Paper wealth used as collateral for loans should be taxed as income (or capital gains).
Most regular people could sit down and cut a billion dollars of dumb shit out of the budget in a few hours (every Congress person has their little pet projects they slide in to omni bills).
The fixes needed for this are massive, and the pain will be felt by everyone. Even taking the harshed path against the 1% will still leave plenty of pain for average folks.
The collateral loan -> invested -> growth, collateral loan -> invested -> growth cycle doesn't just result in tax avoidance on a one-time basis. It's a way to indefinitely grow capital at a higher rate, by pushing taxes further and further into the future.
And when any wealth gains are finally accounted for as taxable income, it's a one time tax that doesn't reflect all the compounding. So a huge time-value of money break.
So there is a compounding of the tax that is avoided over time, despite actual liquidity accessed and deployed all along.
This is one of the primary loopholes that lets wealth gains made from capital get taxed far below wealth created by labor (which gets very reliably taxed, and at higher rates). The percentage of wealth growth that actually gets taxed as a running number keeps growing, despite the ability to make those gains liquid via loans.
Imagine if you could do labor, then instead of taking your income and getting taxed, accept loan proceeds against your "delayed" salary, and invest the net gain from not being taxed. Indefinitely. (With interest on your loan, cancelled out by the "interest" on your delayed salary.)
That would be like being able to choose to pay your own IRA instead of paying taxes.
That's how the unrealized (but real) wealth gains -> leverage (the practical and very real realization) cycle works.
Significant loans on collateral are liquidity events.
In general, any loan that was taxed up front as income, could be paired with counting loan payments on the principle as an expense against income. (And if the loan was for business, not personal, interest would also be an expense.)
This would make loans tax neutral vs. other ways of getting money out of assets.
It would eliminate the practice of cycles of leverage that lets the rich grow their wealth, use that to grow more wealth, over and over, while pushing taxation into the future indefinitely.
And it would make loans less attractive to take out (the upfront tax), and yet much easier to pay off (symmetric tax break for paying down debt). Which would result in a much less leveraged, more resilient, economy.