I think in turn you are describing what 1%ers do to reduce their tax, and not 0.1%ers, which involves all sorts of shady schemes often involving "loans" that are not intended to be repaid.

ex: Larry Ellison taking out a 9 figure loan with Oracle stock as collateral. He prevents a capital gains tax hit, maintains control of Oracle, and gains liquidity.

Kill 3 birds with 1 stone.

And how is this a problem? You would only do this if interest rates are low, and if you believe the stock will appreciate more over the long run than it would cost you to service the interest on the loan. Also, if the value of the stock tanks, the bank will come collecting and sell the shares you pledged as collateral.

Second, this is a part of doing business - you can leverage anything (real estate, stocks, bonds, etc)

Generally speaking I think individuals have the right to minimize their taxes through legal means, no matter how convoluted. But I also think it's reasonable for people to draw the line somewhere for what they consider fair or unfair.

Another example of an instrument that has benefited tremendously from our recent ZIRP + rising equity markets is the Grantor Retained Annuity Trust, which will likely leave a worse taste in people's mouths compared to Ellison's maneuvers. [1]

It is a fair point for people to ask whether these legal maneuvers should remain legal.

[1] http://www.bloomberg.com/news/articles/2013-12-17/accidental...

The problem with a lot of these things is that often you can’t make them illegal, exactly because there are so many use cases that are valid. For example, if you make the above mentioned transaction illegal, with the exception of when it’s used in a valid business transaction or for non tax avoidance motives, his lawyers will just argue that this is the most straightforward way to get liquidity without eroding control of the company.

People like talking about fair and unfair, and the “spirit of the law”, but that all means something completely different to whomever is reading the law. What might seem fair to someone, won’t seem fair to others. I would assume a ton of “normal” people (i.e non entrepreneurs, income tax paying people) consider the loan thing to be unfair, but wouldn’t consider it unfair if they releveraged their own primary residence to achieve a similar result.

Second, if governments want to limit tax avoidance, they should learn to make proper laws (i.e. no half way, rushing something out of the door). A lot of laws are made in a half assed way. Stuff like this comes to mind: http://www.bloomberg.com/news/articles/2014-11-03/malone-gai.... ("He avoided paying taxes on his remaining stake, worth about $260 million, by exploiting IRS regulations meant to block a different loophole.")

> wouldn’t consider it unfair if they releveraged their own primary residence to achieve a similar result.

Spot on! For the less finance lingo savvy, that simply means take a second mortgage/home equity loan or home equity line of credit (HELOC) for a vacation, to invest in another property, pay for college or other large expense, etc.

I completely agree.

Though for better or for worse, we seem to be headed towards an age of populism, which may actually start to affect the consensus manner in which the laws are read.

You can make them illegal by making only one legal way to get money from person A to persons B. Anything over a certain amount per year, basically cost of living, gets taxed. It doesn't matter what path it took to get there.

And thanks for the article. :)

So, if you make $100k per year (and you pay tax on that), and you then go borrow $500k to buy a house, you'd be happy paying tax on that $500k as well? And of course, you would need to repay that debt with after tax income, so you're paying tax twice. Because that's essentially what you're proposing. :)

Debt != income

Mandatory H. L. Mencken quote.

Explanations exist; they have existed for all time; there is always a well-known solution to every human problem — neat, plausible, and wrong.

Nah, Im pulling from high assurance safety and security fields. Only approaches that worked for long periods basically create a design that enforces specific, good properties in every state. Other commenters are talking failed route of open ended design that tries to guess every form of malice. It's whitelisting vs AV signatures.

Let's not make strawman. It's more like you made $500k in income, put that into an asset, borrowed it back, and spent it. That is income. Just not taxable like the rest of us.

> It is a fair point for people to ask whether these legal maneuvers should remain legal.

We can ask all we want, so long as wealthy people buy politicians nothings drastic will happen.

That specific loophole was closed in Norway just half a year ago. Sigh... Lucky you to still have it in the US. (or not, depending on your position)

the one fact many leave out is that the money used to fund those gains was originally taxed. so you/they/me put taxed money into the investment world having already been taxed on it. the lower rate reflects the reality of that fact.

raise capital gains taxes will hit everyone's retirement accounts including those least able to withstand it. the fun of indirect taxation is that when attempting to punish one group there is a lot of collateral damage

But along with those taxes breaks comes increased risks. If a doctor takes their payment as dividends from being a partner at their medical firm, they are one bad local news story from losing a large investment in that firm.

Changing how we tax dividends will cause a massive change in how the highly productive structure their income, and if it reduces risk, it seems to follow it reduce productivity.

For instance, our doctors who invest in their local firm might instead take a salary position at the local big box medical conglomerate and put in their 32 hours a week with Friday for golfing. Instead of 70 hours a week they were putting in at their local firm not counting early morning rounds at the hospital to check on patients.