Having your home go from 800,000 to 1,000,000 and having your property taxes go from 4000 to 5000 a year is very different from having your home go up 200,000 and suddenly owing the government 40,000 to 100,000 dollars.

As I understand the proposal, you wouldn't owe the tax on $100k immediately -- that would only happen when you use the house as collateral for a reverse mortgage or similar. This makes sense to me, because the capital gains are effectively realized when used as leverage.

Parent was arguing to not delay capital gains at all, as was the article. I'm pointing out how that idea is bad.

I agree with you. This makes even more sense as in: if a lender lends you $x against a collateral of N shares, this means that they consider that there is only a tiny chance that said shares may be worth less than $x before the maturity of the debt. So this means that for all practical purposes we could decide that there are at least $x of realised gains. (In a more extreme version you could even consider that all your shares, and not just the N shares used as collateral, should be valued at $x/N per share and treat the gain as a capital gain for tax purposes)

>a massively valued asset that you can't sell

In this case, the value is not well defined. If you don't have a market, you cannot determine the value. You may think it's extremely valuable, but if you have no one else willing to recognize that value, then it doesn't really exist.

The value is precisely defined by a 409a valuation. That's the price options are offered at (the strike price) and what the FMV is.

Aren’t 409a valuations famously gamed?

It is a bogus valuation... as it is not market based. If you can't sell the stock, and nobody wants to buy it, (yes, there are startups that are in this position), then that valuation is mostly wishful thinking. Often the valuation undervalues the company as well, but that's another story.

That's the value when the valuation happens, which can be years before exercise.

A house's capital gains actually have special treatment. But in some states property values for taxes do rise by huge amounts.

I've seen this idea posted a few times without data, and it isn't convincing. The wealthy need to pay back those loans, and realize gains in order to do so. Sure, they can maintain a higher average debt/expenses ratio collateralized by unrealized gains, but the real problems here are:

1. When they do realize gains, the tax brackets are severely broken such that someone realizing $2Billion in capital gains pays a lower effective rate than someone with 1/10000th that number in income.

2. We live in a financial environment in which the Fed will rescue the stock market no matter what, creating asset inflation and making this a relatively reliable strategy, whereas there should be more theoretical risk in doing this. Bear markets, albeit painful, are the only times in recent history where wealth inequality decreases as the economy corrects and reallocates capital [0]. Staving them off at all costs for the last few decades via easy monetary policy is arguably one of the greatest contributors to the rise in wealth inequality, alongside poorly graduated income tax brackets and (to a lesser degree) automation.

Chart: [0] https://fred.stlouisfed.org/series/WFRBST01134

In many of the cases of those loans, they are structured to be payable only after the death of the person receiving the loans. And at that moment the cost basis for all of the investments goes to the price at the end of the day of death... bypassing all of the capital gains taxes. That is the real problem there.

I do completely agree that treating capital gains more favorably than earned income is just crazy (even though I personally benefit from it).

Do you have a source for this? I just struggle to believe that lenders would make loans like that on a large scale, without some major caveats.

I don't think the loans actually need to be structured like that to achieve the same effect. You can just pay off the loan by taking out another loan.

There would be some risk that you couldn't get another loan, but if you're only borrowing 10% of your net worth, it's probably an extremely small risk.

Related to the topic, what is interesting, is Switzerland home loans. When usually countries have max periods of 20-30 years, Switzerland has periods of 50-100 years, so you very well would not pay it back before end of your life.

There's another aspect to consider, perhaps: nowadays it's very easy to get to get that kind of loans with low, low interest rates, well below average market returns. So, if you have a large collateral, you could just use a chunk of the loan to repay interest. I hope my math is not wrong, but if you borrow $100K with a 3% APR — even mere millionaires can get better terms than that — after 10 years, you've had to pay "only" $35K in interests. You could use part of the original loan to pay that, or you could get a new one, assuming your collateral has appreciated. Neither of those require realizing gains, right? You just keep pushing them into the future, until you finally die and your heirs' cost basis gets reset.

>I've seen this idea posted a few times without data, and it isn't convincing. The wealthy need to pay back those loans, and realize gains in order to do so.

No they don't. The article even describes how they use income to pay for that, and then use the interest paid to avoid write off paying any income tax:

>Borrowing offers multiple benefits to Icahn: He gets huge tranches of cash to turbocharge his investment returns. Then he gets to deduct the interest from his taxes. In an interview, Icahn explained that he reports the profits and losses of his business empire on his personal taxes.

You don't get to deduct interest for personal loans, and mortgages interest deductions have been limited to interest on 750K principal since 2017 (this article is picking examples that are no longer relevant.)

The whole article is full of logical fallacies and focusing on the wrong thing to drum up outrage. E.g. I do not care that Bezos didn't pay any taxes in some year where he sold no assets and received no income. What matters is what the tax brackets levy on wealthy people when they do liquidate, which are currently a complete joke and cap out at a number thousands of times lower than the highest earners.

This would also affect most home owners. They purchase a home, it goes up in value, and they refinance or take a second loan rather than sell the property. The wealthy do this as well with property, art, and securities. Trying to tax unrealized gains (like a home that has appreciated in value) would be a new mess of tax legislation with holes you could drive a semi-truck through.

We already have special treatment for capital gains in the form of a primary residence. No reason that couldn't continue.

The special treatment is at the time of sale. My comments were in response to taxing the appreciation at the time of a new loan (such as taking a second mortgage).

The idea is to treat a loan against an asset with capital gains as a sale. So one would have to pay taxes out of the loan and then you get a stepped up basis.

The exact rules could be tweaked to keep it from being a burden on families taking a second mortgage, e.g. if you borrow less than a certain amount in the tax year perhaps the rule doesn't apply. Use your imagination.

Then wouldn't tax law reform on unrealized cap gains drive the wealthy to buy more houses instead?

This sort of wealth tax probably would be targeted at amounts over a $5-50M threshold so it would never hit the primary residence of anyone except billionaires, who could surely pay cash.

So we’ve created one loophole. What if I buy multiple properties below the threshold? Is the limit per household? If so, does this apply to people heavily leveraged with little net worth who own many rental properties? The rent is income, but they often make improvements to the homes and take a cash-out refinance to pay for the cash down payment on a new property. If we do this to homes, and the wealthy move their money to a new place, such as venture capital, do we try and re-price those illiquid assets each year? If one IPO’s and they take a loan against the stock to buy a home, do you give them their previous year’s mark-to-market payment back to them if the stock goes down the following year and they get a margin call? I’m just going through a few scenarios but this would quickly inflate the tax code to an almost unmanageable state without creating just as many more new loopholes. Imagine trying to grow a startup and being worth X on paper with no actual gains or money in the bank. If you don’t include it, it suddenly becomes a tool for someone else to use within the assets you’ve excluded. If you don’t exclude it, you may force an early sale of promising new businesses to their competitors to cover a tax bill on the unrealized gains.

> The rent is income, but they often make improvements to the homes and take a cash-out refinance to pay for the cash down payment on a new property.

This is pretty much the situation that the tax is designed to combat - people using their assets to increase their wealth without paying taxes. So yes, if you did that, you would need to pay taxes on the new money in the refinance. I don't see an issue if that makes this business model unprofitable or untenable.

> If we do this to homes, and the wealthy move their money to a new place, such as venture capital, do we try and re-price those illiquid assets each year?

There's no need to price anything. You value the assets put up as collateral as the amount of the loan they are securing.

> If one IPO’s and they take a loan against the stock to buy a home, do you give them their previous year’s mark-to-market payment back to them if the stock goes down the following year and they get a margin call?

Nope. It's just like selling and immediately re-purchasing.

> Imagine trying to grow a startup and being worth X on paper with no actual gains or money in the bank.

Ok, but nothing happens unless you borrow against it. I'm not sure what scenario you are imagining here.

> There's no need to price anything. You value the assets put up as collateral as the amount of the loan they are securing.

People take out loans for much more or less than the value of the collateral. Do we ban that, or do we open up another tax/laundering loophole by letting the official value of a property diverge arbitrarily from a hypothetical sale value?

The taxable amount would be the loan amount, not the value of the property. The loan is trivial to value. If the property later sells for less than the loan amount then it would be a capital loss that could be carried forward from there.

And the tracking of all transactions over $10,000 used to be a reasonable limit.

> The big takeaway I got from the article missing in your summary is that the wealthy take loans secured by unrealized gains in order to finance their lifestyle.

Which they have to pay back with post tax money. I don't see a problem here. At best this is tax deferral until capital gains are realized, something we allow for good reason - paying real money to cover tax on paper gains (which could vanish) is a problem, and could even force you into giving away an illiquid asset because you can't afford the tax on it.

They're gambling their stock will perform better than the interest rate on the loan. That's a reasonable gamble.

Taxing a loan seems silly.

> Which they have to pay back with post tax money

Unless they die first. If heirs hold on to inherited property for a while (2 years?) they can sell it at the cost basis reset to the value at the time they inherited. They pay back the loan with the before-death gains untaxed. The original buyer got to effectively realize their gains via loans, untaxed.

https://smartasset.com/taxes/how-to-avoid-paying-capital-gai...

Sounds like a problem with how inheritance is taxed, not loans.

Actually it's a feature that rich people get.

We bought a house last year and I was forced by QuickenLoans to liquidate my Tesla positions, that appreciated 5x and incurred short term capital gains. Were I richer, I could have avoided liquidating my long positions and pay proportionally less in taxes.

The most annoying part is that in the end they didn't even need all of my stock portfolio liquidated, only about 30% to cover closing costs. Yet I got hit by a 5 figure tax bill because of it.

In short - the system literally setup to extract as much as possible out of everyone, other than the wealthiest/most powerful. And that includes banks, government and lenders.

>the wealthy take loans secured by unrealized gains in order to finance their lifestyle

Eventually they have to sell stock to pay back the loan?

Aren't they just delaying the taxation?

Exactly, they are just delaying taxation. If their investments return less than loan interest, they will need to begin selling assets to pay the loans. If their equity compounds at a rate higher than the interest rate, then they can continue to defer until death where they can pass on to heirs and take advantage of basis step-up.

https://www.thebalance.com/how-the-stepped-up-basis-loophole...

If they delay taxation until death, the asset's basis resets and the only tax owed would be estate tax.

the wealthy take loans secured by unrealized gains in order to finance their lifestyle.

It's even worse than that. The interest on those loans is tax deductible, according to the New York Times: https://www.nytimes.com/2021/06/08/us/politics/income-taxes-...

The interest being tax deductible isn't too bad. If they had to pay taxes on the capital gains as soon as they borrowed against it, it would be a fine way for them to finance their lifestyle

By virtue of being rich, they get loans to further increase their wealth, and then reduce their taxes because of the interest on that wealth increase.

If people really understood how this all essentially boils down to the rich not having to pay taxes, purely by being wealthy and being given loans on it, they'd riot tomorrow.

There are rumours that some wealthy people are in sufficiently dire straits that the loan-based vehicle for a flash lifestyle is now supported only by a very small number of banks (for them) and their debt instruments are valued well below a 1:1 rate.

It would be interesting to see what happened if a sufficient amount of that debt was bought up and forced to be repaid.

Are there any sources you can point to?

There were some discussions around this soon after the 2016 US presidential election, stating that the president-elect only had 1-2 banks willing to offer loans. As well as indicating that the estimated market value of the debt instruments was around 72 cents per USD. But, it being around 4-5 years ago, I only have vague memories and hearsay.

If you take loans secured by unrealized gains, don't you need to eventually sell some of those gains to repay the loan? You can only take out so many loans until the interest starts stacking up.

You can manipulate the payment of taxes and only pay off the loans when you have other offsets to avoid paying taxes. 9 years no taxes, year 10 I pay off my loans and donate a chair to a University.

The solution would be to close the other loopholes used to not pay taxes on year 10.

Please, there are no legislative solutions open to America. We get one shot, so it needs to go big.

> I agree that a wealth tax is not the way to go.

Why not? A tax on wealth, even a small one, is the only mechanism to avoid a long-term drift towards a feudal-like state of society.

Exactly. The strategic problem here is that the changes that took place in the Vietnam era and 80s ultimately creates a concentration of capital and power that is beyond anything we’ve seen since Roman times.

In the mid-term we’re looking at some sort of weird hybrid plutocrat/government hybrid with an American flavor and a Chinese flavor. Everyone else is in the middle with the scraps.

Because they don't work. Many EU countries have attempted them and they have all failed. There are a host of issues with wealth taxes, one of which is simply placing value on illiquid assets is difficult. How much is that rare art price worth? Well no one knows until you put it on the market. Then there are issues with immaterial things like rights, that would be very tricky to value. What if you had the rights to all of Bill Cosby's recorded stand-up acts? That could have been valued highly before the rape convictions, now it is essentially worthless. A wealth tax would just create a battle of litigation between the wealthy and IRS, and the wealthy would win. The real solution is to just have a VAT like every other developed nation in the world, is the only way to get slice of the pie from the wealthy.

It's not that hard to find a price for a rare art piece, or almost any other asset.

Make the owner declare its value, tax it at the value. But anyone can buy it at that price. If they want to keep it, they'll need to value it correctly, and thus it will get taxed correctly.

this would effectively auction off everything you own. What if an original piece of art is priceless to you? Where does it end?

If it is actually priceless, then you should not be able to hog it for yourself. /s

Can you imagine the day that you declare a value on your house and the following week someone much richer than you comes along and tells you to "beat it; I just bought this place!"

Would do wonders for the Bay Area housing market! On a serious note, this proposal was originally coupled with a pretty radical (from our point of view) approach to land ownership. Land is closer to zero-sum than many other things (ignoring artificial islands etc.), so this forces a more efficient pricing/land use at the expense of doing away with private property rights for land.

Worried that a competitor is catching up or threatening your market? Use your cash reserves to buy their factory out from under them. Don’t bother competing with Tesla, just make sure they can’t keep going once they get a little traction.

Imagine a reasonable policy rather than simplistic worst possible policy strawman. There are already many many laws that prevent abusive transactions in the current system, there's no reason that there wouldn't need to be similar laws to prevent abuse here either.

One can imagine reasonable policies around things like housing, my original two line reply was not meant to detail all the ways this would for all types of assets.

I don't think anyone would have much of a problem with the simplistic scheme applied to rare art though.

I do have a problem with that. I would prefer the Mona Lisa to remain in the hands of the Louvre than be regularly auctioned off. I would prefer American Gothic to remain in the hands of the Art Institute of Chicago, etc.

Try to imagine a reasonable policy rather than assume the worst possible policy and then the outcomes that follow.

One can imagine that public charities or government assets for example are exempt from such a scheme (since they don't pay tax anyway usually).

I’m trying to imagine the reasonably predictable response to the policy that you sketched out. Removing private property rights is not a casual undertaking I agree and would require substantial thought and care, perhaps too much to be practically workable.

Your replies so far don't seem to indicate you gave much thought to how such a system would reasonably work -- as evidenced by the assumption that art owned by charities or governments (institutions which don't pay tax) would also be up for auction.

You likewise don’t appear to have given a ton of thought to the logical responses that would likely occur from your proposal.

How long until some rich art collector starts a charity to hold their art and protect it from being auctioned?

There are already laws that would make such abuse illegal. Abuse of charities is not a new problem.

I'm not a lawyer - but it seems like one obvious factor would take into account where the artwork purchased by the charity resides. Is it in a private residence? A freeport? Probably not really a charity.

Is it hanging on the wall in the Art Institute of Chicago? Might be fine.

Then the question is what happens if the charity tries to sell it back to a private collector at some future point. Might be allowed as long as back taxes are paid assuming some appreciation schedule.

I think the more general point is that policy is _hard_, and to assume that something doesn't work because you've thought about it for 2.5 seconds is probably a bad assumption to make. Most of our existing laws/policies would be similarly easy to attack if distilled to one sentence. There's a reason actual policy and laws are really long.

Yes, policy is hard. That’s the exact same reason that when you think “it’s not that hard to find a price for a rare…”, you probably still have a lot more thinking ahead of you than behind you.

That comment was meant to be taken in theoretical sense not that I had the text of a law ready to go into effect tomorrow. I'm well aware there's plenty more thinking to be done.

You however, seem to think that because you can find a corner case in a two line proposal, the whole thing has no merit.

This a worse idea than the Jump to Conclusions mat.

I have to choose a price for all of my assets and then anyone could just be like 'yeah, I'll buy at that price' and take it from me? What if I bought the assets for the hope of it maybe being worth something in 5-10 years? Do I prematurely announce 'yeah, it's worth the price in 5-10 years that I hope it will be', and pay an enormous tax on something that's not a guarantee it will ever go to that price, just to keep other people from buying it from me if I announced what the market value is now? (And also I'm not allowed to keep any assets at market value unless I announce it's worth more to me?)

Ugh. Never get in a position where you could feasibly propose this in government, please.

Your reply could have been written to be a lot less insulting and assume I'm aware of policy implications of this proposal but did not choose delve into 150 years of research in a two line reply on HN.

I wasn't proposing that this become policy for all assets. Would it allow you to accurately assess the price of rare high valued art for the purposes of a wealth tax -- yes. It would also allow you to value other assets as well, but there are drawbacks.

I don't think your example of speculation is particularly good example of a drawback though. If you need to set the price at X so that someone doesn't buy it from you now, then that means its value is indeed just below X (assuming you've set X correctly).

If you're the only person in the world you thinks that the value of your asset will be 10X in 10 years, then you can safely set the value at X now and nobody will buy it from you. If you aren't the only person in the world who thinks this and someone is willing to buy it from you now for 2X, then I guess the value of the asset right now is 2X.

It's a completely ridiculous policy that would require enumerating every item in history and deciding if people are able to buy it from you.

My fridge? My dog? My shoes? My car? My bike? My boat? My model railroad set? My grandmothers ashes? My underwear? Oops I accidentally undervalued my gaming computer on my taxes and now people are knocking on my door.

You'd end up with a document 3 million pages long and vengeful neighbors and exes buying each others items to fuck with each other. You're calling it a strawman argument, but these are actual things that would have to be addressed.

No amount of "delving into 150 years of research" gets around all the massive, massive holes in your ridiculous idea.

When you come up with a problem (in seconds) with a policy (especially one described in essentially one line), ask yourself, what reasonable change could I make to the original idea to make it more reasonable.

For example, you could easily say that only assets that would be declared as having a value over X amount need to be declared in this way. Choose X to be somewhere in the neighborhood of a house, and you would get almost all the value of such a policy without any of the drawbacks you just listed.

You still have a massive massive number of loop-holes to fill and complexities to answer for.

Does my collection of rare coins count as one asset as a whole, or individual assets that are each under X amount? Who decides what my random painting is worth so I know if I have to declare it? What happens when my asset depreciates?

Also, once you go to X being "somewhere in the neighborhood of a house" you lose a TON of taxable income with this policy to the point where it's probably not worth it. You're not going to gain much money taxing a few mega-yachts and rare paintings, especially when you have to include the money spent dealing with more complicated taxes and audits.

We can just raise income and capital gains taxes instead and it's a whole lot easier. Wealth taxes that include assets are so fragile and complicated.

The purpose of a wealth tax is (mostly) not to raise revenue, it is to provide a downward pressure on the wealth of the wealthiest individuals.

I also think you're making a poor estimate of what the distribution of wealth looks like. Yes, there are lots of small items, but the vast majority of wealth is stored in items/things/land/etc. of significant value. Perhaps more than anything it is stored as equity in companies. For income taxes the top 1 percent paid a greater share of individual income taxes (38.5 percent) than the bottom 90 percent combined (29.9 percent). For wealth the distribution is even more skewed.

I agree there are a lot of things to figure out. That was and is true of our current system too. At one point the rules for all its loop-holes didn't exist and they had to be created and that didn't happen overnight.

If your asset depreciates, then you say its worth less next year. You decide what your random painting is worth. If you don't report an asset that should be reported, I can see multiple mechanisms:

(1) You sell it for more than X. At this point it becomes clear it should have been reported and back taxes are owed. (2) You bought it for X. If you don't report, questions would be asked. (3) There is no record of purchase and you never sell it. You might avoid paying taxes. I'm not sure what assets of significant value (over $500K) would fall into this category.

I don't have a great answer completely off the cuff about how to deal with things like a collection of rare coins. Perhaps the best answer is the easiest answer: they are just treated separately.

> The purpose of a wealth tax is (mostly) not to raise revenue, it is to provide a downward pressure on the wealth of the wealthiest individuals.

Sorry, what? Taxes should always be about raising money for various projects that benefit the country. If we can't see eye-to-eye on that I don't think we'll find common ground here. I'm not looking to punish rich people for being too rich. I'm looking to fund public projects like healthcare, infrastructure, and education.

If we have different goals that are both achieved by the same means, I don't see the problem.

I think raising money through the tax is important, but I think a more important long-term function of a wealth tax is to ensure that large fortunes eventually revert to the mean rather than sustaining in perpetuity for generations. (Unless they continue to be invested with above average returns for generations.)

Also - there are many taxes that exist not for the purpose of raising revenue, but for the purpose of a policy goal. To deny this would be to deny how a great deal of how modern public policy works.

It sounds ridiculous on the face of it to me (one exception: in board games. There's something similar in board games like Isle of Skye where you set a price for tiles that you must pay if other players don't buy them from you, but that's just a 45 minute board game for victory points, not real physical assets)

But I'm willing to read more about the idea, if you have an article or two that makes a good case for your proposal, please post and I'll give it a look.

I saw in another comment someone called it the Harberger tax, and linked to a 66 page paper that I'm just not going to read for the sake of an internet post.

I could have been less antagonistic in my reply, I apologize for that.

I do think you're overestimating how well people can judge, individually, what something is worth accurately on declaration, both now and in the future, especially if it's an asset they don't ever want to part with.

But again, I'd be happy to read articles from experts that make a case for this.

A decent intro is the first chapter of Radical Markets, available here: http://assets.press.princeton.edu/chapters/s11222.pdf but it also isn't short.

Also a video here: https://www.youtube.com/watch?v=uj186urDU8c

Neither of these is particularly short and still don't address all (or even many) of the practical issues. As with most real policy and law, I don't think something can be both short and cover all the real world cases. There's unfortunately a reason most laws are really long.

I believe the chapter of the book addresses the issue of how will people know what values to set. In addition to the solution proposed in the book, another alternative (of mine), is to allow people to pay some amount of retroactive tax. Let's say someone tries to buy the asset from you for your set price, but you don't want to sell. You can raise the price to some amount the buyer no longer wants to pay, but since you were underpaying taxes on the asset, you need to make them up.

Would such a proposal probably mean people set lower prices than are correct -- yes; would it still make sense for things like homes -- yes.

I'll at least check out the video. I can put that on in the background while I'm doing dishes later. Thanks for the links.

Also specifically for houses, at what point are you expected to make such a declaration? You don't really own the house until you've completely paid off the mortgage on it. Until then it really belongs to the bank or mortgage lender. So does that mean you're free to not make such a declaration until your 30 year mortgage is up? And what if you take out a second mortgage on the property during that time?

We're designing the system, so I think we can choose what makes the most sense. I think regardless of whether or not you have taken out a loan (collateralized or not), you would still need to declare a value right away.

In a case where you have a collateralized loan to purchase the asset, I imagine the lender could require the value you set to be at least the value left on the loan. (But the lender probably shouldn't be allowed to set the value beyond that stipulation.)

I also want to say that I definitely do not have all the answers for all the possible policy issues that might or will come up. I enjoy trying to think them through, so the first attempt might have problems and the cycle of finding those problems and fixing them will eventually lead to something that hopefully works well.

Interesting idea, but a fundamental aspect of private property is that you don't have to sell it.

Maybe someone knocks on your door and says "I just bought your house. Get out." That would be pretty unpleasant.

Or, more on topic for this site: maybe they do that with your startup.

This is called a Harberger tax and there has been extensive research on it: https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?arti...

Your overall point is right, a wealth tax would be massively complex. In all honesty it's probably only worth implementing on billionaires (and using some of the funds raised for beefing up the IRS legal team and auditors).

One thing I want to point out, the reason why 'wealth taxes have always failed' is because it's against the interests of the wealthy, and the wealthy are powerful. Look how scared republicans are of grover norquist and the billionaires that back him. It's hard not to argue the same thing is happening in the EU as well.

How do you even implement in on "only billionaires?" Wouldn't everybody need to doc their wealth to prove that they are not a billionaire?

Billionaires are largely majority shareholders in corporations. I'd say that's a fine place to look. Maybe the IRS can look at the assets of anyone who's suspected to be worth 750M or more. Again, as I said, you could fund better enforcement of this by funding an IRS task force who's job it is to find and tax them. I can't believe something so simple as 'billionaires should pay more than 23% (or whatever it is) taxes are controversial, but here we are.

I especially love how the Koch brothers effectively funded an astroturf campaign that hijacked the republican party, to get blue collar folks to argue against taxes on the 1%. That is some rich irony.

Nobody is saying they shouldn't pay taxes. People are saying they shouldn't be taxed on their wealth partially because anybody with an inkling of historic knowledge knows that a wealth tax will be coming to the masses shortly thereafter. Taxes are already far too complicated.

Most European countries, including Switzerland, still have them. They do work with some limits. And they are absolutely necessary to prevent that, once you have made money, you can profit for the rest of your life including future generations.

If there is no form of weath + inheritance tax, a feudal society is unavoidable.

Even if difficult, we'd better try.

I don't see the problem. As long as there is 2% inflation that wealth needs to be put to work in a way that ends up employing someone, therefore the employee benefits from the existence of the wealth that someone else carried hundreds of years into the future.

> As long as there is 2% inflation that wealth needs to be put to work in a way that ends up employing someone

What exactly do you mean by this? Holding wealth in bars of gold doesnt need to employee anyone (if you have enough of them, you might want security personnel, but you could also just own a Gold ETF or something).

Why should we try? Other than wanting to be greedy and steal from the rich, what reason do we have to try?

Many of these things are already valued, including some by the government such as lot of real estate. We can work to use those valuations. We can make it so insurance companies need to report valuations to the government for example. A painting worth 7 figures is going to be listed in some insurance policy. Report that number to the government and there is no legal argument to be had. Either it is being overvalued for insurance fraud purposes or undervalued for tax fraud purposes. The conflicting incentives should yield a relatively accurate valuation.

We also don’t need to make perfect the enemy of the good. We don’t need to account for absolutely every piece of wealth if we cover the big ones. We can also continue to revise these tax policies as new loopholes are discovered and exploited.

"there is no legal argument to be had"

Oh bless your heart.

Arguing that one valuation is too low/high is and admission that the valuation is wrong and you are therefore open to accusations of fraud. So maybe “no legal argument” is an oversimplification, but no reasonable legal argument can be made without an admission that the other party needs to update their valuation in their benefit.

Perfect *is* the enemy of the good here.

Major components of the economy are not valued regularly, e.g. private businesses. Sure, if a buyer paid $10MM last week for a private business, we might say it's worth $10MM today. But what about a business that was started from scratch by the founder? Or one that was last sold 30 years ago? Or one in a very niche industry?

Put simply, valuation is not only a science, but an art... and it's an expensive art. The cost and difficulty of administration alone would be reason enough to steer clear of a wealth tax.

Lastly, although I'm not a fan of higher taxes on anyone, even simply a more progressive income tax would make more sense than a wealth tax.

We aren’t talking about the economy as a whole or $10m businesses. The wealth tax wouldn’t care about values that low. We can start by focusing on billionaires. Most of those people own businesses that are either publicly traded or have some type of semi-public valuation.

I'll give you this: If you only applied a wealth tax to the wealthiest-of-the-wealthy, say billionaires only, the number of individuals might be small enough such that it's not an insane administration challenge. Forbes lists about 600 billionaires in the USA, so I'd guesstimate there are actually 1,200 (I know of at least three individuals who'd, conservatively, be worth at least $1B... but they're not on any list because they own under-the-radar non-VC companies).

I'm not a fan of taxes on most stocks (eg wealth) rather than flows (eg income). But if you held a gun to my head and said "design a wealth tax!", I'd set the minimum wealth far above the $32MM proposed by Bernie Sanders or $50MM proposed by Elizabeth Warren.

And keep in mind, even if there are actually only 1,200 billionaires in the US, a number of people slightly below the threshold will still have to be analyzed; I might not know if I'm worth $800MM and owe no wealth tax or $1.2B and owe tax on $200B of wealth.

Question? How do you feel about healthcare? Why is this the one place we should follow the rest of the world, wealth tax / VAT?

One might suspect the wealthy are just dropping turds in the punchbowl.

The Dutch (notoriously not the most Socialist of the lot) tax office assumes that any wealth above a certain “pocket money” stash, your first house and lifelong savings (money you effectively lock out of your reach until you reach pension) are invested and therefore taxed at ~20% on the assumed ~2% ROI.

Seems roughly fair

How do you separate wealth building from consumption? If you buy 10 art pieces that could be an investment or an aesthetic/decorating choice. If you buy a TV it's almost certainly going to be worth nothing in a a few years.

>feudal-like state of society

Do you have a source for this? People keep repeating this over and over, but I have never seen a shred of evidence for it. It seems some people have just decided that they hate inheritance and thats just it, no evidence required.

I would encourage you to look at the most unequal countries in the world by wealth. You may find it surprising that none of them are "feudal".

https://en.wikipedia.org/wiki/List_of_countries_by_wealth_in...

Edit: I don't mean to be snarky, apologies if it comes off that way. Unfounded ideas just bother me, and I would love to gain new perspective forming info.

He said "feudal-like". One of the key aspects of feudal society is an aristocratic elite that controls almost all the property and rents it out to the rest of the population.

Take a look at the current housing market craze where wealthy/institutional buyers are taking advantage of low interest rates to buy properties with all-cash, inspection-waived offers above asking price, in some cases whole neighborhoods at a time, so as to rent them out. This is a privilege unavailable even to the upper middle class, and could very well turn into a sort of neo-feudalism if left unchecked.

It's also not unprecedented for companies to own entire towns and pay employees in company "scrip" that was only redeemable at company stores, a practice which lasted well into the 1950s and (after some googling) apparently was tried by the Mexican subsidiary of Walmart as recently as 2008.

Looking at the broader state of the economy, wages have been stagnant for decades; property, healthcare & childcare (at least in the US) and education are more expensive than ever. With the exception of food, everything that matters in life is more unattainable for the average person, and everything that doesn't matter is super-cheap, with no signs of those trends reversing. How does that not turn into a form of neo-feudalism if left unchecked?

The last time we "checked" it (in the US) it took decades of labor protests/riots that often turned bloody and the effects of a couple of world wars. Historically plagues (that actually kill a lot of people indiscriminately) and wars are just about the only re-distributive methods that have proven successful in the long term. Unless we want a repeat of some real nasty history, we need a historically unprecedented way to redistribute wealth.

You should sort the list to notice that at the top of the list are countries that are aristocratic monarchies or pseudo monarchical aristocracies.

The Netherlands topping the list has average house prices at EUR 400k(massive spike in prices in the last year), while average annual income(pre tax) is EUR 60k.

We have a small tax on the wealth of the rich, called the estate tax. It's assessed when the owner will feel the pain the least.

And we have piles of loopholes that make it effectively only a tax on the stupid rich.

Your argument doesn't seem to agree with the evidence.

Feudal economies were actually powered by wealth taxes. So putting in a wealth tax won't do anything to avoid it becoming a feudal society. Further, confiscatory taxes[0] (of which wealth taxes are but one type) are favored by dictatorial regimes throughout history. I don't think we want to go down that road.

Wikipedia has a great summary on feudal taxes[1], and they are based on wealth (usually land and hides). It's actually a pretty good summary of a long period of time, and a complex topic to begin with.

[0] - https://www.merriam-webster.com/dictionary/confiscate [1] - https://en.wikipedia.org/wiki/Taxation_in_medieval_England

And the Decima (10%) to the Church, and another to the Landlord for the rent of their lands.

So please let’s not hot-take it to the extreme

A tax on wealth is heinous, and in the long run won't work. First of all, how do you define wealth? An average over the year, end of year, middle of year? Who defines it? Part of the problem is wealth doesn't really mean anything. You can claim something is with X but until you actually sell it, it really isn't worth anything. The other issue is, I could work hard, build a company up, make the same income as the previous year, but now my wealth had increased because my company increased. So I gave to pay more taxes? Or I own some collectible that goes up in value, and I have to pay more taxes just because someone out there wants what I have? No, a wealth tax is criminal.

> So what if we found a way to make a rule that using unrealized gains as collateral for a loan was, for tax purposes, the same as realizing the gains? (You might need to tweak the rule for fairness but the basic point remains.)

Lenders will quickly adapt to give loans without requiring collateral

And insurance companies will stay clear of unrecoverable loans.

The most politically tenable way to end long term unrealized gains is

1. drop the corporate tax rate to 0%. Most notably, these corporations would follow the REIT tax policy that requires them to distribute > 90% of taxable income to shareholders.

2. Move Social Security and Medicare into the Progressive Income Tax (it being flat on income is regressive)

3. Offset #1 and #2 with a higher income tax (especially for capital gains)

For (1) You can set up pass thru entities that pay 0% tax and distribute 100% of their profits. The income is then taxed as regular income by the shareholders.

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