[jeremy_arnold]

OP here. The point is that taxation can't really be avoided. If you take out loans against your shares to fund a lavish lifestyle, those loans need to be paid back (and you'll also get taxed on much of your consumption via sales taxes / VAT).

Now, sure, there's a way in which you can just keep rolling over loans with new ones until you approach some max % of your collateralized shares. But this has practical limits, and you're still not really avoiding anything. What's happening practically is that the gov has an IOU for 20% of those shares, where the value of that IOU is growing faster than the servicing costs of their own debt. So pushing out the date of realization is basically fine. The rich person may never pay those taxes within their own lifetime, but someone will. And the gov has no meaningful reason to care who pays or when, so long as the increase in share value outpaces their borrowing costs (pretty easy).

EDIT: Should have said 15-20% to be precise, as lowest rate is 15% for long-term holdings.

[partido3619463]

Except building this wealth gives you access to many ways to shield it from taxes.

Even philanthropic donations are effectively tax-shielded ways to further your particular interests (even if noble). Is it better that the Gates foundation is pushing COVAX rather than government institutions? (Which presumably could be funded by taxes on Gates’ wealth).

Gates Foundation does great things, but perhaps same things could be accomplished more effectively by government.

Otherwise way too much of a feudal vibe.

[lucaspm98]

Generally I would expect philanthropic donations to be distributed in a significantly more cost effective and dollar/societal good maximizing way by private individuals. Unnecessary steps of wealth transfer and redistribution through government institutions are avoided that are always prone to corruption, theft, or at least the ever-present government bureaucracy and inefficiency. You will certainly find examples of eccentric billionaires throwing away charitable money to worthless causes, but I’d argue as flawed as it may be it will almost certainly be more efficient than the government.

[jkhdigital]

> perhaps same things could be accomplished more effectively by government.

Perhaps. You could say the same thing about any economic activity. But go too far and you end up with, you know, Stalinist or Maoist communism with tens of millions of citizens dying of starvation. I’ll take the market economy, thank you very much.

[burkaman]

It seems like there might be some room to maneuver in between the current system and communism. Was the US a Maoist commune 50 years ago? Or was it just a market economy with higher income tax rates on the rich?

[jonfromsf]

NO. If the rich person dies the value steps up on inheritance, And nobody pays capital gains tax. (Although they do pay inheritance tax, which basically makes the most sense when thought of as a stopgap measure to plug this loophole.)

[nullc]

As the article points out, the step up basis avoids double taxation. The estate tax is 40% of the whole value, regardless of gains.

The step up in basis also avoids a logistical nightmare, as it can be extremely difficult to determine the cost basis of an asset owned by someone who is now deceased.

If we're not taking in enough from inheritances, we should change how the estate tax works, but eliminating the step up in basis generally would just result in a substantial increase in administrative overheads.

Finally, to the extent that there is a problem with gains totally escaping taxation (e.g. via trusts)-- the article doesn't use any of its massive felony private violation to make a case for that.

[md_]

Presumably you could “realize” gains upon transfers due to death, as you do with other transfers. Does it make estate handling a little more complex? Maybe a bit. But it mirrors other transfers, avoids punishing inherited earned income disproportionately, and avoids complex record-keeping requirements.

(In general, brokers and similar institutions track basis, so I don’t think the death of the owner makes determining the basis especially difficult.)

[fshbbdssbbgdd]

The “double taxation” argument makes no sense to me. If someone has a lot of wage income and leaves it to their kids, they will pay income tax and then the estate will pay estate tax. But if someone has a lot of capital gains and leaves the asset to their kids, nobody pays the capital gains tax because that would be “double taxation” (but only if they didn’t sell before dying). Why is capital gains protected from “double taxation” in this specific scenario but other kinds of income aren’t?

[nullc]

Because they already had the benefit of the income, while the gains are a fiction until the assets are sold. (and the overall tax burden for cap gains is already much higher than income, once you factor in corporate taxes).

I regret repeating the double taxation point, I agree it's the weakest point-- plus, if we want to double tax as a matter of policy, we can do that. Step up really just avoids a logistic mess.

I think regardless of where you think taxes on inheritance should be, we're much better off with the step-up. If we're not collecting enough decrease the thresholds or up the rates (and if we're overtaxing earned wages as a result-- provide a method to exempt some of those from estate taxes, it's an easier accounting issue that not having the step up in basis).

[bradleyjg]

If you lowered the estate tax exemption to $50,000—-just enough to avoid having to value personal property—-then the step up basis rule would be fine. But at $11MM it’s a major loophole.

[nullc]

"sorry, I know you've spent the last 10 years living with your aging mother in her home, but now that she's passed away you'll have to sell it to pay the 40% in its value in estate taxes" -- not so attractive. :)

[xwolfi]

Many countries have punitive inheritance taxes too.

[jkhdigital]

The idea that allowing potential income to compound before taxing it ultimately produces higher tax receipts in the future is WAY too nuanced of an argument for the soak-the-rich crowd. They want their pound of flesh now, dammit!

[Xcelerate]

I mean, couldn’t the government just take the tax and put it in the exact same investment the person would have and achieve the same thing?

[wmf]

No, because the government isn't willing to take the same risks that private citizens are.

[burkaman]

? The government takes enormous risks that no private citizen or company ever would. Extremely long term esoteric research that might never earn a profit, investing in programs that don't earn any financial profit (healthcare, firefighting, public libraries, etc.), huge loans and grants to cutting edge businesses that might fail (Tesla, Solyndra, Moderna, etc.), building up huge stockpiles of resources in case of emergency, and so on.

[gruez]

How is the US sovereign wealth fund doing?

[jkhdigital]

Can’t have a sovereign wealth fund while simultaneously issuing the world’s reserve currency!

[austhrow743]

So government owned means of production?

[alasdair_]

The problem is that unlike humans, corporations can be effectively immortal. It’s entirely plausible that the game can be played long enough that new laws could be passed that will ultimately never give the full amount to the IRS.

If you can defer for a hundred years or more, many scenarios are possible.

[fshbbdssbbgdd]

You seem to be assuming that the heirs of billionaires are going to sell everything eventually, but I see no reason to think that should be true. They can live off the interest forever and the state will never touch the principal.

[jeremy_arnold]

The only way this is possible is if the assets are still accruing value in sufficient excess of loans made against the assets. So long as this happens, it's fine for the realization to be 1,000 years off. The IOU doesn't expire, and the gov's carrying costs are lower than the gained value of their share in this scenario.

[fshbbdssbbgdd]

So your argument requires the US being the first empire to maintain a consistent tax policy for millennia, while we watch the heirs of billionaires hoard all this wealth and enjoy living in the lap of luxury (and assume they won’t manage to change the rules sometime between now and the end of time)? It’s not convincing.

Also, couldn’t you make the same argument that wage income, and every other kind of tax should be deferrable if the money gets invested? We should all just not pay the government and the government should give us an IOU until eternity? I suppose the modern monetary theory people would be on board.

[jeremy_arnold]

As I've said elsewhere, if the US wants to set some max window for realizing gains, that could be fine. ProPublica and others are welcome to write opeds arguing for it. People can debate that on its own merits.

The difference between this and deferring wage income is that wages don't need to be liquidated. And that's not a small difference.

[md_]

Worth noting that the IRS taxes earned income even if granted as stocks or options, forcing liquidation. Your arguments against forcing liquidation apply equally to RSUs, yet the real-world treatment is different.

[lupire]

> The rich person may never pay those taxes within their own lifetime, but someone will.

Citation needed.

[jeremy_arnold]

I mean there are elaborate schemes to avoid this, but it's not obvious to me that many of them really work short of active (i.e., illegal) tax evasion.

You can, for example, shield stuff in trusts, which is tax-efficient. But when an heir wants to realize gains to buy stuff, it's going to be taxed. All you're doing is deferring, which is fine from the gov's POV as their share of the pool isn't changing, and the pool is in most cases growing a rate that exceeds their borrowing costs.

That said, if Congress wants to make estate/inheritance laws more strict, sure, fine! I think most would be ok with that. Or they could even put a max window on gains realization. But the thing to do there is write an op-ed directly calling for the desired policy, not some sort of alarmist piece about the rich and their "true tax rate".

[ratsforhorses]

Dumb question, couldn't the rich invest their money in their children's startups who then have "an asset that they can build , maintain to then borrow against ("their wealth") doing the same for their kids ad infinitum..? (Ponzi scheme?) Considering that interest rates have been going lower and lower seems like a great scam ... I mean historically it's nothing new the have's beget the have's ...there is an illusion of self determination and simulacrum of democracy but maybe where it hurts is that people feel shocked seeing "le roi nu" (or feel stupid yet trapped for putting up with such blatant truths..)

But to diverge, why not simply increase interest rates for people putting their money in the bank (so they stop buying multiple houses to increase their wealth ( making home ownership unaffordable for most of us) and instead give them similar returns for leaving their money in the bank to lend it to these people who borrow against their wealth...

Is it because higher interest rates leads to the boogeyman inflation?

[jonnycomputer]

How often do people get to write off their lavish lifestyles as business expenses?

[grecy]

> The rich person may never pay those taxes within their own lifetime, but someone will

Which just goes to show rich people live under an entirely different system that gives them a huge advantage. I'm 39, and have never purchased my own home (can't afford it - prices in Canada are insane).

If I could have put off paying my taxes I'd have enormously more money on hand right now that I do, and I could buy a house without having to pay interest, I could buy shares.. I could do all kinds of things that would help me accumulate more wealth. .. then I could just pay my taxes on my death bed when I don't need it anyway.

Instead, I have to pay taxes now, keeping my down, and rich people don't.

[barko]

Except the rich person can only get the equivalent of a fraction of their wealth as a loan, and cannot use the rest without liquidating. When using this approach they effectively have direct access to significantly less money than they would have if they liquidated their assets and paid the taxes on the gains. You could do the same, but likely want to utilize a greater portion of your wealth to live on.

[grecy]

Your mental gymnastics are impressive.

A person with 10M (or 100M or >1B) only gets to live on a few hundred thousand a year and doesn't have to pay tax.

I live on ~$50k a year and pay tax.

I'm not sure there's any universe where there is anything other than an unfair playing field here.