6 ms·

That stereotype of PE investors is about how PE treats the businesses it invests in; it's not something they do to themselves.

SV_BubbleTime 3y ago
What if someone found out they were delicious too?
- selimthegrim 3y ago
  Gobble gobble.
colechristensen 3y ago
True, regardless debt is used all over the place to “liquidate” assets without actually selling them as a tax scam. If you sell something and realize gains then you have to pay taxes and such. If you take out a loan against the increased value of an asset without selling, you get the profits without anybody charging you taxes on them. There are more complex benefits too. It’s a hole in regulation that’s too complicated to legislate against and one of the hidden ways wealth is shielded from tax.
- dataflow 3y ago
  I don't really understand the hole you mentioned here. If you take out a loan against the increased value of an asset without selling, then how do you "get the profits"? Don't you still owe that loan back?
  - vlovich123 3y ago
    It converts illiquid paper capital into a positive cash flow. Yes, you do have to pay it back (unless you dissolve before then) but it’s over a longer time period. And who knows - your illiquid asset might grow faster than your loan payment in which case you can refinance indefinitely for a cash flow you don’t need to pay taxes on.
    - chii 3y ago
      Or the illiquid asset tanks in value due to unpredictable future circumstances, and you now either lose the asset or bankrupt. There's no zero risk profit here. Getting a loan using an asset as collateral is not some loophole to evade tax. The loan isn't used for consumption with zero residual value - otherwise how do the lender expect the borrower to service the interest? The loan is used to produce more profit via investment, increasing overall wealth, which means it's correct to not tax it the same way you would tax profit or capital gains. At the point of consumption is where the best place to tax occurs.
      - vlovich123 3y ago
        Your business goes bankrupt but you’ve still used the bank provided cash flow for payroll & the like. For personal investments it can work out the same way because the interest rate on the loan can be negotiated to a much smaller level than what is available to normal people if you have a lot of money. So as long as you make a reasonable bet that your fairly liquid investments (stock in a public company is really liquid) can return more value than your loan repayment. There’s some risk but it’s not that insane and it’s manageable. > At the point of consumption is where the best place to tax occurs. Keep in mind that sales tax still exists but it’s a flat rate and is thus what’s called a regressive tax (vs a progressive income tax). So a rich person using a collatorized loan against their stock portfolio is going to pay less relative tax than a normal person receiving income who paid both income tax & the same sales tax amount. Yes there can sometimes be a luxury sales tax but all that means is that goods that normal people wouldn’t even be able to afford in the first place have a marginally higher tax rate.
        chii 3y ago
        > sales tax still exists i'm not referring to sales tax regarding point of consumption. I am referring to personal income taxes (capital gain or otherwise). As soon as the profits move from being re-used for investment to becoming personal wealth (intended for consumption), the taxation should occur.
  - deleted 3y ago
    [deleted]
  - scheme271 3y ago
    You get the money right away and depending on the loan terms you may only have to pay interest for a while so you might be able to effectively get the value of the asset at rates that are much less than capital gains. E.g. capital gains mean that you pay 20% if you sell some land but if you get a loan against the land, you can get the value of the land at 5% interest. If the value of the land keeps going up you may be able to keep refinancing it for a while.
    - dataflow 3y ago
      This makes... no sense? You have to pay back the loan on top of the interest, it's not like you got that money for free at a lower tax rate. Whereas if you sell something the proceeds become yours. How in the world is that a "loophole"? It's not like there's any guarantee you'd end up paying less in interest than if you'd bought bonds or left it in a bank account or something. You're risking your money, whether you make a profit or not isn't guaranteed. That's not a "loophole", that's by-design and a feature that's available to everybody.
- dave4420 3y ago
  I would think that if we made interest non tax deductible (i.e. make it so that interest cannot be paid out of pre tax income) then this hole in regulation would be eliminated. Is there a reason why this isn’t so? (I get that there are other reasons why we might not want to do this… I’m curious whether this would fix the issue in the first place.)
  - colechristensen 3y ago
    I would guess it would need to be something more along the lines of certain actions (taking out a loan against an asset) triggering realizing those gains as income.
cpach 3y ago
I’m only guessing here but, could it be some kind of multi-level PE scheme…?

SV_BubbleTime 3y ago

What if someone found out they were delicious too?

selimthegrim 3y ago
Gobble gobble.

colechristensen 3y ago

True, regardless debt is used all over the place to “liquidate” assets without actually selling them as a tax scam. If you sell something and realize gains then you have to pay taxes and such. If you take out a loan against the increased value of an asset without selling, you get the profits without anybody charging you taxes on them. There are more complex benefits too. It’s a hole in regulation that’s too complicated to legislate against and one of the hidden ways wealth is shielded from tax.

dataflow 3y ago
I don't really understand the hole you mentioned here. If you take out a loan against the increased value of an asset without selling, then how do you "get the profits"? Don't you still owe that loan back?
- vlovich123 3y ago
  It converts illiquid paper capital into a positive cash flow. Yes, you do have to pay it back (unless you dissolve before then) but it’s over a longer time period. And who knows - your illiquid asset might grow faster than your loan payment in which case you can refinance indefinitely for a cash flow you don’t need to pay taxes on.
  - chii 3y ago
    Or the illiquid asset tanks in value due to unpredictable future circumstances, and you now either lose the asset or bankrupt. There's no zero risk profit here. Getting a loan using an asset as collateral is not some loophole to evade tax. The loan isn't used for consumption with zero residual value - otherwise how do the lender expect the borrower to service the interest? The loan is used to produce more profit via investment, increasing overall wealth, which means it's correct to not tax it the same way you would tax profit or capital gains. At the point of consumption is where the best place to tax occurs.
    - vlovich123 3y ago
      Your business goes bankrupt but you’ve still used the bank provided cash flow for payroll & the like. For personal investments it can work out the same way because the interest rate on the loan can be negotiated to a much smaller level than what is available to normal people if you have a lot of money. So as long as you make a reasonable bet that your fairly liquid investments (stock in a public company is really liquid) can return more value than your loan repayment. There’s some risk but it’s not that insane and it’s manageable. > At the point of consumption is where the best place to tax occurs. Keep in mind that sales tax still exists but it’s a flat rate and is thus what’s called a regressive tax (vs a progressive income tax). So a rich person using a collatorized loan against their stock portfolio is going to pay less relative tax than a normal person receiving income who paid both income tax & the same sales tax amount. Yes there can sometimes be a luxury sales tax but all that means is that goods that normal people wouldn’t even be able to afford in the first place have a marginally higher tax rate.
      - chii 3y ago
        > sales tax still exists i'm not referring to sales tax regarding point of consumption. I am referring to personal income taxes (capital gain or otherwise). As soon as the profits move from being re-used for investment to becoming personal wealth (intended for consumption), the taxation should occur.
- deleted 3y ago
  [deleted]
- scheme271 3y ago
  You get the money right away and depending on the loan terms you may only have to pay interest for a while so you might be able to effectively get the value of the asset at rates that are much less than capital gains. E.g. capital gains mean that you pay 20% if you sell some land but if you get a loan against the land, you can get the value of the land at 5% interest. If the value of the land keeps going up you may be able to keep refinancing it for a while.
  - dataflow 3y ago
    This makes... no sense? You have to pay back the loan on top of the interest, it's not like you got that money for free at a lower tax rate. Whereas if you sell something the proceeds become yours. How in the world is that a "loophole"? It's not like there's any guarantee you'd end up paying less in interest than if you'd bought bonds or left it in a bank account or something. You're risking your money, whether you make a profit or not isn't guaranteed. That's not a "loophole", that's by-design and a feature that's available to everybody.
dave4420 3y ago
I would think that if we made interest non tax deductible (i.e. make it so that interest cannot be paid out of pre tax income) then this hole in regulation would be eliminated. Is there a reason why this isn’t so? (I get that there are other reasons why we might not want to do this… I’m curious whether this would fix the issue in the first place.)
- colechristensen 3y ago
  I would guess it would need to be something more along the lines of certain actions (taking out a loan against an asset) triggering realizing those gains as income.

cpach 3y ago

I’m only guessing here but, could it be some kind of multi-level PE scheme…?