We do tax capital gains. You pay taxes when you sell. Do you mean tax unrealized capital gains?
There is a reason you don’t owe taxes on a stock you haven’t sold yet. For one thing, what if you have to pay tax at one valuation, and then it goes down later.
I agree that taxing unrealized capital gains is a fundamentally flawed approach. However, the problem with the current system is that these ultra-wealthy people just end up borrowing against their equity, avoiding selling if possible.
I think it would make sense to count borrowing against equity as tax-wise equivalent to selling that same equity.
With that loophole closed, together with raising the capital gains tax, I think the tax system would be much more in line with what people expect from it.
But borrowing is not equivalent to selling, tax wise or any otherwise.
When you get a mortgage to buy a $750k house, do you want to be taxed as though you had $750k income that year? You’re just borrowing against the value of an asset after all.
Yes, but the difference is that borrowing against your unrealized investments is a way of dodging taxes. I think the tax code can handle that level of subtlety without paying attention to your flippant reductio ad absurdum.
Sure and borrowing $750k to buy a house is a nifty way for me to get $750k without having to pay income taxes on $750k worth of income. What an amazing loophole that gives me completely free money and no taxes!
What the government could do is stop loaning out money at 0% (i.e. printing free money which inflates assets, like stocks held by wealthy people). If the prime rate increased, the rate banks would charge on asset-backed loans would also increase, which would make it less attractive than just selling the asset and paying the capital gains tax.
Taxes on real estate work that way and are a favorite among economists. I borrow say $500k to buy a house. Then I’m taxed some % of the property value each year e.g 1%.
Real Estate is not the same thing as stock. There is a finite amount of land. You didn't make it. Ultimately it is a shared resource and we pay a fee to society while we are permitted the exclusive use (with some restrictions) of a small part of the planet we all share.
Anyone can start a company tomorrow and declare that they have a billion shares of stock in that company. They only become worth something because the person that started the company uses their own effort and ingenuity to make the company do something that is valuable to everyone else.
Yes property taxes have another dimension of “fairness” to them, but that’s not why economists favor them: it’s because they can’t easily be dodged and are easy to extract (knowledge of property ownership is pretty reliable).
Taxation isn’t necessarily based on what’s fair or rational, it’s a way of financing public expenses. It might be more logical from the perspective of the people as a whole to tax wealth more and income less (for example) even though wealth is less logical and “fair” to tax than income or consumption.
It should be possible to target this. Have it kick in say over $10 million or when a loan is backed by existing rather than new assets purchased with the loan.
They don't "avoid selling," at least in the way you and others are implying. They only delay selling. At some point the loan must be paid back, and at that point they will have to sell something or take income, which incurs either income or capital gains tax.
And a trivial way to work around your proposed rule: borrow without collateral. Why would a lender be willing to do this? Because they know the other party is wealthy, that in the event of bankruptcy they have ways to collect, they make money on interest, and it is tax efficient under your new rule.
And in the meantime, they get to retain the full power and influence that comes with the stock/company that they control. The wealth inequality issue is as much about power dynamics as it is about dollars and cents.
> borrow without collateral
And it would be trivial to write the law to prevent that loophole. If a person has any unrealized gain over a certain amount, then any personal loan, secured or not, would qualify for some sort of realized gain tax.
Personally, I think it is simpler and more elegant to implement a wealth tax. It would encourage the wealthy to take more income or dividends to cover the tax, and it would also help shift investments towards more profitable/cash flow positive ventures. For example, all of the tech unicorns burning loads of VC money to acquire negative cash flow would be penalized under such a scenario.
Borrowing against your stocks isn't a loop hole. You eventually have to pay the loan back, when you do, you sell stock, pay taxes on the profit of the sale, and use the rest to pay the loan.
You didn't avoid anything, you just deferred it until later.
By the way, if the bank "forgave" the loan, and said you don't have to pay it back, that forgiveness is taxed - usually in a form 1099. So there isn't a loop hole there, either.
The issue is when the ultra-wealthy take out loans against their investment assets (and thus, those unrealized capital gains).
By doing that, ultra-wealthy _are_ realizing the value of their investments without being taxed. That's how this wealth is being accessed, and that's a large component of what drives these ultra-low tax rates for the ultra-wealthy.
Then HELOC would be taxed which many middle class people rely on. Also its a loan so it need to be paid back. Will payments on private loans be deducted from income then?
This is not on topic, but to me it's ridiculous that something like HELOC exists and is somehow widely accepted. Like dude, you'll never pay down that debt. Your house is not an ATM machine.
The underlying assumption that prices only go up. It's so deep in the culture you don't even see the absurdity of not building any equity except for what's generated by upwards price momentum.
Well, population growth has been a constant throughout that culture and that nation's entire history, so all of the consequences of that are to be expected, no?
Housing prices always reverts back to CPI over multiple decades, i.e they offer no real capital gain. Robert Shiller wrote a lot about this.
Also I don't understand how a growing population leads to increasing prices, while there's so damn much unused land? Either there is enough new land, then people eventually spread out (and prices revert to the CPI, to the cost of construction), or there isn't enough land and homelessness increases as more and more people are completely priced out. Right now nearly every country is in the first situation.
> Either there is enough new land, then people eventually spread out (and prices revert to the CPI, to the cost of construction), or there isn't enough land and homelessness increases as more and more people are completely priced out.
It's not binary. People like to live near other people in cities. Demand to live close to one's job, friends, activities, and loved ones drives up prices in dense areas even with unlimited room to expand elsewhere.
Desirable locations are desirable even on an infinitely-sized map.
Solutions to taxation do not need to be black and white simple rules. The US tax code is already purported to be 70,000 pages. It would be perfectly reasonable to write one tax code for middle class people below a certain net worth that encourages wealth creation, family wealth, credit and investment. It would be perfectly reasonable to have a separate tax code for the ultra wealthy that curtails loopholes, tax shelters, dynastic wealth and offshore accounting. For example, some countries tax net worth over a certain number of millions.
The free step-up in basis at death makes no sense for the very wealthy. The rule originates from the difficulty in determining the basis of assets of dead people. The very wealthy have accountants that track this.
Warren Buffett can pay capital-gains tax AND estate tax.
What if? Most jurisdictions assess property taxes annually, and many of them regularly reassess the property value on which the tax is calculated, rather than waiting until a sale to reassess.
One question is whether we want to encourage pure ownership/holding of assets (the current stock ownership situation) or whether we want to encourage productive use of an asset (the current land ownership situation).
And additionally, a significant fraction of most people's net worth is in their housing. With a typical tax rate of 1%, most non-wealthy people are effectively already paying a large wealth tax on a huge fraction of their net worth. But if you are ultra rich and have most of your wealth in capital instead, you get away with practically no wealth tax at all. The system is rigged beyond belief.
Land can have buildings on it. It might have resources like water, oil, minerals, timber, that can be used. It's a shared resource and we pay society for exclusive use of it.
What "productive use" are you going to get out of a share of Amazon stock?
The company itself will do productive things, but taxing people to hold the stock is going to make them do what productive thing, exactly?
This isn't really true. If you receive RSUs as part of compensation, you have to pay taxes according to the value of the stock at the time of vesting. You also have to pay tax when you sell the stock equal to the difference in price from vesting.
You might get a refund or you might pay more taxes when you sell, but there is precedent to paying taxes on stock that you currently hold.
Isn’t that generally a problem where people get slammed with huge tax bills on stock they aren’t able to sell and may not have the cash available to pay?
>Isn’t that generally a problem where people get slammed with huge tax bills on stock they aren’t able to sell and may not have the cash available to pay?
No, I can't say I've ever heard of that happening. You should be able to sell to cover. This will typically happen during an open trading window and brokerages will offer an option for "sell to cover".
>Why would we want to do more of that?
I didn't make a value statement one way or the other. I'm just saying your claim is wrong and maybe your misunderstanding of taxation on stock is not the reason that unrealized capital gains aren't taxed.
Ok correct me if I'm wrong, but RSUs are given to you as a part of your income, right? You don't buy them? That would make sense then to tax them as compensation. If the company gave you other non-cash items as a form of compensation, you would have to pay tax on that too. If the company rents an apartment for you, the value of the rent would be considered income.
That is a lot different than buying a stock at $10, having it go up to $100, and you now have to pay taxes on the gain (which may be temporary, the day after you pay taxes it could go back to $10).
The caveat would be that the capital gain during sale is calculated based on the difference from the price at vesting. So the original taxation is carried with you while you hold the stock which is the mechanism that you thought didn't exist for a reason.
For the second paragraph, it's not so different from real estate market fluctuations. You pay taxes based on the value of your property at a specific date even if that value tanks the very next day.
There is a reason you don’t owe taxes on a stock you haven’t sold yet. For one thing, what if you have to pay tax at one valuation, and then it goes down later.