The debate about the different tax policies to fund the infrastructure bill over the past several months has come to a halt, because the bill has passed Congress. The ultra-wealthy are unaffected by the bill, at least for now.
Pressure on billionaires has mounted so much that Musk has tried to address it. He proposed selling 10% of his stock in the company because he thought it was a way of avoiding taxes. 4% of his holdings have now been liquidated.
For the many impractical tax schemes introduced by economists and members of Congress, there has been no discussion of how the wealthiest Americans avoid paying taxes. The reason for Musk to sell off some of his shares was to pay off his loans.
If wealthy individuals use low-interest loans to avoid capital gains taxes, the solution should be to directly tax the underlying loans that are treated as personal income.
There is a lot of bad tax policy.
The debate over wealth taxes has grown louder over the years, and it has made the wealthy pay more in taxes. It has become a central theme in campaigns, political messaging, and news stories about income inequality.
The French economist Thomas Piketty's "Capital in The Twenty-First Century" lays the groundwork for the arguments for increasing taxes on the wealthy. The bigger a fortune, the faster it will grow. Fortunes of the top 1% are often concentrated in one or two firms.
The numbers speak for themselves. The top 1% of Americans own 27% of the total wealth. The net worth of billionaires has increased by more than a trillion dollars since the start of the epidemic. Net worth has increased over the past decade, but it remains locked up in companies owned by these individuals unless shares are sold or borrowed against. A number of proposals have attempted to simultaneously fund public investments and capture unrealized gains in wealth.
Senator Elizabeth Warren's 2% annual wealth tax for people with a net worth over $50 million was a tax response. In France, the policy led to 10,000 French nationals leaving the country in order to avoid being taxed. Gabriel Zucman and Emanuel Saez argue that the US has different taxes for mobility and expatriates than Europe does. There would be some attrition in a mobile world. The US economy would be badly affected by the loss of even a fraction of the US's most ambitious and entrepreneurial minds along with their capital.
Ron Wyden, the Senate Finance Chair, included a plan to unrealized tax gains in his proposal. If the expectation is that the shares will increase in value, billionaires are able to avoid long-term capital gains taxes by never selling shares in their firms. This strategy has allowed the wealthy to take out loans that are later re-financed as a stock's value increases in order to pay back previous loans. This can be done as a stock's value goes up, meaning that the borrowers don't have to sell shares to pay back the loans.
There are a lot of questions regarding fairness and implementation when it comes to taxing an unrealized gain. If someone's net worth changes because of a stock price, when do you tax them? If a stock is worth $3 today and $1 tomorrow, and no stock sale has taken place, is it fair to collect the remaining amount?
Musk's recent sale has shown the problem of liquidity. If a large sale of shares is not forthcoming, the price of the stock will fall and it will be harder for buyers to find stock in the company. How do you collect on the appreciation in value of art and real estate?
Large loans should be treated as realized income.
The equation for wealth preservation is: buy, borrow, die. Tax policy has placed borrowing in a blind spot, as a loan is not an asset.
If a company can generate cash flow or have resale value, it has value. Immediate value for the owner is created when stocks are used as a line of credit and avoid a tax event. If the value of the stock is being taken away by the owner, then large personal loans would be treated the same as realized income.
The knock-on effect of placing a 10% tax on large loans that are drawn against existing assets may require high net-worth individuals to sell their assets to cover the costs of the principal and interest, which in turn may cause a larger capital gains tax. The tax policy would reduce the use of this tax avoidance scheme by the wealthy. It would make sure that the value captured by borrowing against assets is taxed. According to some estimates, the wealthiest Americans avoid paying $163 billion in taxes every year, and debt is the primary tool used to escape tax burdens.
Musk would agree with taxing consumption and inheritances as an approach to the problem of hyper-wealthAccumulation. A tax framework that taxes individuals after selling, borrowing, and dying is a result of prudent tax policies. This path of least resistance will require targeting schemes like asset-based lending that have enabled the ultra-wealthy to avoid paying taxes.
