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> "tax the income" is flawed because it allows to borrow as much as your wealth allows, and live your life exactly as if you had that in income, without ever pa

> "tax the income" is flawed because it allows to borrow as much as your wealth allows, and live your life exactly as if you had that in income, without ever paying the income tax. I don't see how that can be true, you eventually have to repay the loan, to do that you need income which will be taxed. For example if you borrow 100000 dollars for one year with 3% interest you will have to pay to the bank 103000 dollars, as far as I understand you can only write off the 3000 dollars on your taxes. The reason rich people borrow against their equity is because they don't want to sell it and their equity makes them more money than the interest rate on their loans. Furthermore while the article does distinguish wealth from income, it fails to distinguish realized from unrealized gains. Taxing unrealized gains comes with two very significant downsides. Firstly to make the system fair it should provide tax credits for unrealized losses which means when the market goes down all of these people will use that tax credit to cancel out the huge salaries they will be paying themselves on that year. Secondly while a tax on unrealized gains will be annoying to rich people it will be devastating to small time investors, because it will force them to liquidate their minor positions in order to pay their taxes. To give a concrete example lets assume a college grad has a single share of amazon he bought last year for around 2000 usd, today that same share is worth around 3000 usd that's 1000 dollars of gains if our hypothetical student has to pay income tax on that 1000 dollars let's say 20% because he also has income. He will have to pay with his income (which has already been taxed) or he will have to sell that stock essentially robbing him of the future gains he could have if he held that stock.

imhoguy 5y ago
> I don't see how that can be true, you eventually have to repay the loan, to do that you need income which will be taxed. You refinance constantly.
- koheripbal 5y ago
  Bankers aren't stupid. At some point, they'll stop lending you money and will just seize your collateral.
  - imhoguy 5y ago
    You are right, they aren't. You need to grow wealth and hang out with bankers at company expense ;) No more growth and no more yaht trips then it is time for dividends or shares sell off to pay loans.
  - toast0 5y ago
    Only if the value of the assets goes down signficantly. Your loan based on Enron stock needs to be paid back (or recollaterialized), but one based on a stock that's been doing well or on a reasonably diversified portfolio can probably avoid repayment until you sell or die. From what I've seen, asset backed loans will have a % limit of value for initiating a loan and a higher % limit to keep the loan, but both limits are often much lower than a brokerage margin loan.
  - drdec 5y ago
    You have $100M of stock in Berkshire Hathaway. You use use that as collateral to borrow $11M. You use $1M of the loan to pay expenses (including the interest on the loan). You invest the other $10M in Amazon. A year later you have $11M in Amazon stock and $110M in Berkshire Hathaway. You borrow against the Amazon stock and use that to pay off the first loan. Lather, rinse, repeat. The bankers are always happy. Why would they ever foreclose on you?
    - dnissley 5y ago
      Because stocks don't always go up
      - 34679 5y ago
        When they go down to any significant degree, Congress steps in and socializes the losses.
        koheripbal 5y ago
        Individual stocks never go down? Is this a serious comment?
weird-eye-issue 5y ago
You're mistaken - not all types of loans require you to pay towards the principle. Google pledged asset line
- kristjansson 5y ago
  They sell your assets if you don’t pay the principal though, which would trigger capital gains.
  - weird-eye-issue 5y ago
    Only borrow half of what they allow you to. Don't borrow the full amount. In that case it would require more than a 50% drop before you run into issues.
- throwawayffffas 5y ago
  I googled a bit, it looks to me that pledged asset lines, typically require you to pay off the capital. There are loans marketed as interest only, but my understanding is that even with these loans the payment of the capital is deferred to the end of the term, not that you don't have to pay it back at all. There are annuities, a financial instrument where the seller receives a lump sum and then pays back a fixed amount in perpetuity but I think only insurance companies sell these. I think the most likely scheme is what the other comment is suggesting, refinancing the loan repeatedly
  - weird-eye-issue 5y ago
    No, there is no "end of term". You just have to pay the interest every month. They can ask for the principal back at any moment though but by the nature of the loans if that happened you'd sell your stocks to make good on it. But in practice that would only happen if there is a sharp decline in the underlying assets so if you only borrow like 30% of the value then you are generally fine. Obviously there is risk involved since this involves the stock market and borrowing money.
  - triceratops 5y ago
freddie_mercury 5y ago
You don't have to repay anything. You die and your estate pays off the balance. The basis is stepped up at death and the estate can then sell with zero tax to settle the debt.
- andrewflnr 5y ago
  > your estate pays off the balance. This is what I guessed, but maddeningly the article doesn't actually say it out loud, instead talking about estate taxes and trusts (which surely also play a role). Do you know another source for this?
- vnkatesh 5y ago
  > The basis is stepped up at death Isn't that a major tax loophole? What is the rationale behind it in the first place?
  - freddie_mercury 5y ago
    The US tax code has had step-up basis for over 100 years, since income tax was first put in place. I don't think there are any archival documents showing the reasoning for that particular choice. I think the common belief is that it was a simplification due to the relative lack of record keeping 100+ years ago. If you inherited some assets in 1909 it could have been very hard to figure out what the cost basis was, since you would have no idea where the records were or if any records had even been kept.
- bpodgursky 5y ago
  The basis is stepped up because of the 40% estate tax. Basically no countries have both a not-stepped-up basis and an estate tax.
  - freddie_mercury 5y ago
    This isn't true; they have no relation to one another. It definitely wasn't a "well, since we are taxing the estate, we should create a step-up basis". The step-up basis was the result of Treasury Decision T.D. 2690 in 1918. The modern estate tax went into effect in 1916. The step-up basis is likely simply a mistake influenced by UK norms. The tax code was created from whole cloth by regulators that had never done it before. (Congress basically passed the buck, abdicating responsibility to Treasury to figure it all out.) Treasury made several errors of basic logic in the early years, some of which were subsequently fixed, others (like step-up basis) weren't. On the UK influence: back in 1913 the UK (and most other countries at the time) didn't tax capital gains at all. The law passed by Congress implied that capital gains should be taxed but the drafter of the law (it was written by a single person) was surprisingly confused and vague on the subject giving five or six different possible interpretations of what he meant. And so: step-up basis. The original 1913 income tax law didn't say what should happen. Over the next several years Treasury grappled with the issue, and related capital gains questions, effectively a "first time in history" kind of solving the problem. From a history of early errors in the tax code by the Treasury: "Beyond mere error, there was the influence of the income tax of the United Kingdom––the foreign income tax most prominent in the minds of the drafters of the 1914 regulations––which did not tax capital gains at all. As Marjorie Kornhauser recounts in her work on the early history of capital gains taxation under the federal income tax, from 1913 until 1921 Treasury’s interpretation of the income tax as encompassing capital gains was controversial, and it was unclear whether Treasury’s interpretation would withstand judicial challenge. If total exemption of capital gains was thinkable because of the UK model, then basis rules allowing for widespread self-help exemption might have seemed unexceptionable. In addition, the trust law distinction between principal and income––under which capital gains are assigned to principal rather than income—may have influenced Treasury’s misunderstanding of the role of basis in an income tax. Finally, there was the statutory declaration that income did not include the value of property received by way of gift or bequest. For regulators not accustomed to the distinction between deferral and exclusion provisions, it would have been easy to overread the statute as implying a permanent exclusion rather than as merely being silent on the question of permanent exclusion versus deferral." The Treasury decision was enshrined into law in 1921 -- based on the Congressional testimony of a single person whose testimony has been described as "not his finest hour" due to logical errors like this that went unremarked upon by the Senators -- cementing the mistake permanently due to a failure to apply consistent logic to taxation issues. The claim that one should get a step-up basis because of the estate tax is obviously nonsensical. If you sell the assets before death, you pay both the capital gains tax and then the estate tax. But if you don't sell the assets before death, you only pay one tax. There is no logical explanation for why the application of both taxes should occur if the sale happens before death but only one tax should apply if the death happens before the sale. In 1976 Congress got rid of the step-up basis in the Tax Reform Act of 1976. Due to intense lobbying by rich people, it was restored in 1980.
fireflash38 5y ago
As a hypothetical: Why do you think people are willing to put money into accounts that they pay no taxes on now, but will have to pay taxes on later? There's multiple reasons, and they all tend to apply to equity too. As a bonus, equity in things like property has even more bonuses for taking loan cash now and repayment later: things depreciate in value (theoretically), and you get write offs. There's all sorts of tax shenanigans you can do to shift around what money you owe when to minimize your tax burdens. Getting 'paid' with a loan is one of them. Another major thing is: they can borrow so much that it doesn't matter. If you could borrow a billion dollars based on your house, would you do it? Do you think you could turn that money into something more? What if you never turned a profit off that billion, and instead just lived off of it. Then died. Never paid any taxes, because you 'lost' money every year. Combine that with all the BS you can do with estate taxes, and you can probably send a huge chunk of change to your kids too.
dillondoyle 5y ago
I don't think anyone is arguing to tax any unrealized gains except the exceptionally wealthy? Like can you argue that someone worth over 100mm would be hurt by say 1% annually? I can see an argument for executive controlled corps, like Zuckerberg wants to maintain control of a company. But it seems like there are many ways Zuck for instance could avoid losing his voting power or restructure some even odder special share class so it doesn't matter. If he doesn't want to pay cash maybe even allow treasury to hold this 1% as stock and pass the voting power back to the owner. Opens a HUGE can of worms in many ways (hold, sell, incentives to increase value can be bad for the rest of us). But I like the fundamental concept of adding back benefit for OUR gov for all we do to help. if the rest of us taxpayers are giving huge support to the market and corporations like QE, stimi, loose regulation/tax law, trade wars, whatever, we should also get some of the gains to fund services or lower taxes on the other 50 or even 99%.

imhoguy 5y ago

> I don't see how that can be true, you eventually have to repay the loan, to do that you need income which will be taxed. You refinance constantly.

koheripbal 5y ago
Bankers aren't stupid. At some point, they'll stop lending you money and will just seize your collateral.
- imhoguy 5y ago
  You are right, they aren't. You need to grow wealth and hang out with bankers at company expense ;) No more growth and no more yaht trips then it is time for dividends or shares sell off to pay loans.
- toast0 5y ago
  Only if the value of the assets goes down signficantly. Your loan based on Enron stock needs to be paid back (or recollaterialized), but one based on a stock that's been doing well or on a reasonably diversified portfolio can probably avoid repayment until you sell or die. From what I've seen, asset backed loans will have a % limit of value for initiating a loan and a higher % limit to keep the loan, but both limits are often much lower than a brokerage margin loan.
- drdec 5y ago
  You have $100M of stock in Berkshire Hathaway. You use use that as collateral to borrow $11M. You use $1M of the loan to pay expenses (including the interest on the loan). You invest the other $10M in Amazon. A year later you have $11M in Amazon stock and $110M in Berkshire Hathaway. You borrow against the Amazon stock and use that to pay off the first loan. Lather, rinse, repeat. The bankers are always happy. Why would they ever foreclose on you?
  - dnissley 5y ago
    Because stocks don't always go up
    - 34679 5y ago
      When they go down to any significant degree, Congress steps in and socializes the losses.
      - koheripbal 5y ago
        Individual stocks never go down? Is this a serious comment?

weird-eye-issue 5y ago

You're mistaken - not all types of loans require you to pay towards the principle. Google pledged asset line

kristjansson 5y ago
They sell your assets if you don’t pay the principal though, which would trigger capital gains.
- weird-eye-issue 5y ago
  Only borrow half of what they allow you to. Don't borrow the full amount. In that case it would require more than a 50% drop before you run into issues.
throwawayffffas 5y ago
I googled a bit, it looks to me that pledged asset lines, typically require you to pay off the capital. There are loans marketed as interest only, but my understanding is that even with these loans the payment of the capital is deferred to the end of the term, not that you don't have to pay it back at all. There are annuities, a financial instrument where the seller receives a lump sum and then pays back a fixed amount in perpetuity but I think only insurance companies sell these. I think the most likely scheme is what the other comment is suggesting, refinancing the loan repeatedly
- weird-eye-issue 5y ago
  No, there is no "end of term". You just have to pay the interest every month. They can ask for the principal back at any moment though but by the nature of the loans if that happened you'd sell your stocks to make good on it. But in practice that would only happen if there is a sharp decline in the underlying assets so if you only borrow like 30% of the value then you are generally fine. Obviously there is risk involved since this involves the stock market and borrowing money.
- triceratops 5y ago

freddie_mercury 5y ago

You don't have to repay anything. You die and your estate pays off the balance. The basis is stepped up at death and the estate can then sell with zero tax to settle the debt.

andrewflnr 5y ago
> your estate pays off the balance. This is what I guessed, but maddeningly the article doesn't actually say it out loud, instead talking about estate taxes and trusts (which surely also play a role). Do you know another source for this?
vnkatesh 5y ago
> The basis is stepped up at death Isn't that a major tax loophole? What is the rationale behind it in the first place?
- freddie_mercury 5y ago
  The US tax code has had step-up basis for over 100 years, since income tax was first put in place. I don't think there are any archival documents showing the reasoning for that particular choice. I think the common belief is that it was a simplification due to the relative lack of record keeping 100+ years ago. If you inherited some assets in 1909 it could have been very hard to figure out what the cost basis was, since you would have no idea where the records were or if any records had even been kept.
bpodgursky 5y ago
The basis is stepped up because of the 40% estate tax. Basically no countries have both a not-stepped-up basis and an estate tax.
- freddie_mercury 5y ago
  This isn't true; they have no relation to one another. It definitely wasn't a "well, since we are taxing the estate, we should create a step-up basis". The step-up basis was the result of Treasury Decision T.D. 2690 in 1918. The modern estate tax went into effect in 1916. The step-up basis is likely simply a mistake influenced by UK norms. The tax code was created from whole cloth by regulators that had never done it before. (Congress basically passed the buck, abdicating responsibility to Treasury to figure it all out.) Treasury made several errors of basic logic in the early years, some of which were subsequently fixed, others (like step-up basis) weren't. On the UK influence: back in 1913 the UK (and most other countries at the time) didn't tax capital gains at all. The law passed by Congress implied that capital gains should be taxed but the drafter of the law (it was written by a single person) was surprisingly confused and vague on the subject giving five or six different possible interpretations of what he meant. And so: step-up basis. The original 1913 income tax law didn't say what should happen. Over the next several years Treasury grappled with the issue, and related capital gains questions, effectively a "first time in history" kind of solving the problem. From a history of early errors in the tax code by the Treasury: "Beyond mere error, there was the influence of the income tax of the United Kingdom––the foreign income tax most prominent in the minds of the drafters of the 1914 regulations––which did not tax capital gains at all. As Marjorie Kornhauser recounts in her work on the early history of capital gains taxation under the federal income tax, from 1913 until 1921 Treasury’s interpretation of the income tax as encompassing capital gains was controversial, and it was unclear whether Treasury’s interpretation would withstand judicial challenge. If total exemption of capital gains was thinkable because of the UK model, then basis rules allowing for widespread self-help exemption might have seemed unexceptionable. In addition, the trust law distinction between principal and income––under which capital gains are assigned to principal rather than income—may have influenced Treasury’s misunderstanding of the role of basis in an income tax. Finally, there was the statutory declaration that income did not include the value of property received by way of gift or bequest. For regulators not accustomed to the distinction between deferral and exclusion provisions, it would have been easy to overread the statute as implying a permanent exclusion rather than as merely being silent on the question of permanent exclusion versus deferral." The Treasury decision was enshrined into law in 1921 -- based on the Congressional testimony of a single person whose testimony has been described as "not his finest hour" due to logical errors like this that went unremarked upon by the Senators -- cementing the mistake permanently due to a failure to apply consistent logic to taxation issues. The claim that one should get a step-up basis because of the estate tax is obviously nonsensical. If you sell the assets before death, you pay both the capital gains tax and then the estate tax. But if you don't sell the assets before death, you only pay one tax. There is no logical explanation for why the application of both taxes should occur if the sale happens before death but only one tax should apply if the death happens before the sale. In 1976 Congress got rid of the step-up basis in the Tax Reform Act of 1976. Due to intense lobbying by rich people, it was restored in 1980.

fireflash38 5y ago

As a hypothetical: Why do you think people are willing to put money into accounts that they pay no taxes on now, but will have to pay taxes on later? There's multiple reasons, and they all tend to apply to equity too. As a bonus, equity in things like property has even more bonuses for taking loan cash now and repayment later: things depreciate in value (theoretically), and you get write offs. There's all sorts of tax shenanigans you can do to shift around what money you owe when to minimize your tax burdens. Getting 'paid' with a loan is one of them. Another major thing is: they can borrow so much that it doesn't matter. If you could borrow a billion dollars based on your house, would you do it? Do you think you could turn that money into something more? What if you never turned a profit off that billion, and instead just lived off of it. Then died. Never paid any taxes, because you 'lost' money every year. Combine that with all the BS you can do with estate taxes, and you can probably send a huge chunk of change to your kids too.

dillondoyle 5y ago

I don't think anyone is arguing to tax any unrealized gains except the exceptionally wealthy? Like can you argue that someone worth over 100mm would be hurt by say 1% annually? I can see an argument for executive controlled corps, like Zuckerberg wants to maintain control of a company. But it seems like there are many ways Zuck for instance could avoid losing his voting power or restructure some even odder special share class so it doesn't matter. If he doesn't want to pay cash maybe even allow treasury to hold this 1% as stock and pass the voting power back to the owner. Opens a HUGE can of worms in many ways (hold, sell, incentives to increase value can be bad for the rest of us). But I like the fundamental concept of adding back benefit for OUR gov for all we do to help. if the rest of us taxpayers are giving huge support to the market and corporations like QE, stimi, loose regulation/tax law, trade wars, whatever, we should also get some of the gains to fund services or lower taxes on the other 50 or even 99%.