When you get a mortgage to buy a $750k house, do you want to be taxed as though you had $750k income that year? You’re just borrowing against the value of an asset after all.
What the government could do is stop loaning out money at 0% (i.e. printing free money which inflates assets, like stocks held by wealthy people). If the prime rate increased, the rate banks would charge on asset-backed loans would also increase, which would make it less attractive than just selling the asset and paying the capital gains tax.
That's now how borrowing money to buy a house works.
Anyone can start a company tomorrow and declare that they have a billion shares of stock in that company. They only become worth something because the person that started the company uses their own effort and ingenuity to make the company do something that is valuable to everyone else.
Taxation isn’t necessarily based on what’s fair or rational, it’s a way of financing public expenses. It might be more logical from the perspective of the people as a whole to tax wealth more and income less (for example) even though wealth is less logical and “fair” to tax than income or consumption.
And a trivial way to work around your proposed rule: borrow without collateral. Why would a lender be willing to do this? Because they know the other party is wealthy, that in the event of bankruptcy they have ways to collect, they make money on interest, and it is tax efficient under your new rule.
And in the meantime, they get to retain the full power and influence that comes with the stock/company that they control. The wealth inequality issue is as much about power dynamics as it is about dollars and cents.
> borrow without collateral
And it would be trivial to write the law to prevent that loophole. If a person has any unrealized gain over a certain amount, then any personal loan, secured or not, would qualify for some sort of realized gain tax.
Personally, I think it is simpler and more elegant to implement a wealth tax. It would encourage the wealthy to take more income or dividends to cover the tax, and it would also help shift investments towards more profitable/cash flow positive ventures. For example, all of the tech unicorns burning loads of VC money to acquire negative cash flow would be penalized under such a scenario.
You didn't avoid anything, you just deferred it until later.
By the way, if the bank "forgave" the loan, and said you don't have to pay it back, that forgiveness is taxed - usually in a form 1099. So there isn't a loop hole there, either.
I think it would make sense to count borrowing against equity as tax-wise equivalent to selling that same equity.
With that loophole closed, together with raising the capital gains tax, I think the tax system would be much more in line with what people expect from it.