I'd much prefer seeing us close up the tax loop holes than create an even more complex system.
Taxing unrealized gains will be extremely complex, and given that they aren't allowing us to deduct unrealized losses its a pretty shitty setup for the taxpayer.
We need to drastically simplify our tax code rather than further increase its complexity.
Doesn't this "close" the tax loophole in which holders of tradable assets can take out loans against those assets in perpetuity, never paying taxes on any of it?
Not necessarily, though that is the hope. This wouldn't directly close the loophole, its meant to be attempt to block it without actually closing it.
A huge question I have here is how unrealized gains on nonfinancial assets would be handles. How would the government determine the fair market value of a multimillion dollar mansion, for example?
More broadly, how would we justify only taxing unrealized gains on individuals? Or would this apply to corporations, banks, and financial institutions as well?
My point isn't actually any specific issue in the proposal, these are just examples of what could be a problem. Our tax code is massive and incomprehensible to almost everyone. Adding further caveats and stipulations just makes it worse. Taking an axe to much of the tax code seems like a much more reasonable approach in my book.
In my experience, state property tax assessments do a decent job at trying to calculate relative values but a terrible job at defining actual property values. Meaning, they may pretty reliably value my house at 10 or 15% less than the house next door based on age or size, but the actual value they put on either house isn't even close to what it would sell for (I've always seen tax assessments come in much lower than market rate).
I don't know how that plays out with mansions though. Whether a mansion is worth $30M or $10M is often hard to predict with the pool of potential buyers being so low.
> But yes, a tax on "unrealized gains" basically amounts to a property tax, not anything related to an income tax.
The main difference being that a property tax only takes into account the assessed value and ignores what you paid for it. They tax the value, not just unrealized gains.
Yeah, I just meant it is more similar to a property tax than an income tax. Of course the other difference is that you might be able to deduct the tax you paid if the value drops back down before the gain is realized... but I haven't heard enough of the proposed implementation details to sort that out.
I mean, you have to pay the loans back. Which requires income which is taxed. This would only work if you either don't spend any money (which then what is the point of the loan) or if your assets are always going up and increasing in value beyond that of the loan which inevitably will not be the case.
The actual loophole is the step-up basis for inheritance. This allows you to never realize gains, living off loans against them. Then, when you die, your heirs inherit the appeciated assets, and the liabilities. But, their cost basis for the assets is stepped up to the then-current fair value. So, they can sell off assets to pay the loans off, but have no realized gains.
But charging taxes on the loan won't really reflect that well. Also, there are limits on inheritance before estate tax kicks in, so folks with 100's of million in assets passed on to their heirs are still paying estate tax, it won't be tax free at that level.
(Edited to correct "inheritance tax" to the technically correct term, "estate tax")
If you're a billionaire who does the "take out loans against your unrealized cap gains" trick, then you, you know... can't sell your stock. So then your stock passes to your kids -- who, due to the stepped up basis, yes, do not have to pay cap gains on that stock.
But there's a 40% estate tax.
Estate tax generally isn't very relevant even to the ordinarily-rich, because it has an extremely high deduction (about $27M for a married couple), but for a billionaire it's absolutely relevant.
Now, sure, if you paid both the cap gains and the estate tax you'd pay that much more taxes, but if you compare a normally-wealthy person (pays 15-20% cap gains and 0% estate tax) and a billionaire (pays 0% cap gains and 40% estate tax), it's obvious that the billionaire, eventually, pays a much higher tax rate.
Right. In my opinion, the 'fair' and 'simple' thing to do would be to eliminate the estate tax, and the step-up basis. Then there would be no loop hole to borrow against unrealized gains (and no real point to do so), while still allowing wealth to be enjoyed by the family that generated it, requiring them to pay taxes in the same way everyone else does (simplifying the tax code).
Well, you still have to pay the estate tax, but you are probably arguing that is independent as it would need to be paid regardless of the step-up in basis.
Yeah, the real loophole is step-up in basis with no corresponding tax event. What should really happen is that every step-up in basis should correspond to a tax event or, somewhat more speculatively, only net changes in basis should result in tax events. Incidentally, this would also give everybody access to reduced taxes due to unrealized losses (tax loss harvesting) instead of just people with accountants.
That's not a loophole, it is illegal. You can't deduct personal expenses from a business. I realize the rich do it, but if that is the problem let's go after that.
Also if you sell stocks you always pay tax on the capital gains regardless if there is a loan or not.
>You can't deduct personal expenses from a business. I realize the rich do it, but if that is the problem let's go after that.
We have gone 'after it' again and again, making the system more and more complex. So much that you can now out-lawyer the IRS if you have enough money. There is no 'personal' expense, everything is somehow a business need. There is no simple solution to this really. Whatever you do to hurt ten billionaires, the ten million small business owners will face the brunt of it.
>Also if you sell stocks you always pay tax on the capital gains regardless if there is a loan or not.
That is the point, you don't sell stocks that makes you a billionaire. Instead, you find more and more creative ways to leverage that stock for loans, for deals, for power/control, etc etc. Also see cross collaterals where the same asset is used for multiple purposes at the same time!
So if you argue that we already can't enforce existing tax laws then why is proposing new, extremely expensive and difficult to enforce tax laws the solution?
I'm pretty sure that whole notion of these magical loans to avoid taxes is a made up internet conspiracy theory.
A) Loans need to be paid back, with interest. The person must either be selling assets or drawing in other (taxed) income to pay back the loan. A loan could delays the taxes to a future year to let someone buy a house or yacht or whatever without the full tax burden in year 1, but they still ultimately pay all the taxes
B) If they die while still having outstanding loans, their heirs pay a 40% inheritance tax on everything above like 10 million, so there is no magic avoidance of taxes there, just a change in whether it's capital gains tax today or inheritance tax tomorrow.
I'd love to be disproven if someone can explain a real tax loophole, but as far as I can tell, the "Billionaires avoid taxes by taking out loans" thing is completely untrue.
If I'm reading the IRS data[1] correctly, "debts and mortgages" are considered a deduction on the estate valuation, which means any money left in the estate (i.e. instead of in a trust) solely to cover loans would not be taxed. I think the idea is that you would roll the debts until death, at which point the estate can sell the securities with their stepped up cost basis, thereby avoiding (nearly all) capital gains tax.
I'm not an expert on this, and I could be misunderstanding some subtlety here.
Putting it even more simply, people don't need tax breaks. If our current system has loop holes it needs to be simplified such that loop holes can't reasonably exist.
In my opinion, we don't need perfect and we aren't comparing to good.
A perfect tax code would be impossible, a more simply one would be very doable.
We're talking about a campaign proposal here with no legislative draft so its a guessing game, but in my opinion any move similar to taxing unrealized gains will serve only to make it more complex and would not fall under the category of "good" for me.
The audience of HN are striving to be "people in these brackets" and far more here have experienced paper gains over $100M then seen it evaporate, than the few that end up at a place they are insensitive to marginal dollars.
No we're not, since we are smart enough to realize what sort of person you would need to be and what it would cost you in one's actual life (TM) to even have a chance to get there. And most folks here are not high functioning sociopaths to start with.
Upper middle class its where highest quality of life happens, if one is smart enough to understand how happiness and life fulfillment works, to not die full of hard regrets. You can have meaningful true friendships. Enough to afford whatever is you need or desire to do, not enough to become self-entitled spoiled lazy disconnected from reality piece of shit parent and partner type of folks. No you don't need private jet or mega yacht or 5 mil hypercar for that, that's poor man's idea of what sort of quality wealth brings you in life.
Seems like DNC party policies always move in the direction of what improves the job market for lawyers and bureaucrats. More complex legal code, more complex maneuvers to get around it. Tax and finance lawyers for the wealthy are going to see a salary bump if this law passes.
I don't actually see it as a left/right or DNC/RNC decide. The policies often look different on the surface, but in the US today both sides of either "divide" lean heavily into increasing federal authority and regulation.
RNC certainly has it's problems with giving powerful and wealthy individuals ways to avoid paying taxes. But when it comes to the litigation economy it is generally DNC causing the offense. RNC, to their credit, will often roll onerous regulation.
I've wondered if it wouldn't be better to shift the tax code to bias companies toward paying dividends, as used to be more universal among profitable firms. Then the shareholders will have the appropriate progressive income tax bracket applied.
The reason companies pay in shares and not dividends anymore is _because_ doing paying out profits using a share (buyback) is more tax efficient. Especially for recipients who want to let it ride in the stock market.
It doesn't seem like a genie you'll be able to put back into the bottle without reducing the net tax take.
> Taxing unrealized gains will be extremely complex, and given that they aren't allowing us to deduct unrealized losses its a pretty shitty setup for the taxpayer.
I pay taxes on the unrealized gains of my house appreciating in value over the years.
I'm not arguing one way or the other about whether various wealth tax ideas are good. But, I don't believe that the concept is as infeasible as some are making it out to be when it's been happening with property taxes for a very long time.
I pay taxes on the unrealized gains of my house appreciating in value over the years.
You pay taxes on the assessed value of your house. It doesn't matter what you paid for it, or how much equity you have in it. It's more of a use tax than a capital gains or wealth tax.
That's a fair point. It's definitely pretty different from an unrealized capital gain because, like you said, it's not about your net gain or loss on the house. But, I'd still say that it's practically similar enough to a wealth tax precisely because it's a tax based only on the current value of the thing that I own.
Also, just to add to the above discussion, it's even worse in practice than a tax on unrealized gains because I'll have to pay the same amount of tax every year if my house stays the same value. If it were a tax on the unrealized "gains" of my house, I'd pay $0 if it stayed the same value. And if the value of my house decreases, I'll still have to pay more than $0 in property tax, whereas a capital loss would mean I would pay at most $0.
So, I think I still stand by my sentiment that property taxes are more burdensome than a tax on unrealized capital gains.
Property taxes exist because we want to tax externalities like land use. Taxing fake wealth because you own a company and some VC assigns it a valuation is insane.
Why should you dilute your ownership share just because of some arbitrary number?
> Taxing fake wealth because you own a company
> [...]
> Why should you dilute your ownership share
So... is owning piece of a productive company "fake wealth"? Is it fake when you can leverage that valuation to have access to more credit and use that to buy real stuff (like property...)?
I'd argue that property taxes exist because we still live in a system resembling the feudal system we evolved from, and governments believe it is their right to tax our property to pay for their projects.
Who--other than "governments"--decided that its "your" property and that you somehow deserve monopoly rights to a piece of the planet that you didn't create?
Taxing unrealized gains will be extremely complex, and given that they aren't allowing us to deduct unrealized losses its a pretty shitty setup for the taxpayer.
We need to drastically simplify our tax code rather than further increase its complexity.