No More Tax-Free Lunch for Billionaires: Closing the Borrowing Loophole

“Buy, Borrow, Die”

https://www.dcfpi.org/all/how-wealthy-households-use-a-buy-b...

> 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).

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!

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)

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.

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.