Easy way to tax billionaires who would actually work: tax loans


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  • The ultra-rich avoid paying taxes by using stocks as collateral for loans and delaying the sale of assets.
  • A fair and efficient tax policy would treat personal loans large to the rich the same as income earned.
  • Tax policy should target the consumption and “buy, borrow, die” tax evasion schemes of the rich.
  • Emil Skandul is an opinion writer on economic policy and founder of a digital innovation company, Capitol Foundry.
  • This is an opinion column. The thoughts expressed are those of the author.

With the infrastructure bill now passed by Congress, debate over different tax policies to fund the infrastructure bill in recent months has come to a standstill. The bill is without direct tax increases, and the ultra-rich are left unscathed – at least for now.

Yet the pressure on billionaires has grown so much that Elon Musk has tried to tackle the problem head on. “There has been a lot of talk lately about unrealized gains being a means of tax evasion, so I am proposing to sell 10% of my Tesla shares,” he said. tweeted earlier this month. The decision was ultimately made by questioning his supporters – around 4% of his holdings have now been liquidated.

For the many inconvenient tax regimes introduced by economists and members of Congress, none have explained how wealthier Americans avoid paying taxes to begin with: they take out loans for a living using their stocks as collateral. In fact, Musk’s likely motivation to sell some of his Tesla shares was to pay off those loans.

So, if low interest loans are used by high net worth individuals to avoid selling stocks and paying


capital gains

taxes, the solution should be obvious: directly tax the underlying loans that are treated as personal income.

Bad tax policy

Wealth taxes are a political debate that has grown fiercely stronger over the years, and it has put the wealthy in the sights of lawmakers and the public. In recent years, it has become a central theme in campaigns, political messages and reporting on growing income inequality.

Much of America’s understanding of why income inequality is inevitable and how it has reached its highest levels since the Golden Age can be attributed to the work of the French economist Thomas Piketty “Capital in the 21st Century”, who laid the groundwork for increasing taxes on the rich. There is more return on capital than on labor, and the larger a fortune, the faster it will grow. The fortunes of the richest 1% are systematically less diversified and often accumulate exclusively in one or two companies.

The numbers speak for themselves. The richest 1% of Americans today have accumulated 27% of total wealth. Even more blatantly, since the start of the pandemic, more than half a trillion dollars has been added to the net worth of billionaires, whose number has increased by 13.4%. Although net worth has grown over the past decade, that value remains stuck in companies owned by these people unless stocks are sold or borrowed. From the taxation of unrealized capital gains to the establishment of an annual wealth tax, a number of random proposals have attempted both to finance public investments and to capture these unrealized capital gains. .

Senator Elizabeth Warren’s 2% annual wealth tax for people with net worth over $ 50 million was a tax response. However, when this policy was implemented in France, it led 10,000 French nationals to leave the country to avoid being taxed. The economists behind the plan, Gabriel Zucman and Emmanuel Saez, argue that taxes on mobility and expatriation are different in the United States and Europe – so the same scenario would be unlikely. But in a highly globalized and mobile world, there would undoubtedly be some attrition. Losing even a fraction of America’s most ambitious and enterprising minds and capital would be bad for the US economy and not worth the inconvenience of a tax experiment that has already been attempted.

Even more recently, a proposal from Senate Finance Chairman Ron Wyden included a plan to tax unrealized gains. Billionaires are able to avoid the 23.8% long-term capital gains tax by never selling the shares of companies they own if the value of the shares is expected to be increases. This strategy has enabled the wealthy to take out loans, which are then refinanced as a stock’s value increases in order to repay past loans. This can be done over and over again as a share’s value increases, meaning the borrower never has to sell shares to pay off the loans.

However, the imposition of unrealized gain leads to an endless series of questions regarding fairness and implementation. When exactly do you apply the tax if someone’s equity fluctuates due to a volatile stock price? If a stock is worth $ 3 today and $ 1 tomorrow, and no stock sale has taken place, is it fair to effectively collect the remaining amount because it was worth $ 3 yesterday?

In addition, there is the problem with


liquidity

as the recent sale of Musk showed. Selling a large number of shares of a company will mean that there will have to be buyers for those shares, and if not, a large sale will drastically reduce the share price as was the case with Tesla, whose price initially fell 15.4% to recover 7%. Likewise, for other illiquid assets, such as real estate and art, how do you collect the capital gain?

Treat large loans as realized income

The wealth preservation equation can be summed up as “buy, borrow, die”. Despite this, fiscal policy has put “borrowing” in a blind spot – a loan is considered a debt, not an asset.

Ownership of a company or stock has value only if it can generate cash flow or has resale value to others. But when stocks are used as collateral to draw down a line of credit and avoid a taxable event, it creates immediate value for the owner. A fair and efficient tax policy would treat large personal loans as realized income, because the value of the shares is extracted, even impermanently, by the owner.

By imposing a 10% tax on large loans that are drawn on existing assets, the ripple effect can also force high net worth individuals to voluntarily sell their assets to cover the costs of principal and interest, thus triggering capital. higher tax on earnings. This tax policy would effectively curb this popular tax evasion scheme used by the wealthy around the world. This would ensure that the value obtained by borrowing on assets is taxed – a value that increases each year. By some estimates, the richest Americans avoid paying $ 163 billion in taxes each year, and debt is the primary tool used to evade the tax burden.

Indirectly taxing consumption – wealth from personal loans – and inheritances is one approach to the hyper-wealth problem that Musk, surprisingly, would agree with. Combined with other prudent tax policies, including targeting trusts and foundations as well as loopholes in inheritance taxes, a simple tax framework emerges that taxes individuals after they sell, borrow, and die. It is this path of least resistance to ensuring that taxes are collected that will require targeting programs such as asset loans that have allowed the ultra-rich to avoid paying taxes.


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