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This is something people love to rage about, yet it's not one with an obvious fix. The counterpoint is that this leaves money invested, which means others inves

by _bin_ 2y ago

This is something people love to rage about, yet it's not one with an obvious fix. The counterpoint is that this leaves money invested, which means others invest in other things, and still entails interest payments. It exists in part because you don't want someone who inherited his parents' house and wants to move in to go broke trying to pay taxes, or have to re-mortgage it, with an even stronger case with family farms. And it exists in part because there are so many legitimate cases for doing it, even as a wealthy person: pretend you're a relatively successful businessman whose company has appreciated to $50mm. In this world, you can't just leave your gains unrealized and borrow against them. So you can - Try to find somebody to sell to, which is a sketchy move. Of course, as your company continues to appreciate, you will be forced to continue reducing your ownership stake. Over time, this will make keeping a family business in the family largely impossible. - Try to find money to pay taxes. This means less money for R&D, for expansion, for your employees. - Just dump the whole business to private equity and move on. These all suck, and the government generally collects money on assets as they move not assets at rest. I see no way to resolve it that isn't suckier than the status quo and so am left with the conclusion that people who agitate for such changes are more resentful of the rich than they are worried about the justice or lack thereof of tax avoidance.

deleted 2y ago
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JumpCrisscross 2y ago
Attach a lien to the property. If it’s a small business, the government’s share of the step up is put against the business. There will still be shenanigans. But it avoids forcing liquidation wile preserving the state’s interest.
- ryandrake 2y ago
  This actually seems like a very reasonable solution. Although it would lead to perpetual liens on properties that simply get passed down dozens of generations, never getting sold. At some point, the music has to stop, or the rich will exploit it.
cperciva 2y ago
This is something people love to rage about, yet it's not one with an obvious fix. In Canada, assets are deemed to have been disposed of upon death (or gifting) so the estate pays capital gains taxes on the accrued profit. There are a few exemptions for political reasons, e.g. to allow farmers to pass appreciated farm property to their children tax free, but they're sufficiently limited that they don't cost very much. Seems like an obvious fix to me -- when the cost basis is stepped up, taxes are due -- and in practice it seems to work pretty well.
- _bin_ 2y ago
  Family farms are a good example but there are still plenty of others like a family business. I wouldn't care to see an increasing fraction of assets fall into institutional ownership simply because people are taxed out of owning them intergenerationally. There's a massive difference between "the government will tax you for part of your value" and "the government will, over a sufficient time, tax you entirely out of even a growing asset." If the concern is how much the policy costs the nation, then I don't think that's a sufficient reason to change things either. The top 1% in America hold about 31% of a total $140 trillion, or $43 trillion. This is, in a very optimistic case, around twenty years worth of the current federal deficit. Given the trajectory it's taken over my entire lifetime I find it unlikely it would last more than a decade. If the concern is cost, we have a "money out" problem in the US, not a "money in" one, largely driven by our ballooning mandatory spending (much of which goes to a radically outsized group of old people, whose entitlements neither party will touch despite their outsized ownership of wealth) and the high interest expense that's caused. Even if we outright confiscated every dollar of the 1%'s net worth, that wouldn't represent a remotely sustainable solution. Hence my comment about most of these policies looking more like schadenfreude than a sincere desire to fix things.
  - kelseyfrog 2y ago
    Help me understand why a family farm would have such an issue if the owner-operator dies, but Walmart didn't when Sam Walton died? Is it an issue of incorporation/business structure?
schmidtleonard 2y ago
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- _bin_ 2y ago
  If the only value you can add to this thread is calling me a clown or a useful idiot, please comment elsewhere. But to seriously respond to what you said, I don't understand how you can have a good faith belief nobody can possibly see the world differently from you. There's quite a lot of downward mobility out of the upper quintiles of wealth in America. "Getting paid for being rich" usually only applies if you're rich and smart and you deploy your assets in an economically productive way. After all, there are more than enough rich people who go back to being poor. If you refuse to believe anyone who doesn't share your view of class struggle is either stupid or malicious, I don't see why you bother engaging at all.
- vikingerik 2y ago
  The problem with directing tax heat towards assets is that you chase away the assets to more favorable jurisdictions (ie, overseas.) Real estate / property tax works because land can't be moved. But if you tax capital in the US, the capital holders will simply leave the US.
deleted 2y ago
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metacritic12 2y ago
The obvious fix is to not step up basis on death. The estate tax already means that the estate of a person who dies may need to sell / divide / split stuff to pay the government. There already is no fundamental protection for an asset passing unscathed from a parent to a child. I don't see how not stepping up basis qualitatively changes this. And your argument of "you want a child to be able to inherit a family business / house and keep the family business protected" is incredibly axiomatic and the antithesis of a tax. While it's inherently consistent, you're making the same general argument as "all taxes are theft". Yes taxes may be theft in one view, but under our current society, raising revenue for the common welfare is also a virtue, so we can't have have it both ways.
- geysersam 2y ago
  It's a funny argument the one about the family farm. In this case it's not even about inheritance tax. It's a sob story about a guy who couldn't inherit the farm because his dad owed the state money because they had let him not pay tax on his capital gains for a long time. Sorry for not tearing up.
  - gammarator 2y ago
    It also rarely applies to farms. https://www.cbpp.org/blog/the-myth-that-the-estate-tax-threatens-small-farms https://www.cbpp.org/blog/the-myth-that-the-estate-tax-threa...
  - Rebelgecko 2y ago
    When should he have paid his capital gains tax? Had the farm changed hands back and forth?
  - _bin_ 2y ago
    You can't just arbitrarily set the status quo that way, can't just sneak a premise that the state has default a right to collect a piece of arbitrary appreciation on an asset (as all assets are used for speculation) when the owner hasn't actually gotten cash from that, and that any government that doesn't tax that is just cutting someone a break on something rightfully owed. The state of nature is no tax, and as it's unpleasant, we create societies and fund them with taxes that we must deliberate and determine to be just and reasonable. You don't get to argue from the point that your preferred taxation regime is simply how things should be and that how things are is therefore wrong, especially not without a justification. I'd also point out that people's assets have gone up in nominal terms in the past few years, but for many that's not reflective of an increase in purchasing power. Much of that increase is due to excess inflation from the profligate overspending of our past two administrations, so the cycle currently looks like this: government prints money and causes inflation -> your assets are "worth more" -> taxman says "give me a piece of that" even though your real wages have fallen or have just barely recovered to pre-2020 levels. And of course, even if we index to inflation, that will necessarily hit the poor harder: food and energy are deemed "too volatile" to include in headline CPI, but as necessities, they comprise a larger part of poor households' spending and so inflation will hit them harder than the numbers suggest.
fallingknife 2y ago
You missed the obvious one - borrow against the asset to pay the tax.
- _bin_ 2y ago
  I mentally bucketed that in "try to find money": if you're not selling equity, debt is one way to do that. But the caveat - less money for R&D, expansion, and employees - still applies.
  - a_c_s 2y ago
    Not really, nobody goes "ooh, the stock price is up 5% this year, we can hire 5% more employees!" Most stock wealth isn't doing anything for the company. If the stock price of Apple went down by 90% tomorrow for no reason, the main effect on Apple would be... almost nothing. The employees who get equity compensation would be mad but they don't use their stock value to fund R&D or expansion or salaries.
    - Detrytus 2y ago
      But if you have "unrealized gains" tax you should also have "unrealized losses" tax deduction. Also, instead of Apple try imagining NVIDIA: their stock went up like 1000% in two years, they are now a trillion dollar company. If they had to pay tax on that it would bankrupt them. Or, they could use all their cash + borrow some money against the stocks to pay tax. But then the stock can suddenly crash 90% and the lenders, seeing how their collateral is now 90% down might start demanding repayment of the loans, again, bankrupting the company. "Unrealized gains" tax simply does not make sense. It's just greedy government attempt to squeeze more money from businesses.
      - a_c_s 2y ago
        You aren't arguing against what I wrote: an investor currently pays no tax on their own stock going up. I'm suggesting if an investor in NVIDIA uses their $100 Million in stock that they bought for $10 Million to get a loan they would have to pay capital gains on that $90 Million capital gain. Just like they would have to pay capital gains when they sell the stock. No stock sale has to occur - the investor could pay $18 million in taxes out of their loan. When we decide to tax things is inherently arbitrary: I'm suggesting that we count "borrowing" against an asset as a taxable event which is a simple and straightforward change that makes buy-borrow-die more equitable: government gets taxes at the same time as the investor gets the benefits.
geysersam 2y ago
> The counterpoint is that this leaves money invested, which means others invest in other things, This is a bad argument. Taxes are also money invested, in schooling, infrastructure, etc. It's a very common fallacy of people criticizing public spending to point to the stock market and say "Look! Imagine how rich we would be if we had just invested the public spending instead." Completely falling into the trap of discarding the value growth of public investments just because they are not measured and advertised the same way.
- sologoub 2y ago
  > Taxes are also money invested, in schooling, infrastructure, etc. Not presently. Most tax dollars are spent elsewhere and infrastructure/education get less than 7%: https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending/ https://fiscaldata.treasury.gov/americas-finance-guide/feder... Even that spending is not effective. Drive California roads and you’ll often see fixes that aren’t much better than the damaged roads they replaced. And let’s not talk about our wonderful train projects… In theory, this money would make a lot of difference. In practice, it’s heartbreaking.
  - geysersam 2y ago
    It's invested. In infrastructure, schooling, endless wars on foreign soil, etc. You not agreeing with the quality of the investment is a separate issue. You probably don't agree with every investment in the private sector either.
    - sologoub 2y ago
      Infra in CA is not going so well. Roads as an example are terrible compared to most developed countries. When last years winter storms damaged many roads, the newly paved replacements are not very smooth at all and some have been redone multiple times in the span of a single year. I don’t know what the causes are, but when comparing to EU where they have to account for freezing temps, CA doesn’t seem THAT complicated. Yet EU highways on average are a lot better.
  - 2y ago
opo 2y ago
>This is something people love to rage about ... Yes, people get angry about this, but no one has provided any statistics showing this is actually a common loophole. The basic idea in the reddit post is that there were lenders giving multi-decade loans at a tiny interest rate (only payable upon death with also sharing a % share of the gains). Maybe there are lenders who have lots of capital and also don't understand the time value of money, but no one has actually provided the names of these lenders, etc. According to this: https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185303024.html?guccounter=1 https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185.... Bezos has sold around $13.4 billion in stock in 2024. If he could easily avoid millions (maybe billions) of dollars of capital gains tax by this one simple trick, why didn't he?
- _bin_ 2y ago
  I'm very much on your side of the argument but it's common practice. It's not like you can walk into a bank tomorrow and ask for that sort of thing, but for a HNW customer who makes use of lots of private banking services it's routine. I'm not Bezos or part of his family office so I can't say for sure. My guess would be a mixture of capital demands elsewhere (Blue Origin?) and a desire to diversify. Start-up founders necessarily keep all their eggs in one basket; people building a multi-generational fortune don't.
  - Rebelgecko 2y ago
    Is it still that common? I'm not super duper high net worth so maybe I'm missing out on the good deals, but my bank offers these loans interest of SOFR+2-4% depending on your net worth. When the SOFR rate is <1% like during COVID, it's a pretty good deal. When the SOFR rate is more like 5% (which I think is more typical?), it's not such a good deal.
    - opo 2y ago
      >When the SOFR rate is <1% like during COVID, it's a pretty good deal. It is very common to make loans based on using stocks, etc. as collateral. But that isn't what people claim happens with the "buy, borrow, die" loophole. The claim is that these loans have incredibly low interest rates (much lower somehow than the IRS Applicable Federal Rate) and the interest is only payable upon death - which might be decades away. That is how the borrower can supposedly avoid capital gains taxes. Maybe there are rich lenders who don't understand the time value of money, but doing a quick search, I have not found one stat on how many lifetime loans like this are actually being done.
dietr1ch 2y ago
> These all suck, and the government generally collects money on assets as they move not assets at rest. But staying at rest has been used as a way to sidestep taxes for so long. I'd rather have all investments be taxed every K years as they were sold and bought back. Ideally with selling dates spread throughout the K days to avoid huge spikes.
Salgat 2y ago
I don't get why people say a tax on unrealized gains is not feasible. All it means is that a percent of your investment becomes "realized" every year and you sell a portion of your investment to cover it. So if you have a billion dollars in stocks and you have to realize 10% of it in a year, you sell enough stock to cover the $20 million and the other $80 million becomes realized and never taxed again (only future gains on it). In the end you're only taxed $20M in capital gains every year on a billion dollar investment and after 10 years of this your remaining $800M is not taxed any further. EDIT: Since it's not obvious, this would apply to the very rich, not to someone running a family farm. There would be a threshold and exemptions, which is how most taxes work.
- doe_eyes 2y ago
  > All it means is that a percent of your investment becomes "realized" every year and you sell a portion of your investment to cover it. Because there is a ton of investments that aren't liquid, aren't trivial to value on an ongoing basis, and aren't infinitely divisible. Again, a farm is a perfect example. Land prices are going up. Your family farm was worth n million, and is now theoretically worth twice that. Do you sell a portion of it to developers to pay the tax on the unrealized gains? Oh by the way, the land is probably zoned agricultural, so you actually can't. Or, you buy a famous painting as an investment. Do you cut off a piece each year and auction it off? Yeah, it's relatively easy for stock market holdings. But if stocks get unfavorable tax treatment, all this will accomplish is moving money away from the stock market toward assets that get a better treatment... like investment real estate, with all the problems that entails.
  - martijnarts 2y ago
    If you buy a famous painting as an investment, I'd assume you have enough money to cover the taxes without having to auction it. Accurately valuing the painting every year is definitely very difficult. The same argument doesn't necessarily go for a farmer's farmland. The zoning could of course be calculated into the land value. But I'm unsure if farming economics allow for paying the taxes on those unrealized gains
  - 2y ago
sailingparrot 2y ago
> Of course, as your company continues to appreciate, you will be forced to continue reducing your ownership stake Why? In an hypothetical world where getting a loan on an asset is impossible (or taxed the same as realizing the gains), you still don't get taxed on unrealized gains. You can leave your stock alone and you aren't forced to sell anything. Of course if you decide that now that you are worth a billion you must live like a billionaire, then yes, you will have to sell stock, reduce your influence in the company and pay tax on the gains. I don't see any problem with this? It offers a way for the stock owner to choose if they want to use the stock as power (don't touch it) or as cash (sell it), only taxing you when you opt for the later. edit: I realised I might have misread your post as defending the system allowing one to use unrealized gains to back a loan, hence enabling the buy/borrow/die loophole, when you are in fact defending against taxing unrealized gains. To me the obvious fix is to prevent those loans as discussed above: force people to choose how they want to use their assets, if they choose to use them to live like kings then they must pay tax.
- travisb 2y ago
  The fix in your edit isn't an obviously workable fix though. When talking about the rich, it's best to talk about private corporations -- because that's really how the operate. Firstly, do you want to prevent corporations from taking loans against their assets? Preventing that seems like it would be quite detrimental. Secondly, how do you differentiate legitimate corporate expenses from personal expenses? Is a billionaire having one of their corporations rent a yacht from another of their corporations for a business meeting with another CEO who just happens to also be their friend a legitimate business expense or a personal expense? What if the yacht rental company rented it to the CEO's company instead?
kwanbix 2y ago
Pay a percentage over the difference between the original value (50m) and the death value 740M, to inherit, you have to pay taxes on the difference, with brackets, as first millon 0%, second million 10%, etc.
mcguirep 2y ago
If one believes it’s a big problem, it seems to me there’s an easy solution that doesn’t disrupt anything else. If you use a stock as collateral like that, it’s a taxable event that steps the basis of the stock by the amount of the loan. No unnecessary taxation of assets at rest, no double taxation later because of the step up in basis, and you close the loophole if you view it as such.
efsavage 2y ago
There is definitely an obvious fix, just have collateralization be considered realization. You're welcome to have as much money on paper as you want, but if you want to post $Xm in stock against a loan, you need to pay taxes on it first.
- hluska 2y ago
  What happens if the value of the underlying asset depreciates? Here’s a hypothetical: - I own $100 of stock in Company A. - The First International Bank of efsavage decides to accept that $100 in stock as collateral on a loan. So I pay taxes assuming a value of $100. - When I dispose of the stock, it is only worth $80. Will that be a retroactive credit, meaning that I will have to amend my tax return in the year that I collateralized those assets? Would it be a forward tax credit, meaning that I could apply that credit to future years? I worry about this both from a bookkeeping point of view (since this is potentially a lot of credits) but also worry the ways it could be manipulated.
  - a_c_s 2y ago
    Why would you earn a credit? You created a tax event and paid taxes on it and you got a loan for x% of $100. If you sell the stock at $80 you'd pay no taxes on the appreciation (-$20). No credits, investing is risky.
  - hnaccount_rng 2y ago
    Why not just treat it as any other loss for tax reasons? If I understand this correctly, then the current state is basically: If you take losses you can use those to nullify a future gain. Just do that. And.. the bookkeeping thing is really solvable. That's kind of what banks are for
lotsofpulp 2y ago
Really easy, power law formula marginal sales tax rate. The more and more you spend, the higher and higher your sales tax rate is. Considering most spending happens via electronic payments, this should be easily trackable since we have internet/electronic databases/identifying numbers for each purchaser. You get a 1099 or W-2 for income, why can there not be an equivalent for spending? This plus power law formula land value tax rates would fix multitude of societal problems. Land values are also already in electronic databases. And get rid of income taxes altogether. This would disincentivize hoarding and wasting, and incentivize working and being efficient. The only other aspect of rent seeking I can think of that would need to be nerfed is copyright terms being reduced to 10 years.
doctorpangloss 2y ago
> The counterpoint is that this leaves money invested, which means others invest in other thing.s.. This means less money for R&D, for expansion, for your employees... When grandma's Fidelity manager takes 2% every year to buy overpriced mutual funds that themselves eventually just buy SPY, how many dollars do you think goes to capital raises of any kind? The top of the S&P, which essentially determine its returns, are doing stock buybacks with their cash. You would have been more persuasive if you had said, "Taking cash out of the stock market and into real assets results in inflation, which is bad for everyone, because nobody needs Apple stock to live, but they would like houses."
Adverblessly 2y ago
> These all suck, and the government generally collects money on assets as they move not assets at rest. The government can also collect money on assets at rest (or at least, on cash at rest). They do so by creating money. It could be an interesting tax regime where the only forms of taxation are taxes to discourage action (e.g. tax on tobacco) and money creation.
a_c_s 2y ago
Getting a loan against assets is another way of "using" it, so why not make that a taxable event? Just like now your stock value would not be taxed while it is invested. But now it would be taxed if you use it as collateral for anything. If you don't want to pay capital gains by selling the underlying stock then you can just get a bigger loan and pay the taxes out of that. There, now you don't have to liquidate but the taxpayers benefit too when the wealth is "used" by the owner.
- lesam 2y ago
  This still leaves open ‘buy, don’t borrow, die’ as a way for the dynastically wealthy to opt out of paying capital gains tax. I think the sensible option is making death a taxable event, rather than borrowing (with perhaps exceptions for the family farm, but not for the family billion dollar business). And the second best solution is eliminating the step-up basis, which without deemed disposition at death is just a free gift of capital gains tax rebates to heirs of the most wealthy.
  - eli 2y ago
    Or another way to think of it: your estate has to settle all outstanding tax bills after your death, including the gains in assets that have remained untaxes your whole life.
  - a_c_s 2y ago
    Death already is a taxable event though?
- nemothekid 2y ago
  Only issue I can forsee is that every loan, except a credit card, personal loan, and student loan, is typically loaned against an asset. I guess you could make carve outs for mortgages and auto loans.
  - kemitche 2y ago
    Why would there need to be a carve out for home/auto loans? 1. No one really borrows against the value of their (paid off) car. 2. Property taxes already, generally, are against the assessed value of the home, so it's already happening for that case. There are some minimal exceptions, like CA Prop 13, of course, but generally speaking, if I want to take out a second mortgage or something, my home's value is already appropriately "stepped up."
eli 2y ago
These are just generic anti-tax arguments. Yes, if you pay your taxes you will have less money. And maybe you would have used some of that money to do good things. Oh well. I don't think anyone is seriously suggesting you shouldn't be allowed to borrow against assets. That isn't even the problem. The problem is that you can go your whole life without paying taxes on gains of those assets, then pass them on to your heirs who can sell them and also never have to pay those taxes. It's like a big gift from the IRS: your assets that were previously encumbered by unpaid capital gains taxes instantly become more valuable upon your death. Your heirs should have the same cost basis as you did. And so if they sell they have pay the taxes that you never did.
- Negitivefrags 2y ago
  The main concern with this is how do you actually get the records of what the cost basis was from someone who is dead?
  - saghm 2y ago
    If the issue is that people are dying leaving behind significant wealth but not documenting this, just make the estate tax 100% on any assets missing documentation like this. I'm sure the lawyers would figure out the rest.
    - eli 2y ago
      That's effectively already the rule if you sell something and can't figure out the cost basis - it counts as zero.
  - AnthonyMouse 2y ago
    That isn't really the main concern. It's really a question of alienability. If your great grandfather invested in something a hundred years ago and now 99% of its value is appreciation (or inflation), you may or may not want to continue investing in it. If you do, the step up in basis doesn't really matter because you're not going to sell it anyway. But if you now think it's a mediocre investment, you may be inclined to sell it and invest in something else. Except that you won't if you'd lose a significant proportion of its value to taxes. This is a problem with capital gains taxes in general, but it's especially a problem for anything held intergenerationally (i.e. for a very long time) because not only will the appreciation be large, the inflation by itself would represent most of the value of the "gain". So the step-up in basis is a stupid hack to avoid this and let children make different choices than their parents and grandparents without being punished by the tax code. There are probably better ways to handle this, but "delete it and replace it with nothing" is not one of them.
keybored 2y ago
> This is something people love to rage about, yet it's not one with an obvious fix. Rage about. Off to a good start. I wonder what the conclusion will be? > [look at all of these reasonable-looking arguments for the existing tax laws] Sure. Most people are fine with rich people not getting taxed into the middle class or having to work for a living. What does this prove about anything? > These all suck, and the government generally collects money on assets as they move not assets at rest. I see no way to resolve it that isn't suckier than the status quo and so am left with the conclusion that people who agitate for such changes are more resentful of the rich than they are worried about the justice or lack thereof of tax avoidance. Hmm. I knew there was something off about attributing “rage” straight off the bat. I don’t know how you disentangle “justice” from “resentment” so easily. Resentment IS EXACTLY injustice over a sufficiently long enough time. But I tend to see this idea that people who are upset about something real need to have... pure emotions. They must be upset because someone else (the poor maybe) are getting shafted. They certainly can’t be resentful (jealous) or something selfish like that. (I don’t know what dimension you live in in the real world, confronted with these kinds of people, where this would be a compelling argument to anyone. Seems like a Let Them Eat Cake position.) So people who are rightfully upset—you don’t even argue against that part—get dismissed because they have allowed impurity into their hearts. While the rich get to do their tax schemes. But, he shrugs his shoulder, better that the rich fleece the government than that the commoners have impure thoughts.
briffle 2y ago
There are literal mansions on dozens of acres (with landscaping, ponds, etc) 3 miles from me that have a lower property tax than my 2000sq foot suburban home. They were purchased by a trust in the 80s or early 90's, and now the kids (or grandkids) live in it. My state limits how much property tax can be raised on a home until its sold, and then that number resets. It drives me a bit crazy..
eadmund 2y ago
> This is something people love to rage about, yet it's not one with an obvious fix. Removing the step-up in basis seems like an obvious fix. Record the basis at the time of transfer, then charge taxes when or if it is sold. Adjust for inflation if that seems reasonable. Is there anything wrong with this? It doesn’t require selling on receipt.
mindslight 2y ago
There is a quite simple fix that already applies to the IRAs that most people use as their main tax deferral - if you take a loan using your IRA as collateral, that loan is considered a distribution from the IRA, and is thus taxed. Requiring capital gains to be realized when an asset is used as collateral wouldn't be nearly as problematic as you're making out. For example, if someone's company appreciates to $50M and they then wish to turn some of that abstract value into concrete cash, then yes it's time to pay some taxes. Those taxes can simply be paid with some of the money from the loan too, you know.
_DeadFred_ 2y ago
If someone leases a car instead of buying it in many states they still have to pay sales tax, just on each lease payment. Somehow we can figure out how to charge sales tax on non-sales sales when it impacts the average joe, but not income tax on non-income income when it impact business owners because 'think of the business'. I don't see how taxes when someone extracts value from their company is any different or more difficult than taxing Joe average 'sales tax' on a lease payment. The business is irrelevant. We are talking about the tax on the person who is getting income because our government functions from taxes on income. Just like how we charge sales tax on a non-sale when state government functions on taxes on sales. Tax business owners when they extract value from their business.

by _bin_ 2y ago

deleted 2y ago

[deleted]

JumpCrisscross 2y ago

Attach a lien to the property. If it’s a small business, the government’s share of the step up is put against the business. There will still be shenanigans. But it avoids forcing liquidation wile preserving the state’s interest.

ryandrake 2y ago
This actually seems like a very reasonable solution. Although it would lead to perpetual liens on properties that simply get passed down dozens of generations, never getting sold. At some point, the music has to stop, or the rich will exploit it.

cperciva 2y ago

This is something people love to rage about, yet it's not one with an obvious fix. In Canada, assets are deemed to have been disposed of upon death (or gifting) so the estate pays capital gains taxes on the accrued profit. There are a few exemptions for political reasons, e.g. to allow farmers to pass appreciated farm property to their children tax free, but they're sufficiently limited that they don't cost very much. Seems like an obvious fix to me -- when the cost basis is stepped up, taxes are due -- and in practice it seems to work pretty well.

_bin_ 2y ago
Family farms are a good example but there are still plenty of others like a family business. I wouldn't care to see an increasing fraction of assets fall into institutional ownership simply because people are taxed out of owning them intergenerationally. There's a massive difference between "the government will tax you for part of your value" and "the government will, over a sufficient time, tax you entirely out of even a growing asset." If the concern is how much the policy costs the nation, then I don't think that's a sufficient reason to change things either. The top 1% in America hold about 31% of a total $140 trillion, or $43 trillion. This is, in a very optimistic case, around twenty years worth of the current federal deficit. Given the trajectory it's taken over my entire lifetime I find it unlikely it would last more than a decade. If the concern is cost, we have a "money out" problem in the US, not a "money in" one, largely driven by our ballooning mandatory spending (much of which goes to a radically outsized group of old people, whose entitlements neither party will touch despite their outsized ownership of wealth) and the high interest expense that's caused. Even if we outright confiscated every dollar of the 1%'s net worth, that wouldn't represent a remotely sustainable solution. Hence my comment about most of these policies looking more like schadenfreude than a sincere desire to fix things.
- kelseyfrog 2y ago
  Help me understand why a family farm would have such an issue if the owner-operator dies, but Walmart didn't when Sam Walton died? Is it an issue of incorporation/business structure?

schmidtleonard 2y ago

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_bin_ 2y ago
If the only value you can add to this thread is calling me a clown or a useful idiot, please comment elsewhere. But to seriously respond to what you said, I don't understand how you can have a good faith belief nobody can possibly see the world differently from you. There's quite a lot of downward mobility out of the upper quintiles of wealth in America. "Getting paid for being rich" usually only applies if you're rich and smart and you deploy your assets in an economically productive way. After all, there are more than enough rich people who go back to being poor. If you refuse to believe anyone who doesn't share your view of class struggle is either stupid or malicious, I don't see why you bother engaging at all.
vikingerik 2y ago
The problem with directing tax heat towards assets is that you chase away the assets to more favorable jurisdictions (ie, overseas.) Real estate / property tax works because land can't be moved. But if you tax capital in the US, the capital holders will simply leave the US.

deleted 2y ago

[deleted]

metacritic12 2y ago

The obvious fix is to not step up basis on death. The estate tax already means that the estate of a person who dies may need to sell / divide / split stuff to pay the government. There already is no fundamental protection for an asset passing unscathed from a parent to a child. I don't see how not stepping up basis qualitatively changes this. And your argument of "you want a child to be able to inherit a family business / house and keep the family business protected" is incredibly axiomatic and the antithesis of a tax. While it's inherently consistent, you're making the same general argument as "all taxes are theft". Yes taxes may be theft in one view, but under our current society, raising revenue for the common welfare is also a virtue, so we can't have have it both ways.

geysersam 2y ago
It's a funny argument the one about the family farm. In this case it's not even about inheritance tax. It's a sob story about a guy who couldn't inherit the farm because his dad owed the state money because they had let him not pay tax on his capital gains for a long time. Sorry for not tearing up.
- gammarator 2y ago
  It also rarely applies to farms. https://www.cbpp.org/blog/the-myth-that-the-estate-tax-threatens-small-farms https://www.cbpp.org/blog/the-myth-that-the-estate-tax-threa...
- Rebelgecko 2y ago
  When should he have paid his capital gains tax? Had the farm changed hands back and forth?
- _bin_ 2y ago
  You can't just arbitrarily set the status quo that way, can't just sneak a premise that the state has default a right to collect a piece of arbitrary appreciation on an asset (as all assets are used for speculation) when the owner hasn't actually gotten cash from that, and that any government that doesn't tax that is just cutting someone a break on something rightfully owed. The state of nature is no tax, and as it's unpleasant, we create societies and fund them with taxes that we must deliberate and determine to be just and reasonable. You don't get to argue from the point that your preferred taxation regime is simply how things should be and that how things are is therefore wrong, especially not without a justification. I'd also point out that people's assets have gone up in nominal terms in the past few years, but for many that's not reflective of an increase in purchasing power. Much of that increase is due to excess inflation from the profligate overspending of our past two administrations, so the cycle currently looks like this: government prints money and causes inflation -> your assets are "worth more" -> taxman says "give me a piece of that" even though your real wages have fallen or have just barely recovered to pre-2020 levels. And of course, even if we index to inflation, that will necessarily hit the poor harder: food and energy are deemed "too volatile" to include in headline CPI, but as necessities, they comprise a larger part of poor households' spending and so inflation will hit them harder than the numbers suggest.

fallingknife 2y ago

You missed the obvious one - borrow against the asset to pay the tax.

_bin_ 2y ago
I mentally bucketed that in "try to find money": if you're not selling equity, debt is one way to do that. But the caveat - less money for R&D, expansion, and employees - still applies.
- a_c_s 2y ago
  Not really, nobody goes "ooh, the stock price is up 5% this year, we can hire 5% more employees!" Most stock wealth isn't doing anything for the company. If the stock price of Apple went down by 90% tomorrow for no reason, the main effect on Apple would be... almost nothing. The employees who get equity compensation would be mad but they don't use their stock value to fund R&D or expansion or salaries.
  - Detrytus 2y ago
    But if you have "unrealized gains" tax you should also have "unrealized losses" tax deduction. Also, instead of Apple try imagining NVIDIA: their stock went up like 1000% in two years, they are now a trillion dollar company. If they had to pay tax on that it would bankrupt them. Or, they could use all their cash + borrow some money against the stocks to pay tax. But then the stock can suddenly crash 90% and the lenders, seeing how their collateral is now 90% down might start demanding repayment of the loans, again, bankrupting the company. "Unrealized gains" tax simply does not make sense. It's just greedy government attempt to squeeze more money from businesses.
    - a_c_s 2y ago
      You aren't arguing against what I wrote: an investor currently pays no tax on their own stock going up. I'm suggesting if an investor in NVIDIA uses their $100 Million in stock that they bought for $10 Million to get a loan they would have to pay capital gains on that $90 Million capital gain. Just like they would have to pay capital gains when they sell the stock. No stock sale has to occur - the investor could pay $18 million in taxes out of their loan. When we decide to tax things is inherently arbitrary: I'm suggesting that we count "borrowing" against an asset as a taxable event which is a simple and straightforward change that makes buy-borrow-die more equitable: government gets taxes at the same time as the investor gets the benefits.

geysersam 2y ago

> The counterpoint is that this leaves money invested, which means others invest in other things, This is a bad argument. Taxes are also money invested, in schooling, infrastructure, etc. It's a very common fallacy of people criticizing public spending to point to the stock market and say "Look! Imagine how rich we would be if we had just invested the public spending instead." Completely falling into the trap of discarding the value growth of public investments just because they are not measured and advertised the same way.

sologoub 2y ago
> Taxes are also money invested, in schooling, infrastructure, etc. Not presently. Most tax dollars are spent elsewhere and infrastructure/education get less than 7%: https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending/ https://fiscaldata.treasury.gov/americas-finance-guide/feder... Even that spending is not effective. Drive California roads and you’ll often see fixes that aren’t much better than the damaged roads they replaced. And let’s not talk about our wonderful train projects… In theory, this money would make a lot of difference. In practice, it’s heartbreaking.
- geysersam 2y ago
  It's invested. In infrastructure, schooling, endless wars on foreign soil, etc. You not agreeing with the quality of the investment is a separate issue. You probably don't agree with every investment in the private sector either.
  - sologoub 2y ago
    Infra in CA is not going so well. Roads as an example are terrible compared to most developed countries. When last years winter storms damaged many roads, the newly paved replacements are not very smooth at all and some have been redone multiple times in the span of a single year. I don’t know what the causes are, but when comparing to EU where they have to account for freezing temps, CA doesn’t seem THAT complicated. Yet EU highways on average are a lot better.
- 2y ago

opo 2y ago

>This is something people love to rage about ... Yes, people get angry about this, but no one has provided any statistics showing this is actually a common loophole. The basic idea in the reddit post is that there were lenders giving multi-decade loans at a tiny interest rate (only payable upon death with also sharing a % share of the gains). Maybe there are lenders who have lots of capital and also don't understand the time value of money, but no one has actually provided the names of these lenders, etc. According to this: https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185303024.html?guccounter=1 https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185.... Bezos has sold around $13.4 billion in stock in 2024. If he could easily avoid millions (maybe billions) of dollars of capital gains tax by this one simple trick, why didn't he?

_bin_ 2y ago
I'm very much on your side of the argument but it's common practice. It's not like you can walk into a bank tomorrow and ask for that sort of thing, but for a HNW customer who makes use of lots of private banking services it's routine. I'm not Bezos or part of his family office so I can't say for sure. My guess would be a mixture of capital demands elsewhere (Blue Origin?) and a desire to diversify. Start-up founders necessarily keep all their eggs in one basket; people building a multi-generational fortune don't.
- Rebelgecko 2y ago
  Is it still that common? I'm not super duper high net worth so maybe I'm missing out on the good deals, but my bank offers these loans interest of SOFR+2-4% depending on your net worth. When the SOFR rate is <1% like during COVID, it's a pretty good deal. When the SOFR rate is more like 5% (which I think is more typical?), it's not such a good deal.
  - opo 2y ago
    >When the SOFR rate is <1% like during COVID, it's a pretty good deal. It is very common to make loans based on using stocks, etc. as collateral. But that isn't what people claim happens with the "buy, borrow, die" loophole. The claim is that these loans have incredibly low interest rates (much lower somehow than the IRS Applicable Federal Rate) and the interest is only payable upon death - which might be decades away. That is how the borrower can supposedly avoid capital gains taxes. Maybe there are rich lenders who don't understand the time value of money, but doing a quick search, I have not found one stat on how many lifetime loans like this are actually being done.

dietr1ch 2y ago

> These all suck, and the government generally collects money on assets as they move not assets at rest. But staying at rest has been used as a way to sidestep taxes for so long. I'd rather have all investments be taxed every K years as they were sold and bought back. Ideally with selling dates spread throughout the K days to avoid huge spikes.

Salgat 2y ago

I don't get why people say a tax on unrealized gains is not feasible. All it means is that a percent of your investment becomes "realized" every year and you sell a portion of your investment to cover it. So if you have a billion dollars in stocks and you have to realize 10% of it in a year, you sell enough stock to cover the $20 million and the other $80 million becomes realized and never taxed again (only future gains on it). In the end you're only taxed $20M in capital gains every year on a billion dollar investment and after 10 years of this your remaining $800M is not taxed any further. EDIT: Since it's not obvious, this would apply to the very rich, not to someone running a family farm. There would be a threshold and exemptions, which is how most taxes work.

doe_eyes 2y ago
> All it means is that a percent of your investment becomes "realized" every year and you sell a portion of your investment to cover it. Because there is a ton of investments that aren't liquid, aren't trivial to value on an ongoing basis, and aren't infinitely divisible. Again, a farm is a perfect example. Land prices are going up. Your family farm was worth n million, and is now theoretically worth twice that. Do you sell a portion of it to developers to pay the tax on the unrealized gains? Oh by the way, the land is probably zoned agricultural, so you actually can't. Or, you buy a famous painting as an investment. Do you cut off a piece each year and auction it off? Yeah, it's relatively easy for stock market holdings. But if stocks get unfavorable tax treatment, all this will accomplish is moving money away from the stock market toward assets that get a better treatment... like investment real estate, with all the problems that entails.
- martijnarts 2y ago
  If you buy a famous painting as an investment, I'd assume you have enough money to cover the taxes without having to auction it. Accurately valuing the painting every year is definitely very difficult. The same argument doesn't necessarily go for a farmer's farmland. The zoning could of course be calculated into the land value. But I'm unsure if farming economics allow for paying the taxes on those unrealized gains
- 2y ago

sailingparrot 2y ago

> Of course, as your company continues to appreciate, you will be forced to continue reducing your ownership stake Why? In an hypothetical world where getting a loan on an asset is impossible (or taxed the same as realizing the gains), you still don't get taxed on unrealized gains. You can leave your stock alone and you aren't forced to sell anything. Of course if you decide that now that you are worth a billion you must live like a billionaire, then yes, you will have to sell stock, reduce your influence in the company and pay tax on the gains. I don't see any problem with this? It offers a way for the stock owner to choose if they want to use the stock as power (don't touch it) or as cash (sell it), only taxing you when you opt for the later. edit: I realised I might have misread your post as defending the system allowing one to use unrealized gains to back a loan, hence enabling the buy/borrow/die loophole, when you are in fact defending against taxing unrealized gains. To me the obvious fix is to prevent those loans as discussed above: force people to choose how they want to use their assets, if they choose to use them to live like kings then they must pay tax.

travisb 2y ago
The fix in your edit isn't an obviously workable fix though. When talking about the rich, it's best to talk about private corporations -- because that's really how the operate. Firstly, do you want to prevent corporations from taking loans against their assets? Preventing that seems like it would be quite detrimental. Secondly, how do you differentiate legitimate corporate expenses from personal expenses? Is a billionaire having one of their corporations rent a yacht from another of their corporations for a business meeting with another CEO who just happens to also be their friend a legitimate business expense or a personal expense? What if the yacht rental company rented it to the CEO's company instead?

kwanbix 2y ago

Pay a percentage over the difference between the original value (50m) and the death value 740M, to inherit, you have to pay taxes on the difference, with brackets, as first millon 0%, second million 10%, etc.

mcguirep 2y ago

If one believes it’s a big problem, it seems to me there’s an easy solution that doesn’t disrupt anything else. If you use a stock as collateral like that, it’s a taxable event that steps the basis of the stock by the amount of the loan. No unnecessary taxation of assets at rest, no double taxation later because of the step up in basis, and you close the loophole if you view it as such.

efsavage 2y ago

There is definitely an obvious fix, just have collateralization be considered realization. You're welcome to have as much money on paper as you want, but if you want to post $Xm in stock against a loan, you need to pay taxes on it first.

hluska 2y ago
What happens if the value of the underlying asset depreciates? Here’s a hypothetical: - I own $100 of stock in Company A. - The First International Bank of efsavage decides to accept that $100 in stock as collateral on a loan. So I pay taxes assuming a value of $100. - When I dispose of the stock, it is only worth $80. Will that be a retroactive credit, meaning that I will have to amend my tax return in the year that I collateralized those assets? Would it be a forward tax credit, meaning that I could apply that credit to future years? I worry about this both from a bookkeeping point of view (since this is potentially a lot of credits) but also worry the ways it could be manipulated.
- a_c_s 2y ago
  Why would you earn a credit? You created a tax event and paid taxes on it and you got a loan for x% of $100. If you sell the stock at $80 you'd pay no taxes on the appreciation (-$20). No credits, investing is risky.
- hnaccount_rng 2y ago
  Why not just treat it as any other loss for tax reasons? If I understand this correctly, then the current state is basically: If you take losses you can use those to nullify a future gain. Just do that. And.. the bookkeeping thing is really solvable. That's kind of what banks are for

lotsofpulp 2y ago

Really easy, power law formula marginal sales tax rate. The more and more you spend, the higher and higher your sales tax rate is. Considering most spending happens via electronic payments, this should be easily trackable since we have internet/electronic databases/identifying numbers for each purchaser. You get a 1099 or W-2 for income, why can there not be an equivalent for spending? This plus power law formula land value tax rates would fix multitude of societal problems. Land values are also already in electronic databases. And get rid of income taxes altogether. This would disincentivize hoarding and wasting, and incentivize working and being efficient. The only other aspect of rent seeking I can think of that would need to be nerfed is copyright terms being reduced to 10 years.

doctorpangloss 2y ago

> The counterpoint is that this leaves money invested, which means others invest in other thing.s.. This means less money for R&D, for expansion, for your employees... When grandma's Fidelity manager takes 2% every year to buy overpriced mutual funds that themselves eventually just buy SPY, how many dollars do you think goes to capital raises of any kind? The top of the S&P, which essentially determine its returns, are doing stock buybacks with their cash. You would have been more persuasive if you had said, "Taking cash out of the stock market and into real assets results in inflation, which is bad for everyone, because nobody needs Apple stock to live, but they would like houses."

Adverblessly 2y ago

> These all suck, and the government generally collects money on assets as they move not assets at rest. The government can also collect money on assets at rest (or at least, on cash at rest). They do so by creating money. It could be an interesting tax regime where the only forms of taxation are taxes to discourage action (e.g. tax on tobacco) and money creation.

a_c_s 2y ago

Getting a loan against assets is another way of "using" it, so why not make that a taxable event? Just like now your stock value would not be taxed while it is invested. But now it would be taxed if you use it as collateral for anything. If you don't want to pay capital gains by selling the underlying stock then you can just get a bigger loan and pay the taxes out of that. There, now you don't have to liquidate but the taxpayers benefit too when the wealth is "used" by the owner.

lesam 2y ago
This still leaves open ‘buy, don’t borrow, die’ as a way for the dynastically wealthy to opt out of paying capital gains tax. I think the sensible option is making death a taxable event, rather than borrowing (with perhaps exceptions for the family farm, but not for the family billion dollar business). And the second best solution is eliminating the step-up basis, which without deemed disposition at death is just a free gift of capital gains tax rebates to heirs of the most wealthy.
- eli 2y ago
  Or another way to think of it: your estate has to settle all outstanding tax bills after your death, including the gains in assets that have remained untaxes your whole life.
- a_c_s 2y ago
  Death already is a taxable event though?
nemothekid 2y ago
Only issue I can forsee is that every loan, except a credit card, personal loan, and student loan, is typically loaned against an asset. I guess you could make carve outs for mortgages and auto loans.
- kemitche 2y ago
  Why would there need to be a carve out for home/auto loans? 1. No one really borrows against the value of their (paid off) car. 2. Property taxes already, generally, are against the assessed value of the home, so it's already happening for that case. There are some minimal exceptions, like CA Prop 13, of course, but generally speaking, if I want to take out a second mortgage or something, my home's value is already appropriately "stepped up."

eli 2y ago

These are just generic anti-tax arguments. Yes, if you pay your taxes you will have less money. And maybe you would have used some of that money to do good things. Oh well. I don't think anyone is seriously suggesting you shouldn't be allowed to borrow against assets. That isn't even the problem. The problem is that you can go your whole life without paying taxes on gains of those assets, then pass them on to your heirs who can sell them and also never have to pay those taxes. It's like a big gift from the IRS: your assets that were previously encumbered by unpaid capital gains taxes instantly become more valuable upon your death. Your heirs should have the same cost basis as you did. And so if they sell they have pay the taxes that you never did.

Negitivefrags 2y ago
The main concern with this is how do you actually get the records of what the cost basis was from someone who is dead?
- saghm 2y ago
  If the issue is that people are dying leaving behind significant wealth but not documenting this, just make the estate tax 100% on any assets missing documentation like this. I'm sure the lawyers would figure out the rest.
  - eli 2y ago
    That's effectively already the rule if you sell something and can't figure out the cost basis - it counts as zero.
- AnthonyMouse 2y ago
  That isn't really the main concern. It's really a question of alienability. If your great grandfather invested in something a hundred years ago and now 99% of its value is appreciation (or inflation), you may or may not want to continue investing in it. If you do, the step up in basis doesn't really matter because you're not going to sell it anyway. But if you now think it's a mediocre investment, you may be inclined to sell it and invest in something else. Except that you won't if you'd lose a significant proportion of its value to taxes. This is a problem with capital gains taxes in general, but it's especially a problem for anything held intergenerationally (i.e. for a very long time) because not only will the appreciation be large, the inflation by itself would represent most of the value of the "gain". So the step-up in basis is a stupid hack to avoid this and let children make different choices than their parents and grandparents without being punished by the tax code. There are probably better ways to handle this, but "delete it and replace it with nothing" is not one of them.

keybored 2y ago

> This is something people love to rage about, yet it's not one with an obvious fix. Rage about. Off to a good start. I wonder what the conclusion will be? > [look at all of these reasonable-looking arguments for the existing tax laws] Sure. Most people are fine with rich people not getting taxed into the middle class or having to work for a living. What does this prove about anything? > These all suck, and the government generally collects money on assets as they move not assets at rest. I see no way to resolve it that isn't suckier than the status quo and so am left with the conclusion that people who agitate for such changes are more resentful of the rich than they are worried about the justice or lack thereof of tax avoidance. Hmm. I knew there was something off about attributing “rage” straight off the bat. I don’t know how you disentangle “justice” from “resentment” so easily. Resentment IS EXACTLY injustice over a sufficiently long enough time. But I tend to see this idea that people who are upset about something real need to have... pure emotions. They must be upset because someone else (the poor maybe) are getting shafted. They certainly can’t be resentful (jealous) or something selfish like that. (I don’t know what dimension you live in in the real world, confronted with these kinds of people, where this would be a compelling argument to anyone. Seems like a Let Them Eat Cake position.) So people who are rightfully upset—you don’t even argue against that part—get dismissed because they have allowed impurity into their hearts. While the rich get to do their tax schemes. But, he shrugs his shoulder, better that the rich fleece the government than that the commoners have impure thoughts.

briffle 2y ago

There are literal mansions on dozens of acres (with landscaping, ponds, etc) 3 miles from me that have a lower property tax than my 2000sq foot suburban home. They were purchased by a trust in the 80s or early 90's, and now the kids (or grandkids) live in it. My state limits how much property tax can be raised on a home until its sold, and then that number resets. It drives me a bit crazy..

eadmund 2y ago

> This is something people love to rage about, yet it's not one with an obvious fix. Removing the step-up in basis seems like an obvious fix. Record the basis at the time of transfer, then charge taxes when or if it is sold. Adjust for inflation if that seems reasonable. Is there anything wrong with this? It doesn’t require selling on receipt.

mindslight 2y ago

There is a quite simple fix that already applies to the IRAs that most people use as their main tax deferral - if you take a loan using your IRA as collateral, that loan is considered a distribution from the IRA, and is thus taxed. Requiring capital gains to be realized when an asset is used as collateral wouldn't be nearly as problematic as you're making out. For example, if someone's company appreciates to $50M and they then wish to turn some of that abstract value into concrete cash, then yes it's time to pay some taxes. Those taxes can simply be paid with some of the money from the loan too, you know.

_DeadFred_ 2y ago

If someone leases a car instead of buying it in many states they still have to pay sales tax, just on each lease payment. Somehow we can figure out how to charge sales tax on non-sales sales when it impacts the average joe, but not income tax on non-income income when it impact business owners because 'think of the business'. I don't see how taxes when someone extracts value from their company is any different or more difficult than taxing Joe average 'sales tax' on a lease payment. The business is irrelevant. We are talking about the tax on the person who is getting income because our government functions from taxes on income. Just like how we charge sales tax on a non-sale when state government functions on taxes on sales. Tax business owners when they extract value from their business.