I've seen this idea posted a few times without data, and it isn't convincing. The wealthy need to pay back those loans, and realize gains in order to do so. Sure, they can maintain a higher average debt/expenses ratio collateralized by unrealized gains, but the real problems here are:
1. When they do realize gains, the tax brackets are severely broken such that someone realizing $2Billion in capital gains pays a lower effective rate than someone with 1/10000th that number in income.
2. We live in a financial environment in which the Fed will rescue the stock market no matter what, creating asset inflation and making this a relatively reliable strategy, whereas there should be more theoretical risk in doing this. Bear markets, albeit painful, are the only times in recent history where wealth inequality decreases as the economy corrects and reallocates capital [0]. Staving them off at all costs for the last few decades via easy monetary policy is arguably one of the greatest contributors to the rise in wealth inequality, alongside poorly graduated income tax brackets and (to a lesser degree) automation.
There's another aspect to consider, perhaps: nowadays it's very easy to get to get that kind of loans with low, low interest rates, well below average market returns. So, if you have a large collateral, you could just use a chunk of the loan to repay interest. I hope my math is not wrong, but if you borrow $100K with a 3% APR — even mere millionaires can get better terms than that — after 10 years, you've had to pay "only" $35K in interests. You could use part of the original loan to pay that, or you could get a new one, assuming your collateral has appreciated. Neither of those require realizing gains, right? You just keep pushing them into the future, until you finally die and your heirs' cost basis gets reset.
In many of the cases of those loans, they are structured to be payable only after the death of the person receiving the loans. And at that moment the cost basis for all of the investments goes to the price at the end of the day of death... bypassing all of the capital gains taxes. That is the real problem there.
I do completely agree that treating capital gains more favorably than earned income is just crazy (even though I personally benefit from it).
I don't think the loans actually need to be structured like that to achieve the same effect. You can just pay off the loan by taking out another loan.
There would be some risk that you couldn't get another loan, but if you're only borrowing 10% of your net worth, it's probably an extremely small risk.
Related to the topic, what is interesting, is Switzerland home loans. When usually countries have max periods of 20-30 years, Switzerland has periods of 50-100 years, so you very well would not pay it back before end of your life.
>I've seen this idea posted a few times without data, and it isn't convincing. The wealthy need to pay back those loans, and realize gains in order to do so.
No they don't. The article even describes how they use income to pay for that, and then use the interest paid to avoid write off paying any income tax:
>Borrowing offers multiple benefits to Icahn: He gets huge tranches of cash to turbocharge his investment returns. Then he gets to deduct the interest from his taxes. In an interview, Icahn explained that he reports the profits and losses of his business empire on his personal taxes.
You don't get to deduct interest for personal loans, and mortgages interest deductions have been limited to interest on 750K principal since 2017 (this article is picking examples that are no longer relevant.)
The whole article is full of logical fallacies and focusing on the wrong thing to drum up outrage. E.g. I do not care that Bezos didn't pay any taxes in some year where he sold no assets and received no income. What matters is what the tax brackets levy on wealthy people when they do liquidate, which are currently a complete joke and cap out at a number thousands of times lower than the highest earners.
1. When they do realize gains, the tax brackets are severely broken such that someone realizing $2Billion in capital gains pays a lower effective rate than someone with 1/10000th that number in income.
2. We live in a financial environment in which the Fed will rescue the stock market no matter what, creating asset inflation and making this a relatively reliable strategy, whereas there should be more theoretical risk in doing this. Bear markets, albeit painful, are the only times in recent history where wealth inequality decreases as the economy corrects and reallocates capital [0]. Staving them off at all costs for the last few decades via easy monetary policy is arguably one of the greatest contributors to the rise in wealth inequality, alongside poorly graduated income tax brackets and (to a lesser degree) automation.
Chart: [0] https://fred.stlouisfed.org/series/WFRBST01134