The issue is the step-up in basis, not borrowing against assets. The step-up in basis really is a giveaway. I think that it would make a ton of sense to transfer the basis rather than step it up.
Or the issue is the money printing that tends to be going on. This strategy should be too risky to work. They'd be losing interest on the money each month and they'd go bankrupt in the long term due to eventually borrowing money into a market downturn.
If interest rates are too low though then they wouldn't pay interest each month and the market will keep inflating - so the strategy will work.
Basically, this looks like a tax-effective strategy to stand in front of the money hose. If the money hose wasn't there it would be a tax-effective path to near certain ruin and much less attractive.
One of the best things when you are rich, you can buy when everyone wants to sell, and sell when everyone wants to buy.
At one level of money you are not impacted by a market downturn or crisis.
Many very rich people in Germany became very rich during or after WW2 - but they already were rich. Normal people just get poor in a crisis or market downturn.
A. Yes. Plus selling to the Wehrmacht ("war is a racket"), often with forced labour - or both, first stealing from Jews then selling to the Wehrmacht (like the current owners of BMW, ancestors sold to the Wehrmacht, profited from forced laber and additionally stole from Jews [1]). In communist East Germany Jews even couldn't get back their assets after the war, because Jews where "capitalists".
B. The vast majority of Germans profited from stealing from Jews (see book "Hitlers Volksstaat"), e.g. Germany was out of money before Kristallnacht and Jews had to pay 1 billion Reichsmark after the progroms, which helped the German state. Also jewish furniture etc. was auctioned off to all Germans - people too often only talk about arts and houses.
[1] The Quandts already were rich selling to the Prussian army, then during hyper-inflation of the economic crisis bought struggling companies, then "bought" companies from Jews who were forced to sell, then used forced labour in their companies, sold to the Wehrmacht, after WW2 got everything back and the debt they accumulated to buy all of that had evaporated because of the war. Today they own large chunks of BMW for example.
> One of the best things when you are rich, you can buy when everyone wants to sell, and sell when everyone wants to buy.
Generally untrue, since most rich people hold their assets in what's being sold. There are a handful value investors left, who bother holding cash equivalents when PE ratios get absurd, but they are few and far between. Tech billionaires, in particular, are very unlikely to be sitting on much cash.
If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k.
It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
In my country (Sweden) if you don't know the purchase price, you can use an approximate purchasing price (e.g. for equities you are allowed to assume that it was acquired for 20% of the current value, so you'd be taxed on 80%).
> If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k.
There’s nothing “obvious” about tax policy. It’s an arbitrary determination of what’s in and what’s out.
Taxing capital gains at all is not “obvious”.
Taxing transfers of assets to your children, whether it’s while you’re alive or after you die is not “obvious”.
> It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.
Getting rid of the stepped up basis doesn’t require that we realize the gain at death. Just transfer the basis to the heirs, and if/when they sell, then realize the gain.
Yes. As a Swede, I don't even think of individual ownership of assets.
I see a line of descent as the unit which holds property, rather than individuals from that line, and from that PoV inheritance tax of course makes no sense, but similarly, disinheriting somebody, and some other notions, don't make sense either, so it's a different perspective.
I think the Swedish state actually takes my perspective on this, because in Swedish inheritance law you can't disinherit somebody, and we don't have inheritance tax.
I think you've misunderstood what they're suggesting - they're considering the transfer from parent to child to not be a realization, so there's no taxes, and no change in basis.
The child who sells the house, then has to pay gains from when the house was first purchase, rather than against the value when they inherited it
> The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.
Well, "homestead" exemptions are usually already a thing in most countries' inheritance laws. There is no need to draw stocks into the mix.
> Taxing transfers of assets to your children, whether it’s while you’re alive or after you die is not “obvious”.
It actually is obvious, at least if you want to prevent a return of feudalist eras.
Most parents don’t want meritocracy. They want their children to have an advantage over the children of others. They just have not squared this instinct with political ideology.
This is a kind of odd framing. I have children and I don’t see it as zero sum, as in your description. I want my children to do well. I don’t want other children to do worse, necessarily. I don’t care about other people’s children because I don’t know them and I’m not raising them. I want my kids to do well because I have put huge amounts of labor and love into them. The great beauty of most western systems is that they don’t have to be zero sum and they empower individuals and families.
> Most parents don’t want meritocracy. They want their children to have an advantage over the children of others.
Thing is, "meritocracy" doesn't exist on its own either. Even if a poor person's child is among the more intellectually gifted in school, it's hard to compete against the children of those who are blessed in money. And that extends to adult life as well: those born to academic parents are much more likely to go into higher education themselves and have an easier time there (both due to connections as well as the simple opportunity of having parents to ask how to best format a paper or to proofread one), those born to rich parents can simply afford to "try themselves out" - for someone with millions to burn, they can easily afford to seed-fund whatever scheme their kid comes up while most other potential founders depend on sheer luck meeting someone in a random elevator.
And the importance of children being "advantaged" ruthlessly is a recent trend too. Up until 30, 40 years ago, most kids worked in farms or the trades and they were happy with it. But ever since employers demanded higher education and everything else became decried as "something for immigrants" aka low economic lifetime perspective, that shifted... funny, cities would drown in garbage in a matter of weeks when there would be no garbage haulers, but they would continue to be livable if Wall Street went up in flames.
> The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed.
So make an exception for a single home the inheritor personally lives in and tax everything else.
> It's utterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects.
Who do you think writes the laws and the tax code?
Yup, here in Japan inheritors have to pay 10-55% (progressive based on the amount) of the value of all inherited property globally within 10 months.
As an American, knowing that I could have gotten away without this tax had I decided not to live in Japan long-term, and knowing that I will have considerable inheritance when my parents pass is a bit of a downer; but logically speaking, the step-up basis loophole is BS and it probably ought to be this way, or some variant of it, everywhere.
If you exceed the inheritance tax exemption then you are taxed on the $10k so LTCG would be double taxing. You could argue that the inheritance tax should have a much lower exemption but double taxation is harder to justify.
Bullshit. "Double taxation" is such a weak argument to me.
When I buy gas at the pump it's taxed multiple times. State sales tax. City sales tax. Federal gas taxes. State gas taxes. Quadruple tax on me there.
My wage income has several taxes. FICA taxes. Payroll taxes. Federal income taxes. Potentially state income taxes. Potentially city income taxes.
When I pay for a hotel there's often a bevy of different taxes on that. When I pay my phone bill there's a bunch of different taxes on that. Even getting a drink at a bar there's a sales tax and a liquor tax.
And all of that is on money I've already paid all those several income taxes on, so it's really all just stacking there.
Oh but boo hoo ultra wealthy get their massive inheritance "double taxed". Get bent crying over your "double taxed", I'm quadruple taxed and more all the damn time. Weak argument.
But like, why? It's a worthless point. If there were five taxes of one percent each versus one tax of 20% how is the one tax somehow better? Which one would you choose, getting taxed five times or once?
It doesn't really matter that there's a FICA and an income tax and a payroll tax in the end, what really matters is the overall tax rate and if that's fair given some moral decision of fairness of sharing costs of society.
If a city chooses to levy sales taxes and hotel taxes to capture more revenue from visitors because their town is a tourist destination and want to collect from tourists more than locals that's fine. I won't weep a tear for those getting "double taxed" on their vacations.
What you tax is not really relevant as long as it doesn't disrupt some activity you want to continue happening. If it was up to me I'd tax spending not income. Regardless of what you are spending on. Bread? Sure! Employee? Yes! 10% of Tesla? Same!
> If it was up to me I'd tax spending not income. Regardless of what you are spending on
Under this system the poor who spend the majority of their income just to survive pay the highest effective tax rate while the wealthier who save most of their income have the smallest effective tax rate. That sounds like a fair and equitable system to you?
And yet the rich spend vastly more money than poor. You can see it trivially by noticing that the poor have all their money from the work that they do for the rich.
Taxing spending would be way more equitable than whatever we are now doing.
We are already doing some taxation of spending. VAT, sales tax, social security fees. All of those are paid by buyers of goods, services and labor. If we did the same for investments government would have so much more money to deal with the problems instead of borrowing it from commercial banks at interest.
If interest rates are too low though then they wouldn't pay interest each month and the market will keep inflating - so the strategy will work.
Basically, this looks like a tax-effective strategy to stand in front of the money hose. If the money hose wasn't there it would be a tax-effective path to near certain ruin and much less attractive.