[dwa3592]

>>This post makes the mistake of counting unrealized gains as income. That's not how taxes or investments work. Unrealized gains are NOT income.

Rich people always borrow money on the stocks they own. In effect, those unrealized gains help them borrow money which they spend like income. I will spend part of my paycheck to buy a cup of coffee and they will spend part of the loaned money to buy the same cup of coffee. They can also buy a house with that money. All they need to do is keep paying the 4-5% interest rate on that loan meanwhile the underlying stock appreciates at 15-20%.

Is this a loophole that rich people enjoy? Absolutely. Does this loophole need to be closed - absolutely.

[eudamoniac]

What is the loophole? That banks are allowed to give out loans to trusted clients? Are you proposing that banks can no longer loan to rich people or what? Why does the source of the collateral being a stock matter? A normal person gets a loan based on his home value, assets, other factors, all of which might appreciate faster than the interest rate. When does it become a loophole?

You really don't want loans to be taxed as income, that would cause a lot worse problems than rich people existing...

[dwa3592]

Let me simplify it like i would for a 5 year old.

The loophole is that they never pay taxes on the unrealized gains bc they lived on the borrowed money their whole life. They will never sell their stocks, so there will be no taxable event. When they die they will leave their wealth to the children which effectively erases the unrealized gains. So no one pays taxes on that huge chunk of money. Google "buy,borrow,die".

[smallmancontrov]

Yes, but that's only the long term part of the plan. The short term part of the plan is that the marginal propensity to consume drops with income. Poor people earn and spend all their money, both of which are heavily taxed, while rich people "earn" capital gains and invest all their money, neither of which are taxed.

Here's how investment isn't taxed: take out a loan collateralized against the assets with unrealized gains. If the investment works, it can service its own interest, which is deductible. If it doesn't, the capital loss offsets the capital gain made by selling the collateral. Both cases result in approximately zero tax.

This is nuts.

[eudamoniac]

Poor people pay no income tax. It isn't "heavily taxed."

[smallmancontrov]

They pay payroll and consumption tax, which are quite steep compared to the 0% tax bracket for mega billionaires.

[eudamoniac]

I'm not a five year old, you simplified it to the point of nonsense. The workable aspects of it are complex and unusual. I did Google it and understand now, no thanks to your comments.

[phyzix5761]

The interest rate charged generates taxes, the purchases they make with the credit they borrow generate taxes, and the money they leave in their investments generate taxes through capital usage like paying employees, paying vendors, building facilities, etc. The government taxes every little thing so don't think that money is not generating taxes at all. It actually generates more federal and state taxes by staying invested and that's why unrealized gains are not taxed. The tax revenue outcome is better that way.

[smallmancontrov]

The government taxes every little thing that a poor person does, like earn and consume. The government hardly taxes anything that a rich person does, like rest and invest and watch the green number in the brokerage account go up.

Monetary velocity is notoriously high among the poor and low among the wealthy. If you have a dollar and want to generate maximum economic activity or maximum taxes, the answer is unambiguous that you should give it to the poor person.

[gaadd33]

How does the interest rate of margin loans generate taxes? Just curious since I'm not sure there's any provision explicitly taxing margin income for banks and brokerages. Especially since some brokers will give you the prime rate plus a few basis points, I can't see how there's enough margin in that to cover an explicit tax on it.

[WarmWash]

You can use the same "loop hole", it's called a securitized loan.

The real hack is being able to save money rather than "treat yourself" every single time you get more money.

[dwa3592]

Good attempt at manipulation. Why don't you link some studies here which say it will be better to leave the tax system as is than taxing the unrealized gains somehow.

[phyzix5761]

The numbers are self evident. If you've ever owned a business you know that you have:

1. Corporate income tax 2. Employee Federal income tax 3. FICA Payroll Tax 4. Sales Tax on transactions 5. Property Taxes

Now multiply that by each node on the graph. Each employee, vendor, business that comes in contact with your company spends the money you paid them and is taxed on it as well. It grows exponentially after just a couple of nodes. If each of those nodes is trying to make a profit from their own capital it generates even more tax revenue for the government.

Contrast that with capital gains tax which is a 1 time event at a maximum of 20%. That 20% needs to be taken out of the business in order to pay the taxes if you're going to tax unrealized gains. That means that 20% only gets taxed once instead of going through the graph and getting taxed exponentially many more times as it grows.

[smallmancontrov]

"I shouldn't be taxed because my employees and customers will be!"

Folks, we've found it! Pure, distilled, refined, 100.0%, 200-proof trickle down economics!

Just one teeny tiny itty bitty problem: r>g

Oops.

[WarmWash]

You're getting confused because you are failing to recognize that the owners wealth is being taxed when those other taxes are paid.

If the company had a magical exemption from all taxes, the owner would have a substantially high net worth. The gap between that hypothetical value, and the real value, is the tax being paid.

[smallmancontrov]

This is not only self-serving and/or bootlicking drivel, it's economically illiterate at a level that shouldn't exist outside econ 101 class. Taxes on a transaction are paid by the party with less elasticity / bargaining power, which is, in aggregate, the worker.

Also, you didn't address the r>g elephant in the room.

[xracy]

Gotta love "I don't need to show my work! It's self-evident!"

It's not self-evident, or the person wouldn't have asked for a source.

And you have numbers that you're pulling from "somewhere" without sharing a source for them, which means it's even further not self-evident.

[dwa3592]

Do you wanna get an endoscope test? I think there is koolaid in your gut.

[smallmancontrov]

Yes, "collateralization counts as realization" is the bare basement minimum of what we should do to fixed up the tax code, but I'm less offended by the scenario you described -- which involves skin-in-the-game capital allocation decisions, the whole point of capitalism -- than I am by the far more common situation where the assets just sit and grow and are rewarded for their sloth by a complete absence of tax on the one activity billionaires are best at: sitting back and getting paid for being rich.

Property tax on stock is a better place to aim.