zlacker

Doesn't this "close" the tax loophole in which holders of tradable assets can take out loans against those assets in perpetuity, never paying taxes on any of it?

>>zelias+(OP)
I mean, you have to pay the loans back. Which requires income which is taxed. This would only work if you either don't spend any money (which then what is the point of the loan) or if your assets are always going up and increasing in value beyond that of the loan which inevitably will not be the case.

>>zelias+(OP)
Not necessarily, though that is the hope. This wouldn't directly close the loophole, its meant to be attempt to block it without actually closing it.

A huge question I have here is how unrealized gains on nonfinancial assets would be handles. How would the government determine the fair market value of a multimillion dollar mansion, for example?

More broadly, how would we justify only taxing unrealized gains on individuals? Or would this apply to corporations, banks, and financial institutions as well?

My point isn't actually any specific issue in the proposal, these are just examples of what could be a problem. Our tax code is massive and incomprehensible to almost everyone. Adding further caveats and stipulations just makes it worse. Taking an axe to much of the tax code seems like a much more reasonable approach in my book.

>>_heimd+O6
With regards to the mansion, doesn't the (state) government already do that with property taxes?

>>spacem+aa
In my experience, state property tax assessments do a decent job at trying to calculate relative values but a terrible job at defining actual property values. Meaning, they may pretty reliably value my house at 10 or 15% less than the house next door based on age or size, but the actual value they put on either house isn't even close to what it would sell for (I've always seen tax assessments come in much lower than market rate).

I don't know how that plays out with mansions though. Whether a mansion is worth $30M or $10M is often hard to predict with the pool of potential buyers being so low.

>>nights+r3
> Which requires income which is taxed

And there lies the loophole. These loans are often structured as some kind of business expense that can be paid from pre-tax income.

So, ultra rich people get to double dip here. No taxes on selling stocks for money, as there's a loan, plus no taxes on the income for paying it off.

>>nights+r3
The actual loophole is the step-up basis for inheritance. This allows you to never realize gains, living off loans against them. Then, when you die, your heirs inherit the appeciated assets, and the liabilities. But, their cost basis for the assets is stepped up to the then-current fair value. So, they can sell off assets to pay the loans off, but have no realized gains.

>>spacem+aa
Property tax assessments are rarely fair market value. They are at best a very gross approximation.

But yes, a tax on "unrealized gains" basically amounts to a property tax, not anything related to an income tax.

>>fooker+ie
That's not a loophole, it is illegal. You can't deduct personal expenses from a business. I realize the rich do it, but if that is the problem let's go after that.

Also if you sell stocks you always pay tax on the capital gains regardless if there is a loan or not.

>>pkaedi+Xe
But charging taxes on the loan won't really reflect that well. Also, there are limits on inheritance before estate tax kicks in, so folks with 100's of million in assets passed on to their heirs are still paying estate tax, it won't be tax free at that level.

(Edited to correct "inheritance tax" to the technically correct term, "estate tax")

>>ensign+ch
> But yes, a tax on "unrealized gains" basically amounts to a property tax, not anything related to an income tax.

The main difference being that a property tax only takes into account the assessed value and ignores what you paid for it. They tax the value, not just unrealized gains.

>>pkaedi+Xe
However, there is the estate tax.

If you're a billionaire who does the "take out loans against your unrealized cap gains" trick, then you, you know... can't sell your stock. So then your stock passes to your kids -- who, due to the stepped up basis, yes, do not have to pay cap gains on that stock.

But there's a 40% estate tax.

Estate tax generally isn't very relevant even to the ordinarily-rich, because it has an extremely high deduction (about $27M for a married couple), but for a billionaire it's absolutely relevant.

Now, sure, if you paid both the cap gains and the estate tax you'd pay that much more taxes, but if you compare a normally-wealthy person (pays 15-20% cap gains and 0% estate tax) and a billionaire (pays 0% cap gains and 40% estate tax), it's obvious that the billionaire, eventually, pays a much higher tax rate.

>>_heimd+Rj
Yeah, I just meant it is more similar to a property tax than an income tax. Of course the other difference is that you might be able to deduct the tax you paid if the value drops back down before the gain is realized... but I haven't heard enough of the proposed implementation details to sort that out.

>>zelias+(OP)
I'm pretty sure that whole notion of these magical loans to avoid taxes is a made up internet conspiracy theory.

A) Loans need to be paid back, with interest. The person must either be selling assets or drawing in other (taxed) income to pay back the loan. A loan could delays the taxes to a future year to let someone buy a house or yacht or whatever without the full tax burden in year 1, but they still ultimately pay all the taxes

B) If they die while still having outstanding loans, their heirs pay a 40% inheritance tax on everything above like 10 million, so there is no magic avoidance of taxes there, just a change in whether it's capital gains tax today or inheritance tax tomorrow.

I'd love to be disproven if someone can explain a real tax loophole, but as far as I can tell, the "Billionaires avoid taxes by taking out loans" thing is completely untrue.

>>pkaedi+Xe
Well, you still have to pay the estate tax, but you are probably arguing that is independent as it would need to be paid regardless of the step-up in basis.

Yeah, the real loophole is step-up in basis with no corresponding tax event. What should really happen is that every step-up in basis should correspond to a tax event or, somewhat more speculatively, only net changes in basis should result in tax events. Incidentally, this would also give everybody access to reduced taxes due to unrealized losses (tax loss harvesting) instead of just people with accountants.

>>nights+2i
>You can't deduct personal expenses from a business. I realize the rich do it, but if that is the problem let's go after that.

We have gone 'after it' again and again, making the system more and more complex. So much that you can now out-lawyer the IRS if you have enough money. There is no 'personal' expense, everything is somehow a business need. There is no simple solution to this really. Whatever you do to hurt ten billionaires, the ten million small business owners will face the brunt of it.

>Also if you sell stocks you always pay tax on the capital gains regardless if there is a loan or not.

That is the point, you don't sell stocks that makes you a billionaire. Instead, you find more and more creative ways to leverage that stock for loans, for deals, for power/control, etc etc. Also see cross collaterals where the same asset is used for multiple purposes at the same time!

>>aether+5k
Right. In my opinion, the 'fair' and 'simple' thing to do would be to eliminate the estate tax, and the step-up basis. Then there would be no loop hole to borrow against unrealized gains (and no real point to do so), while still allowing wealth to be enjoyed by the family that generated it, requiring them to pay taxes in the same way everyone else does (simplifying the tax code).

>>fooker+ON
So if you argue that we already can't enforce existing tax laws then why is proposing new, extremely expensive and difficult to enforce tax laws the solution?

>>nights+y41
It's not.

Taxing unrealized capital gains is just going to give these people more loopholes to play with.

But "tax the rich" seems to be the zeitgeist for whatever reason.

>>marcus+Gr
If I'm reading the IRS data[1] correctly, "debts and mortgages" are considered a deduction on the estate valuation, which means any money left in the estate (i.e. instead of in a trust) solely to cover loans would not be taxed. I think the idea is that you would roll the debts until death, at which point the estate can sell the securities with their stepped up cost basis, thereby avoiding (nearly all) capital gains tax.

I'm not an expert on this, and I could be misunderstanding some subtlety here.

[1] https://www.irs.gov/statistics/soi-tax-stats-estate-tax-fili...