Buy, Borrow, Die: Tax, Income and Capital Gains

One of the arguments put forward by rich people for taxing their gains at lower rates than your income is that their capital can move offshore more easily than your income can. But that argument only works because government policy is designed to ensure it works.

Extract from The Rebel Accountant’s Taxtopia

…for reasons that remain inexplicable (unless somehow wealthy people are able to dictate tax policy) [ten points for sarcasm], capital gains are taxed at lower rates than income.†

The issue here is so obvious – wealthy people don’t need to use convoluted tax avoidance tricks to pay lower rates of tax, because capital and income are already taxed at different rates.

Of course, I’m not saying that they don’t use convoluted tax-avoidance tricks, too.

Once you get to a certain level of wealth you no longer need to use your own money to buy stuff (because what kind of pauper would do that?), which means you no longer need an income (or to make capital gains) – which means you no longer need to pay income tax (or capital gains tax).

One of the easiest ways for the really ridiculously wealthy to avoid paying taxes is to use the wealth they already have as collateral and borrow money instead.

Elon Musk, for instance, is said to have never accepted a pay cheque from Tesla – though he was offered minimum wage (for legal reasons). And yet, he’s still doing alright. If he finds himself needing a bit of cash, he can borrow it. Borrowing money doesn’t make you richer – you still owe the bank, after all – but it does mean that you now have cash in your pocket, and still own all your Tesla shares.

You read that right. Elon can get cash to buy things without earning anything at all. And where there are no earnings, there’s no tax.

This tax-avoidance tactic is sometimes called “Buy, Borrow, Die”.

[ … ]

The “Die” part of “Buy, Borrow, Die” goes like this: when a billionaire dies, the borrowed money reduces their taxable estate, so their heirs pay less tax too (though also inherit less). But their heirs also inherit the, say, Tesla shares, without inheriting the “unrealized gain”. This means that all that tax that was not paid by Elon or Jeff or whoever will never be paid.

Luckily, we're smarter than this in Australia (my home country). See notes, below.

This might seem scandalous, but what they’re doing is effectively what lots of old people do when they get an equity release mortgage – borrowing cash using their (in the old people’s case) house, spending that cash and then letting their kids inherit anything that’s left, (but not the unrealized gain).

I’m not advocating dying to avoid your taxes, by the way, though it is bloody effective.‡ [pmsl]

† I say “inexplicable”, but one of the arguments put forward by rich people for taxing their gains at lower rates than your income is that their capital can move offshore more easily than your income can. But that argument only works because government policy is designed to ensure it works [Economist, and Citibank’s top trader for 2011, Gary Stevenson, often makes this point. I highly recommend his YouTube channel Gary’s Economics]. i.e. government policy could just as easily say, “if you make offshore gains you have to pay tax on those gains here, at high rates.” Depressingly, when income taxes were first introduced, “unearned” wealth was taxed at higher rates than incomes form jobs, as this was seen to be fairer. But slowly, bit by bit, such policies have been turned upside down, so that now, like in feudal times, it’s the poor that get shaken down the most.

‡ That is, bloody effective for everyone except Australians, who very cleverly (and almost uniquely) don’t allow unrealised capital gains to evaporate on death.