Comment by umvi | Hacker News Reader

Comment by umvi | Hacker News Reader

> In the American system, there’s a huge difference between how we tax wages and how we tax investments. Income from financial assets is generally taxed at a lower rate.

Right, this is the part people miss. The top wealthy aren't getting hundreds of millions of dollars per year via truckloads of cash which they then somehow pay a small tax rate on. Instead they (for example) own a large % of a company and when the value of the company goes up, the value of their wealth goes up. So in some sense that money is imaginary.

Imagine buying a million dollars worth of gold bars and putting them in your house. Next year, the value of gold has gone up 50% so the same pile of gold is now worth $1.5 million. So you've "made" $500k! But it's not a real $500k, it's an "imaginary" aka "unrealized" $500k. You might find it's not really worth that much if you attempted to sell it all. Until you've "realized" those gains buy selling your gold, you don't pay taxes on it. I think most people agree that's a reasonable policy, yet a lot of people are outraged that there is no "wealth tax" to force the gold owner to sell off gold every year to pay for any unrealized gains.

What people ought to be outraged at are the loopholes the wealthy exploit in order to not pay taxes on realized gains such as the "buy, borrow, die" loophole (https://wallethacks.com/buy-borrow-die-estate-planning-strat...). For example, wealthy people will take out huge loans backed by unrealized assets (stocks), use the loans to fund their lifestyle, and then die without paying back the loan. Then your heirs use the inherited money to pay off the loan at a way lower rate than normal because the stock cost-basis is stepped up at the time of inheritance.

> The top wealthy aren't getting hundreds of millions of dollars per year via truckloads of cash which they then somehow pay a small tax rate on

I believe your take is incorrect. The article is talking about capital gains tax paid when investments are sold, and how it is lower (as a percentage) than payroll tax.

FTA:

"Since 2013, that long-term capital gains rate has been 20%, about half the top rate on ordinary income (37% in 2018)."

This is correct for Mexico:

Mid-tier income people will pay from 20% to 35% (in a progressive tax setting, granted). This is people whose taxes are collected automatically and they don't have any say in that money.

Whereas rich people, they will invest in Stocks and REITS (FIBRAs in Mexico), the former has a 10% Tax while the latter (FIBRAs) doesn't have any tax (for generated "dividends"). So, rich people have better instruments to make their money grow and pay less taxes, while the average Joe is bled.

In reply to just the FTA quote (not the parent comment's content): The 20% long-term gains might also be subject to 3.8% net investment income tax, right? There is still a difference but it's closer to "about 2/3" than "about half."

And the article does omit state taxes but California would tax both LTCGs and income at 13.3% for this cohort.

That might be splitting hairs and I'm not justifying billionaires' tax rates. Politically I probably line up with the ProPublica stance more than not, but feel there is some hand-waving in this series of articles that distracts from the argument, especially around defining the term "true tax rate."

The super rick get loans against their stock holdings and spend the loans like tax free income.

People play these games all of the time with their houses.

"It's worth $600k!"

Yes, it's worth that much. Which means you can take on an even bigger line-of-credit if a mortgagor agrees. (Buy, borrow, die: Normie edition).

Doesn't mean it will sell for that much, and even if it did, the houses around you are likely worth just as much.

I'm still learning about buy-borrow-die, but US estate taxes are higher than income taxes above ~$12 million, right? Much less capital gains. So buy-borrow-die would generate more taxes than buy-sell-spend?

Your taxable estate is calculated after subtracting debts from your assets, so even if you don't want to leave any inheritance, you can borrow equal amounts to your unrealized assets and effectively spend all your money while you are alive without ever paying capital gains tax or estate tax.

If you do want to leave inheritance, capital gains basis is reset at death, which effectively forgives your lifetime unrealized capital gains, so you would only owe estate tax. If you sold before you died, you would still have to pay estate tax in addition to the capital gains tax.

That makes some sense. So buy-borrow-die with all the shares used as collateral generates no taxes, if you can find someone to lend for the full value of the shares. I wonder how high a ratio you can borrow if you're e.g. Musk or Bezos.

On the off chance anyone finds this comment, I found this page with the current modification proposals helpful as well: https://crsreports.congress.gov/product/pdf/IF/IF11812?fbcli...

Reply on news.ycombinator.com