Why not tax borrowing of the hyper wealthy, when it is used for their personal consumption? Say a billionaire buys an Hawaiian island with borrowed money (as Larry Elison of Oracle did, spending 350 million of borrowed money). Then have the tax code consider the borrowed money as income, and tax it like ordinary income…
One could make exceptions if the money is used for research, development, re-injected in the business, or for public benefit. And of course there would be a threshold of under which one would not be taxed (a few millions), and the tax rate would then augment progressively.
For example Elon Musk owns 48% of SpaceX. As long as all this potential capital is reinjected in SpaceX, no tax on the borrowed money.
BUT, if Musk borrowed money to buy himself a palace somewhere, that borrowed money would be viewed as parsonal income, and would be taxed. The advantage of taxing luxury consumption debt is that extravagant borrowing is only for the very wealthy. There would be a natural cutoff, and the non-wealthy would not be affected. This avoids the pitfall of taxing unrealized capital gains, which is a very scary notion, and a slippery slope… Even for the poor, as a house can end up being worth a lot, even if the owner is poor. Larry Ellison of Oracle, did not get personally taxed, because he borrowed using his stock holdings as collateral. Then he bought the huge Hawaiian island of Lanai. He is not the only billionaire to buy himself an island. Gates and Branson already did this. During the COVID crisis, Branson blackmailed a number of governments to get billions to keep his companies going. He never considered selling his tax haven island. Billionaires understand leverage. It is time we progressives also do.
Patrice Ayme
[That was a (slightly edited) comment to the New York Times, which sat on it the entire day, approving meanwhile hundreds of other (less significant and innovative) comments, before finally publishing it… Hoping nobody would read it, and no billionaire, so dear to the New Pork Times would be hurt in the process?
Tags: Tax Hyper Wealth
Patrice Ayme's Thoughts 
October 27, 2021 at 1:33 pm |
Good thinking, Patrice. One difficulty: How does one differentiate consumption from business? Take Mr. Ellison’s island: How do we know this is mere consumption and not an exceptionally expensive real estate investment on the way toward building an exclusive island paradise get-away for those who are willing to pay $10,000 or $100,000 a night for the privilege?
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October 28, 2021 at 8:31 am |
Thanks for the comment, John, which is cogent. I will have to answer that one well, before I flood the pseudo-progressive with the the idea (which I have mentioned for several years, BTW…)
First it’s not a question of trapping all the rats. Trapping some of the rats will be good enough.
Take housing for common folks: they can deduct interest on borrowing up to 750K (Trump, down from 1.1 million; 40 years ago, it was unlimited… Real estate fortunes were made…)
So say a billionaire buy himself a mansion. How does he do that? He goes to the bank, and ask for the money. Then the bank buys the mansion for him. Then he calls it home sweet home.
One could decide, by law, that, say, above 10 millions, it is luxury consumption.
Musk bought himself a French (literally! It was built by a French noble) chateau for 23 millions. He is now trying to see it for 32 (used to be 37, who is counting…) So I would tax 13 millions of the 23 as ordinary income.
One could strike lower. Gene Simons of Kiss “bought” a house in Vegas last June. Too hot (115F). So he is now selling it for… 14 millions. The bank bought it for him, but Gene will pocket the profit… This musician has properties, mansions, all over… Including Hawaii, of course… In any case, if he borrowed 50 millions to pay for his houses, I would tax 40 millions as income…
Similarly I would tax other advantages provided to the wealthiest by the government. For example in the countless list of subsidies…
However, I would not tax Musk ploughing back dozens of billions into SpaceX (he owns 48% and SpaceX is probably worth 200 billions… Latest floor is 100 billions…)
Now for the question of what they do with their borrowings. First, as I said, for houses, common folks are limited to one in being advantaged when borrowing. So I just put more restrictions… Of interest only for the hyper wealthy….
Second, people have professions, licenses. For example in the financial markets, not everybody can do anything. One cannot get into an IPO, or invest in private company (there are all sorts of regulations). A hotel-restaurant license requires 25%+ of sales coming from selling food… If Larry Ellison wants to become an hotelier, fine… As long as he doesn’t live in the hotel… Howard Hughes style…
My suggestion would turn around what I view as one of the main way to avoid paying taxes: borrowing, using unrealized capital gains as collateral. Pseudo-democrats are eager to promote the idea, because it will fail, and if it does not, it will allow, in the fullness of time, to unrealize and decapitalize further the middle class (protected by armies of lawyers, billionaires won’t pay…)
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October 28, 2021 at 3:49 pm |
Some further comments on this subject.
1. Harry seems confused in his comment about interest being taxed. If I borrow money for a business expense, the cost of the interest is deductible. If I borrow for investment purposes, the interest I pay on the loan is a deductible expense.
2. The problem with paying tax on the principal: I must still pay that principal back. And to cover that repayment, I have to earn money . . . that is likely to be taxed. (I can put off paying taxes for a long time, but not forever.) . . . So . . . when I pay off my debt with pre-taxed dollars, do I get a refund of the taxes I paid on the principal when I originally took out the loan?
3. You wrote, originally, “[E]xtravagant borrowing is only for the very wealthy. There would be a natural cutoff, and the non-wealthy would not be affected.” Mmmmm.
a. Look at the history of the income tax in the US. (Check, for example, https://taxfoundation.org/historical-income-tax-rates-brackets/.)
* Originally, the income tax was supposed to be onerous only for the obscenely wealthy, and then only at a relative pittance (7% top marginal rate for people earning over $500,000–the equivalent of $13.85+M today; see https://www.usinflationcalculator.com/). The poorest of the poor “only” had to pay 1% (beginning at their first dollar). That was 1913.
* By 1916, the government adjusted brackets. People earning over $500k ($12.58M in today’s money) had to pay a marginal 12%. Those at the bottom, earning from $1 to $19,999: 2%.
* One year after that? Hey. If you made $2,000 ($42,900 today), you were paying 4%. And if you earned over $500k ($10.7M today), you faced a marginal rate of 54%. And, suddenly, whether we were wealthy or not, we ALL had to file returns or face fines and potential prison sentences simply for failing to report to the federal government.
* 1918: you were paying 6% on your first dollar. If you earned over $4,000 ($72,700 in today’s money), you had a 12% marginal rate. And for every $1,000 to $2,000 more you earned ($18,100 to $36,200 in today’s money), your tax rate went up an additional percent . . . till you earned $100,000 ($1.8M) and paid 60%. . . After that: above $100k, you were paying 64%, then a few more brockets until you maxed out at 77%. . . .
b. Who defines “extravagant”? At one time, I thought anyone who bought anything fancier than a Toyota Corolla was being extravagant. And I remember, in the late ’80s, my wife and I struggled to pay the $625 a month rent we owed on an 800-square-foot Santa-Ana-winds-blow-through-the-walls hovel in Pasadena, CA. I imagine your place, Patricia–wherever you are currently living–is probably “extravagant” compared to that. . . .
c. You speak of “a natural cutoff.” Really? What is that?
d. One doesn’t need to be a billionaire, millionaire, or even $100,000-aire to use borrowed money for living expenses. Check out a book like THE AND ASSET by Caleb Guilliams.
4. Please know that I think there is a place for government . . . and government needs revenue to operate. At the same time, I think we need to recognize that what we think is “right” or “just” for those better-off than we often can–and does–become exactly what we should expect for ourselves. . . . So, it seems to me, we had best think through how we ourselves want to be treated in the future.
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October 28, 2021 at 9:01 pm |
Hi John and thank you for the long and thoughtful comment. I have to run now, so can’t give it justice… I have to go see “Dune” with family (;-))
How to compute the cut-off? The idea is when wealth start to exponentiate. That can actually be computed. It’s not so difficult to do, considering the Fed overnight rate, average returns, etc.
As I said, the idea is not to catch them all… Just to catch them more and more as they grow bigger and bigger…
I personally use borrowed money… Yet don’t want to tax myself, of course…
I understand the slippery slope argument… But as I said there is a cut off, and one should marginalize above that. Musk would still be welcome investing all his money tax free to colonize the solar system…
Speaking of slippery slope, inflation is a tax on the poor… first of all (bcs assets go up with it so asset rich families don’t suffer…)
My “place” has been rather confined since COVID. I live rather modestly in the US (Musk even beats me to that sometimes, living in a tiny house at Boca Chica, apparently…) I do have property overseas, though (shared, so I get the bonus of family soap opera… Making me even wealthier…
I am far from poor, but I saved and invested real hard for that. Yes I drove a Toyota Corolla forever, had the engine rebuilt, and got rid of it only when the roof rusted!!!!!!!!! Not that I could not afford something else by then, but my spouse and I were attached to it…
As I said the natural cut-off is the point, and then get very slowly progressive, well above that.
It gets tricky when re-investing, what I do a lot of, brings large potential cap gains. I (indirectly) invested in Modena and the like and ate crow for more than a decade… But it’s tanks to biotech investors, not just bench scientists, that we got the mRNA vaccines (with a gigantic future)… So should the new biotech billionaire investors get taxed the way I suggested? Only for that ten million secondary home in Sun Valley and the tertiary home in Kauai… If we they want to borrow money to re-invest in biotech, or semi-conductors, they should not be taxed…
Perhaps one should distinguish CRUCIAL INDUSTRIES the survival of civilization depends upon. Actually the directorate of national intelligence just came out with a list of them… Borrowing to invest in those should be protected… OK, most of my portfolio… But the continuity of civilization depends upon them… Not the luxury goods which sink… France…
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October 28, 2021 at 8:06 am |
NYC, Oct. 27
@Patrice Ayme Uh, borrowing is already taxed. Have you not heard of interest payments? Interest is taxed.
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October 28, 2021 at 8:33 am |
Indeed! Very smart! Interest gets taxed, indeed… BUT NOT THE PRINCIPAL!
Amusing that was published in the NYT… Which crows on every roof that it blocks stupid comments…
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