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Comment by slg | Hacker News Reader

Once you reach a certain level of wealth, your net worth increasing becomes a substitute for income because these people live off the debt backed by their illiquid assets. That allows them to avoid a large tax bill.

Take out a $1b loan using $10b in assets as collateral. When that $1b loan comes due, your net worth has grown to $15b. Take out a $2b loan, pay off the original loan and have $1b left to live on. No taxes are paid because no gains have been realized and loans aren't taxable.

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This isn't an infinite money cheat. You eventually have to settle the debt. The only way to do that is with income.

There is obviously an upward limit on the debt they can acquire. The problem isn’t that this is an infinite money cheat. It is a tax avoidance cheat because now the income is all long term capital gains that can be realized whenever is most convenient and gains can be offset by losses. That is how these people have tax rates below 5%.

There is a $3000 cap on capital gains loss offsets. Useful for the middle class, but useless if you're Jeff Bezos.

You are misremembering the details of that cap. The $3k cap is for offsetting ordinary income. These people have little ordinary income. Almost all of their money would be from capital gains. A $1b capital loss can be used to completely offset a $1b capital gain and leave a tax bill of $0.

Right. Because the tax due on $0 net is $0.

You never have to settle the debt. You die with the debt and the assets and your estate settles the debt then passes the rest in to your heirs

To piggy back on this a bit, there's something cost step-up cost basis and so while you pay have bought stock at 1$ and it appreciated to 100$ your estate's cost basis will be 100$ so there is 0 capital gains. Which means that the loan can be paid off without paying any capital gains tax.

heirs don't inherit debt. Your debt will be settled by the estate which will pay the tax. What's left will be passed down to your children/heirs.

The step up basis rule applies to the estate and it is stepped up to the current value on the date of death. So the estate settles the debt and pays no capital gains tax on any assets that had to be sold to pay off the debt. Then, the remaining assets go to the heirs. Or, if it is setup like most super wealthy, the assets left in the estate will more or less be cancelled out leaving little in the estate thus avoiding estate tax. Most of the assets will have already been passed along or will remain in various trusts and non-profits for the benefit of the heirs.

Only counts for estates less than $11.2 million. Again, useful for the middles class. Meaningless if you're Bezos.

[Citation needed]

Step-up cost basis is useless for a middle class estate because below $11.2M you don't pay an estate tax. [1]

Propublica has done a lot of research of this which you should read. [2]

[1]: https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act_of_2017#... [2]: https://www.propublica.org/article/the-secret-irs-files-trov...

No, I don't believe there is a limit for the step up rule.

You are thinking of the estate tax exemption. That is avoided through other loopholes.

Which can happen by liquidating assets. As long as your net worth grows faster than your debt, this is absolutely an infinite money cheat.

OK... liquidating assets is a taxable event. You aren't avoiding the taxman by borrowing money.

If you can hold off on liquidating assets until death, your estate will pay no capital gains when it liquidates due to the step up rule.

That’s not an infinite money cheat when the required input is infinite wealth growth.

During a period of low interest rates, yes this was the case, but now that rates are rising, this won't be as common.

You can get 2.33% margin loans through Interactive Brokers right now. I guarantee you a billionaire can get much less than that. Banks will always give rates near zero to billionaires because the risk is very low and they want to curry favor and possibly get other, much more lucrative deals from said billionaire.

> Once you reach a certain level of wealth, your net worth increasing becomes a substitute for income because these people live of the debt backed by their illiquid assets. That allows them to avoid a large tax bill.

Income is periodic. I get a salary every year. I can spend that amount every year as long as I'm employed at the same salary. Elon Musk can't spend 220 billion every year. If you want to compare net worth to income you should look at if he were to sell his shares and put it in a safe annuity earning 4% a year or so in perpetuity. So take his wealth, and multiply it by 4%. Also note that the annuity won't grow, unlike my income.

> Take out a $1b loan using $10b in assets as collateral. When that $1b loan comes due, your net worth has grown to $15b.

So you can expect his assets to grow at 50% a year? Here's a life hack: invest in Tesla if you think its going to grow 50% a year. Then even with $100,000 invested today would have you become a billionaire in 23 years!

Notice I said "your net worth increasing becomes a substitute for income" and not "your net worth becomes a substitute for income". These billionaires can get periodic influxes of cash through taking loans on their increased net worth. So I agree Elon's $220b net worth isn't directly comparable to my income, but the $121b increase in his net worth is pretty comparable to my income.

The numbers I made up in that example are obviously made up. I included them to illustrate my point and not as a prediction that all billionaires see their net worth increase 50% every year. That said, Elon's net worth went up over 100% last year.

The page compares it with the $120bn growth in his net worth last year, which absolutely is a capital gain over a fixed period comparable with how much salary and capital gains you made last year.

Admittedly that's an atypical return from the most hyped stocks in a bull market. But using a made up figure for Musk's earnings based on normies' annuities is just as unrepresentative of the typical annual return of being Elon Musk

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