Following ProPublica’s release of a report based on the tax records of wealthy taxpayers, NTUF Executive Vice President Andrew Moylan and I wrote a response piece in Reason. In this op-ed, we pointed out the fallacious nature of comparing taxes paid as a percentage of wealth growth. After all, our system taxes income, not on-paper wealth, and the richest Americans pay a disproportionate amount of their income in taxes already. ProPublica’s analysis knowingly compares apples to oranges.
One of the most common counter arguments the Reason op-ed received was to reference the practice of “buy, borrow, die.” The argument goes like this: the wealthy borrow against their assets rather than selling them, thus avoiding the capital gains tax. Then they are able to hold the assets until they die, at which point the “step up in basis” protects their heirs. This step up allows someone to inherit an asset and establish its basis for tax purposes at current market values, rather than its value when first purchased by the decedent.
It’s true that this is a tax avoidance strategy that some wealthy individuals use. It’s not foolproof — corporate assets are still taxed through the corporate tax code, and borrowing against assets does incur interest, leading to the borrower having less cash rather than more. But the more significant point is that the conclusions some draw from this are entirely wrong.
One such conclusion is that loan proceeds should be taxed as regular income. Presumably any such proposed tax would include substantial exemptions, so that college students and prospective homeowners getting a mortgage wouldn’t get a nasty surprise. Even use of a credit card might come into question, since they are effectively short-term loans. Furthermore, if loan proceeds are taxable as income, then loan payments should be deductible.
Even if policymakers could structure such a tax to avoid these more obvious pitfalls, challenges would still remain. For instance, regardless of its use to minimize tax burdens, borrowing against assets is a crucial tool for entrepreneurs. The ability to borrow against one’s assets instead of selling them off to raise cash allows successful entrepreneurs to maintain control over their businesses.
NTUF previously looked at a similar threat to entrepreneurship: a wealth tax. We illustrated how even comparatively wealthy individuals without much in the way of cash on hand could be forced into slowly selling off start-up assets by such a tax, resulting in greater corporate consolidation and making innovation and entrepreneurship less rewarding.
Taxing loan proceeds as regular income could have a similar effect, pushing asset-rich but cash-poor entrepreneurs towards selling off their assets rather than borrowing against them.
The other conclusion, usually pushed by people who manage to always arrive at this conclusion no matter the underlying data, is that the solution is a wealth tax. Writers like Ryan Cooper at The Week insist that only “condescending billionaire apologists” would conclude otherwise.
But (and excuse my condescension) that’s nonsense. Despite Cooper’s claims that countries who axed their wealth taxes only did so because of nefarious neoliberals who hated all the growth that the wealth tax was bringing (???), wealth taxes were shown the door because they were monstrously complex and hampered investment and growth. Today, just four European countries maintain a wealth tax, and these often have low rates and remain controversial.
Wealth tax advocates like Cooper argue that we already have a wealth tax in the form of property taxes, so concerns about complexity are overblown. That’s a bit like a homeowner saying that they have a pool in the backyard, so they don’t need to worry about that tsunami.
Property taxes are assessed on a single asset, for which comparable assets are constantly being sold and valued. Wealth taxes would need to value an individual's entire net worth, which includes hard-to-value assets like artwork, stakes in closely held businesses, and trusts.
Take a recent example — when singer Michael Jackson died, the IRS assessed the value of his image at $434 million for estate tax purposes. His estate valued it at $2,105. It took twelve years of legal proceedings for the courts to finally set the value at $4 million. Imagine if the IRS had to value the image of thousands of celebrities and socialites moving in and out of favor with the public on an annual basis.
Fundamentally, the ProPublica report told everyone little that wasn’t public knowledge already. To conclude from it that the “solution” to the problems raised by it is to drastically alter the income tax regime or implement a harmful wealth tax would be entirely mistaken.