[__turbobrew__]

> In fact the conversion rate between them is about 20. A wealth tax of 1% is equivalent to an income tax of 20%.

Sure, but you actually have to work for continued income. Wealth accumulates with no input once established.

Wealth has the ability to increase (capital gains) without having to pay tax until it changes hands, whereas when income increases it is immediately taxed at a higher rate. Additionally, wealthy people can use securities as collateral for near zero interest lifetime loans which also bypass having to pay income tax.

[jppope]

> Wealth accumulates with no input once established.

This is incorrect, historically you'll pay a ~2%-3% loss via inflation if you keep your money in cash. If you invest (making it capital) in bonds or securities then you will see accumulation, but thats actually a risk premium.

> Additionally, wealthy people can use securities as collateral for near zero interest lifetime loans which also bypass having to pay income tax.

This is true, its typically called "Buy, Borrow, Die" but the reality is that it is only available to a very small percent of wealthy individuals and exists because of the way inheritance is handled ("stepped-up basis"). Even reasonably (not fabulously) wealthy people will still pay retail rates on the loans making the tactic basically ineffective. Last I heard you needed something like 100M+ liquid for lenders to even consider it (presumably, because they will make more off of some other deal with you)

[Epa095]

The S&P500 has increased 9.8% annually the last 100 years, roughly 6% annually adjusted for inflation. Yes, past performance is no guarantee for future, but historically a completely passive index placement of wealth into S&P500 would double the real (adjusted for inflation) wealth every 12 years. With absolutely no work.

[__turbobrew__]

Also, if you are wealthy enough you can just wait out any economic downturn. Hell, Im not even that wealthy and it would have to get really bad before I would be forced to sell in a down market.

[xphos]

Yeah but the 5% Paul used is also kind of conservative since the 1970s stock market returns is like 10% ignoringinflation. Its a big difference if your well grows 7% verse 5% a 1% wealth tax with that in mind is only 15% but i think factoring in inflation is unfair concerning labor pays tax after inflation. That brings the rate down to 10% and thats without taking any significant risk.

I think a real solution is a forced step up in bases every year so people cannot put taxes off forever. It can be modest too 5% of your investment value delta. You could make the carried lost yoy track the net so you cannot be forced to pay when things are down.

Also the idea that capital gains tax should be less than income tax rate is strange. Like the people that own large amount of capital are in the lowest risk situations why should they also.have the most generous tax positions it makes no sense. No real person things the business owner who gets large returns is actually worse off or in high risk because if they were they'd be culled by economic evolution

[skybrian]

Step-up basis is important for anyone who inherits property from their parents. That can be substantial in places like California where real estate has gone up a lot.

And for inherited rental property, there is another huge loophole: you can can depreciate the full market value of an asset that you got for free. That’s a substantial tax benefit for many years.

[PokedBear]

The step up basis makes sense in a world where you still have to pay substantial inheritance taxes. But with minimal to no inheritance taxes, the step up is a giveaway.

[sokoloff]

It’s also a practical policy. It’s far easier to know the stepped-up basis on the date of X’s death than it is to know the basis that X had in something once X is dead.

[topaz0]

Which argues in favor of the inheritance tax mentioned.

There could be other solutions too -- say, require a virtual wash trade at time of inheritance, so the capital gains from the parent's lifetime are taxed at time of death and the child gets the stepped up basis. Somewhat different than an inheritance tax, but at least not a giveaway.

[sokoloff]

The full value of the shares (original basis plus step-up [or step-down] in basis) is already part of the estate and so is already subject to the inheritance tax rules.

It's just that the exclusion amounts are fairly high, so in practice the tax owed is often $0.

[jandrewrogers]

There is little evidence that wealthy people actually borrow for income in any significant way. For example, this paper[0] finds that borrowing only accounts for 1-2% of economic income among the top 1%.

This makes sense. Borrowing for income in most scenarios is strictly worse financially than recognizing conventional income if you actually do the math. Wealthy people are optimizing for financial outcomes, not avoiding taxes per se.

[0] https://www.sciencedirect.com/science/article/abs/pii/S00472...

[opo]

>...Additionally, wealthy people can use securities as collateral for near zero interest lifetime loans which also bypass having to pay income tax.

This is just Internet mythology. The IRS would go after such arrangements very quickly - the IRS has the Applicable Federal Rate for loans. Though this really isn't an issue with banks as they are not charities and tend to want to make money.

[__turbobrew__]

It is called “Buy, Borrow, Die” and it is a very real thing.

[opo]

The buy, borrow, die idea came from McCaffery in the 90s which was before various IRS sections like 1259 and 7701(o) were codified.

Go get a calculator - if you took out a loan and had the interest set a the minimum of the AFR, what would it compound to in 30 years? It would obviously be much higher than just selling stock and paying capital gains on it.

The ultra rich do take out loans, and these loans do get repaid, and that money has to come from somewhere. Go google something like billionaire stock sales to see examples - if they all could just say, "Thanks for the zero percent interest loan! I'll pay you back in 30 years in my estate!" - I think they would have.

[nullocator]

You're going to have a hard time convincing me the wealthy aren't gaming the tax system after all the reporting and leaks over the last ~40 years.

I suspect you are simplifying what's happening quite a bit, not sure if it's intentional or otherwise. But wouldn't the more likely scenario be that you borrow 100m with a 10 year draw at x% interest and then at the end of the 10 years you do a stock sale (some taxes paid), pay the interest (interest is generally non-taxable) and then take out a new loan for 500m based on your much larger portfolio, and finally claim significant losses against some other asset (regain your actual stock sale taxes losses "oh no my art lost value!")? Repeat ad nauseam until you're dead.

[opo]

>You're going to have a hard time convincing me the wealthy aren't gaming the tax system after all the reporting and leaks over the last ~40 years.

Obviously every person tries to avoid taxes - you don’t have to be rich do do that - but the idea that there are magic banks that loan money and don’t mind waiting decades to get their money back is some kind of weird propaganda.

>...I suspect you are simplifying what's happening quite a bit

People keep saying “buy, borrow, die” as if it is really that simple - like it is that one simple trick that banks and the IRS hate.

>...But wouldn't the more likely scenario be that you borrow 100m with a 10 year draw at x% interest and then at the end of the 10 years you do a stock sale (some taxes paid), pay the interest (interest is generally non-taxable) ...

Your scenario is not “buy, borrow, die” as a core concept of that meme is you take advantage of the stepped-up basis upon death and the estate pays the interest. With your scenario the person imght have an interest payment of 50 million + the original 100 million, so now they have to sell enough stock to pay the 150 million and the 23-36% taxes on the gain (depending on the state they are located in - obviously different for countries other than the USA). That isn’t estate planning, that is hoping your stocks really go up and that the loan doesn’t come due in a downturn like 2008.

>"oh no my art lost value!"

That trick where for example, where someone would donate some painting to a museum and pay someone to say the donation is with N million, might have worked at some point in time, but that kind of thing is pretty much guaranteed to get an audit these days from what I have read and I would be very careful trying to do that.

A variant of the "buy, borrow, die" which some claim is done is basically that a bank essentially becomes a minority shareholder of the estate for giving the money. Though I recall one CPA who dealt in this area replying that none of the family offices he knew would likely be interested in this approach - people like Goldman Sachs are not your friends.

[blitzar]

Ironically, a wealth tax of 1% is equivalent to 20% of the risk free earnings on that wealth.