5 ms·

I agree that taxing unrealized capital gains is a fundamentally flawed approach. However, the problem with the current system is that these ultra-wealthy people

by pontus 5y ago

I agree that taxing unrealized capital gains is a fundamentally flawed approach. However, the problem with the current system is that these ultra-wealthy people just end up borrowing against their equity, avoiding selling if possible. I think it would make sense to count borrowing against equity as tax-wise equivalent to selling that same equity. With that loophole closed, together with raising the capital gains tax, I think the tax system would be much more in line with what people expect from it.

imgabe 5y ago
But borrowing is not equivalent to selling, tax wise or any otherwise. When you get a mortgage to buy a $750k house, do you want to be taxed as though you had $750k income that year? You’re just borrowing against the value of an asset after all.
- deleted 5y ago
  [deleted]
- robryan 5y ago
  It should be possible to target this. Have it kick in say over $10 million or when a loan is backed by existing rather than new assets purchased with the loan.
- knodi123 5y ago
  Yes, but the difference is that borrowing against your unrealized investments is a way of dodging taxes. I think the tax code can handle that level of subtlety without paying attention to your flippant reductio ad absurdum.
  - imgabe 5y ago
    Sure and borrowing $750k to buy a house is a nifty way for me to get $750k without having to pay income taxes on $750k worth of income. What an amazing loophole that gives me completely free money and no taxes! What the government could do is stop loaning out money at 0% (i.e. printing free money which inflates assets, like stocks held by wealthy people). If the prime rate increased, the rate banks would charge on asset-backed loans would also increase, which would make it less attractive than just selling the asset and paying the capital gains tax.
    - knodi123 5y ago
      > Sure and borrowing $750k to buy a house is a nifty way for me to get $750k without having to pay income taxes on $750k worth of income. That's now how borrowing money to buy a house works.
      - imgabe 5y ago
        Yeah and “free money you never pay taxes on” is not how borrowing against stocks works either
- alkonaut 5y ago
  Taxes on real estate work that way and are a favorite among economists. I borrow say $500k to buy a house. Then I’m taxed some % of the property value each year e.g 1%.
  - imgabe 5y ago
    Real Estate is not the same thing as stock. There is a finite amount of land. You didn't make it. Ultimately it is a shared resource and we pay a fee to society while we are permitted the exclusive use (with some restrictions) of a small part of the planet we all share. Anyone can start a company tomorrow and declare that they have a billion shares of stock in that company. They only become worth something because the person that started the company uses their own effort and ingenuity to make the company do something that is valuable to everyone else.
    - alkonaut 5y ago
      Yes property taxes have another dimension of “fairness” to them, but that’s not why economists favor them: it’s because they can’t easily be dodged and are easy to extract (knowledge of property ownership is pretty reliable). Taxation isn’t necessarily based on what’s fair or rational, it’s a way of financing public expenses. It might be more logical from the perspective of the people as a whole to tax wealth more and income less (for example) even though wealth is less logical and “fair” to tax than income or consumption.
  - paulpauper 5y ago
    but that is only 1% and real estate is generally considered less volatile than stocks
bendbro 5y ago
They don't "avoid selling," at least in the way you and others are implying. They only delay selling. At some point the loan must be paid back, and at that point they will have to sell something or take income, which incurs either income or capital gains tax. And a trivial way to work around your proposed rule: borrow without collateral. Why would a lender be willing to do this? Because they know the other party is wealthy, that in the event of bankruptcy they have ways to collect, they make money on interest, and it is tax efficient under your new rule.
- qqqwerty 5y ago
  > At some point the loan must be paid back And in the meantime, they get to retain the full power and influence that comes with the stock/company that they control. The wealth inequality issue is as much about power dynamics as it is about dollars and cents. > borrow without collateral And it would be trivial to write the law to prevent that loophole. If a person has any unrealized gain over a certain amount, then any personal loan, secured or not, would qualify for some sort of realized gain tax. Personally, I think it is simpler and more elegant to implement a wealth tax. It would encourage the wealthy to take more income or dividends to cover the tax, and it would also help shift investments towards more profitable/cash flow positive ventures. For example, all of the tech unicorns burning loads of VC money to acquire negative cash flow would be penalized under such a scenario.
geoduck14 5y ago
Borrowing against your stocks isn't a loop hole. You eventually have to pay the loan back, when you do, you sell stock, pay taxes on the profit of the sale, and use the rest to pay the loan. You didn't avoid anything, you just deferred it until later. By the way, if the bank "forgave" the loan, and said you don't have to pay it back, that forgiveness is taxed - usually in a form 1099. So there isn't a loop hole there, either.
- orwin 5y ago
  > You eventually have to pay the loan back No. You can roll indefinitely.

by pontus 5y ago

imgabe 5y ago

But borrowing is not equivalent to selling, tax wise or any otherwise. When you get a mortgage to buy a $750k house, do you want to be taxed as though you had $750k income that year? You’re just borrowing against the value of an asset after all.

deleted 5y ago
[deleted]
robryan 5y ago
It should be possible to target this. Have it kick in say over $10 million or when a loan is backed by existing rather than new assets purchased with the loan.
knodi123 5y ago
Yes, but the difference is that borrowing against your unrealized investments is a way of dodging taxes. I think the tax code can handle that level of subtlety without paying attention to your flippant reductio ad absurdum.
- imgabe 5y ago
  Sure and borrowing $750k to buy a house is a nifty way for me to get $750k without having to pay income taxes on $750k worth of income. What an amazing loophole that gives me completely free money and no taxes! What the government could do is stop loaning out money at 0% (i.e. printing free money which inflates assets, like stocks held by wealthy people). If the prime rate increased, the rate banks would charge on asset-backed loans would also increase, which would make it less attractive than just selling the asset and paying the capital gains tax.
  - knodi123 5y ago
    > Sure and borrowing $750k to buy a house is a nifty way for me to get $750k without having to pay income taxes on $750k worth of income. That's now how borrowing money to buy a house works.
    - imgabe 5y ago
      Yeah and “free money you never pay taxes on” is not how borrowing against stocks works either
alkonaut 5y ago
Taxes on real estate work that way and are a favorite among economists. I borrow say $500k to buy a house. Then I’m taxed some % of the property value each year e.g 1%.
- imgabe 5y ago
  Real Estate is not the same thing as stock. There is a finite amount of land. You didn't make it. Ultimately it is a shared resource and we pay a fee to society while we are permitted the exclusive use (with some restrictions) of a small part of the planet we all share. Anyone can start a company tomorrow and declare that they have a billion shares of stock in that company. They only become worth something because the person that started the company uses their own effort and ingenuity to make the company do something that is valuable to everyone else.
  - alkonaut 5y ago
    Yes property taxes have another dimension of “fairness” to them, but that’s not why economists favor them: it’s because they can’t easily be dodged and are easy to extract (knowledge of property ownership is pretty reliable). Taxation isn’t necessarily based on what’s fair or rational, it’s a way of financing public expenses. It might be more logical from the perspective of the people as a whole to tax wealth more and income less (for example) even though wealth is less logical and “fair” to tax than income or consumption.
- paulpauper 5y ago
  but that is only 1% and real estate is generally considered less volatile than stocks

bendbro 5y ago

They don't "avoid selling," at least in the way you and others are implying. They only delay selling. At some point the loan must be paid back, and at that point they will have to sell something or take income, which incurs either income or capital gains tax. And a trivial way to work around your proposed rule: borrow without collateral. Why would a lender be willing to do this? Because they know the other party is wealthy, that in the event of bankruptcy they have ways to collect, they make money on interest, and it is tax efficient under your new rule.

qqqwerty 5y ago
> At some point the loan must be paid back And in the meantime, they get to retain the full power and influence that comes with the stock/company that they control. The wealth inequality issue is as much about power dynamics as it is about dollars and cents. > borrow without collateral And it would be trivial to write the law to prevent that loophole. If a person has any unrealized gain over a certain amount, then any personal loan, secured or not, would qualify for some sort of realized gain tax. Personally, I think it is simpler and more elegant to implement a wealth tax. It would encourage the wealthy to take more income or dividends to cover the tax, and it would also help shift investments towards more profitable/cash flow positive ventures. For example, all of the tech unicorns burning loads of VC money to acquire negative cash flow would be penalized under such a scenario.

geoduck14 5y ago

Borrowing against your stocks isn't a loop hole. You eventually have to pay the loan back, when you do, you sell stock, pay taxes on the profit of the sale, and use the rest to pay the loan. You didn't avoid anything, you just deferred it until later. By the way, if the bank "forgave" the loan, and said you don't have to pay it back, that forgiveness is taxed - usually in a form 1099. So there isn't a loop hole there, either.

orwin 5y ago
> You eventually have to pay the loan back No. You can roll indefinitely.