If they sell and incur capital gains. But they have so many better alternatives than you or me. And if they do incur capital gains they pay the same tax rate (or maybe 5 basis points higher, depending on your income) as you or me.
Borrowing against assets. Wealthy people get low, low rates, much lower than the hoi polloi would get on a HELOC or brokerage account margin loan. Banks like having them as clients.
Not only they get low rates, but if they have friends in the palace, they tend to be beneficiaries of large governmental contracts; during times of economic upset, they are the beneficiaries of large “monetary injections” that later cause inflation and prices to rise for all of us. During 2008, COVID, and the Mango recession the wealthy got much much wealthier, and all we got was expensive eggs and higher costs of living.
You don't pay back the loan. You die, your assets pass to your heirs, and their cost basis is stepped up. The heirs sell some of the assets to pay the loan back. They don't have capital gains because of the stepped-up cost basis.
There are finer points I don't understand such as:
1. Is the stepped-up cost basis available to the estate or only to the heirs? If it's to the estate, it's easier for the bank to trust they'll be paid back.
2. If the heir gets the stepped up cost basis, what legal guarantees does the bank have that the heir will pay the loan back?
And probably a lot else. I assume there's expensive lawyering and accounting involved in setting it up, so it isn't cost-effective unless you have a certain amount to shield from taxes in the first place.
First of all, prime can be pretty good vs being taxed. Secondly, who knows what kind of sweetheart deal can be pulled for a small (in the big scheme of things) "loan" when banking of billions is at stake.
> Nobody loans out money with a guaranteed prospect of below market returns
Not to you or me. Giving powerful people who can send more business the bank's way a freebie on their personal accounts might make sense as a loss leader.
An ELOC for a HNWI can be significantly lower interest than a mortgage. They can often get "fed funds rate/LIBOR + 0.5%" or so. This is because they can accept a floating rate, while mortgage rates get locked in for 10-30 years.
Only short term gains are taxed as income. Long term capital gains tax caps at 20%, wildly lower than the top income tax bracket of 37%. And it's always possible to defer short term gains (e.g. put your trading money in an IRA).
IRA contributions are drastically limited to a $7000 cap per year under 50. Whether they should be is another question, and one worth exploring.
Long-term investment is rightly seen as something to be encouraged hence the lower tax rates. You can make the argument that the rate should be more like 0% since the money invested and risked was already taxed most likely...20% is a reasonable value for the market regulating infrastructure provided by gov't entities.
IRA caps are low, but loads of people earning enough that they'd reasonably save more than 7k annually have access to 401ks or similar accounts that raise the annual cap to >30k, vastly more than the typical person is saving.
The middle class isn't taking advantage of low capital gains rates to earn more from their taxable brokerage accounts because they haven't even filled up their tax-advantaged accounts.
There are loopholes to roll all sorts of nonsense into an IRA though. There was a whole news cycle in the 2012 election about Mitt Romney's $4M "IRA" or somesuch. And IRAs are hardly the only shelter from income tax, they're just the most obvious.
The simple truth is that wealth beyond the ~$10M level in the US pays essentially zero "income tax". It just doesn't happen, no one does it. Short term gains are only taxed for small investors who don't know any better.
"Entrepreneur Elon Musk announced on social networks that this year he will pay 11 billion dollars, thus becoming the largest taxpayer in the history of the USA."
That was on a sale of Tesla stock that he'd held for much longer than the long term rate threshold. He paid 20% on it, or plausibly less. I, personally pay a higher rate than that. Big numbers notwithstanding, Elon Musk shouldn't be paying less tax than I do, sorry.
Financial policy is very specifically against people saving their money though - that's why a certain level of inflation is considered desirable to mainstream economists. Spending and borrowing is heavily encouraged at all levels, while investment opportunities are gated based on wealth and income to prevent the poor from being able to "work smarter".
> investment opportunities are gated based on wealth and income
Anyone can install robinhood on their phone and trade using their credit card.
> Financial policy is very specifically against people saving their money
No, it isn't. People who save money are terrified of risk. There's nothing stopping anyone from investing the money.
> that's why a certain level of inflation is considered desirable to mainstream economists
That's the excuse the government makes to inflate the money. You'll never see a politician point out the real reason for inflation. It's so they can spend it without raising taxes, but it does cause inflation, and inflation has to be blamed on something else. Anything but the truth.
Sorry, nothing prevents the poor from working smarter. Just because you are poor does not mean you are uneducated. And, investment opportunities are NOT gated based on wealth and income. Literally anyone in the US can open an investment account and get started. The lack of desire is the real issue.
We have tax-advantaged retirement accounts to enable the middle class to save a reasonable amount in order to retire without being a burden on society. A typical saver doesn't have additional extra money leftover for a taxable brokerage account that exposes them to capital gains taxes.
Low capital gains taxes aren't meaningfully encouraging somebody making 75k and saving 10k annually to continue with their saving plan.