Consider the following scenario:
Say the interest rate for a wealthy individual like Bezos is 1% per period.
Case A: Bezos sells $100 of stock. He pays 20% and consumes $80. NPV of tax liability is $20.
Case B: Bezos borrow borrows $80 to spend in a period and then at the end of the period sells $101 of stock to pay back the loan and (and pay taxes on it). Thus his tax liability at the end of the period is .20*101, which in present value terms = .20*100 = $20. Exactly the same amount of taxes he would have paid if he didn't borrow.
Case C: Bezos sells only $80 of stock and then borrows $16 to pay his taxes, ending with a debt of $16.16 at the end of the period, and he will need to sell $20.2 in stock to extinguish his total liability ($16.16 due the bank and also the $4.04 in taxes on the sale), which in present value terms is the same payment as before, namely $20.
The real reason people like Bezos borrow to pay their taxes is because the interest rate charged to them by the bank is less the growth rate of their assets. Therefore they are acting like a bank, borrowing at one rate and investing at another rate, making money on the spread. Thus keeping the stock is worth more to Bezos than borrowing to pay the tax, which is effectively what is happening.
At least, this is what they believe. Of course this type of balance sheet expansion comes with risk - risk that they bear that if the stock price falls, they will end up paying much more than if they hadn't levered up and borrowed to pay their taxes. But that's a risk they are willing to take.
So you don't need to pull your hair out worrying that Bezos is not paying taxes. He is effectively borrowing to pay taxes so that he ends up with a bigger payment down the road, which in present value terms is the same tax liability as if he didn't borrow. The treasury will receive not only all the tax money as if Bezos never borrowed, but all the tax money with interest, namely whatever interest Bezos needs to pay. However Bezos is betting that the growth rate of his assets is even higher. So now you understand why everyone is borrowing to pay taxes -- because interests are so low. So thank the Fed that this type of arbitrage is possible. It's not tax arbitrage, it's interest rate arbitrage.
It is just not true that because there is a carried interest loophole, for example, that you can just make up arbitrary other tax loopholes that don't exist and blame "the rich" for abusing them, and then when confronted with being wrong on the facts, cite the carried interest loophole as a justification. "Piketty" isn't some magic word you can use to waive away reality.
The debts will need to be paid to the banks as part of the settlement process of Bezos' personal assets, which will require asset sales, and these sales will incur a tax liability and all of the above calculations will take effect.
OK, at this point you are just speculating wildly, right? You are inventing tax loopholes that don't exist, and when this is pointed out, more loopholes are invented which also don't exist. Point is, that's not how consumer lending, tax law, or inheritance law works. Those loans will be settled requiring asset sales at his death. If banks forgive a loan, that debt forgiveness is counted as income and is taxable.
Actually it is likely they will be wound down before his death as he will want to reduce his personal asset holdings and put them in a trust, because the inheritance taxes on all of his wealth are much stricter than any income taxes. But reducing his asset holdings will require de-leveraging because loans against equity require quite a bit of collateral.
Are you aware of "step-up in basis" [1] that is widely considered a loophole around CGT for inherited assets? Any gains on assets up to the point they are inherited will not be subject to CGT.
[1] https://www.investopedia.com/terms/s/stepupinbasis.asp#step-...
That is not a tax loophole.
E.g. if someone buys stock for $10, then the share price grows to $100 and they die, so that a family member receives $100 of stock, and then the share price goes up to $110 and the inheritor sells, then in the current system, the inheritor pays:
$40 on receipt of shares at $100 (cost basis for him is zero)
$4 on sale of shares at $110 (cost basis is now 100)
for $44 in taxes paid on that stock.
RSUs also work in the same way -- you pay taxes the moment you get them, and then if you keep them, when you sell your cost basis is the price of the shares when you were given them. That is important to know if you like to hold onto your RSU shares for a while -- know that your cost basis is not zero, but whatever the price of the shares were when you paid taxes for receiving them as income.
In your opinion. However, some people clearly believe it _is_ a tax loophole, presumably including those you're discussing with upthread.
One of the talking points against inheritance tax is that it taxes the same money twice. If I'm a middle earner I pay taxes on my income, and I pay CGT when I dispose of assets to pay for my car or retirement or whatever. Taxes are then levied a second time on what's left when I die.
People above are pointing out that, in contrast, extremely wealthy people manage to avoid the income/CGT part by borrowing against their assets tax-free and repaying the loans once they die and after the assets can be stepped up. So yes, inheritance tax may still be paid, but a great deal of their day-to-day income while alive is untaxed. Inheritance tax should be _in addition to_ income/CGT rather than instead of it, and part of the perceived injustice is that the ultra-wealthy get to dodge this in ways "ordinary" people can't.
Based on that I personally would call it a loophole.
Only people who are not familiar with basic accounting or tax economics can believe this.
> One of the talking points against inheritance tax is that it taxes the same money twice. If I'm a middle earner I pay taxes on my income, and I pay CGT when I dispose of assets to pay for my car or retirement or whatever.
OK, you are mixing two different things here. One is the "double taxation"(1) on assets in the inheritance tax. First, don't worry, only a handful of families pay this tax. But ignoring that, the double taxation applies to income not spent. It is irrelevant to this discussion, in which Bezos borrows to spend. If he didn't borrow and sold assets to spend, then those sold assets still wouldn't be taxed as an inheritance tax. So that double taxation unfairness complaint is again just a confusion about what is happening and has nothing to do with whether borrowing to spend is somehow tax avoidance.
Now as to the second point: "If I'm a middle earner I pay taxes on my income, and I pay CGT when I dispose of assets to pay for my car or retirement or whatever."
No, you only pay taxes on the gains. Think back to what we were discussing before -- you get $100 of stock, then it goes up by $10 and you sell. So you have two taxable events in which income is recognized - the income of getting $100 and then the income of getting $10. When you sell for $110, your cost basis is $100, not 0, because you already paid taxes on the $100. Thus there is no double taxation for you or for Bezos(2).
No one is treated differently here. It is the exact same re-upping you were complaining Bezos being given -- that re-setting is available to everyone else for any other kind of asset they have for any reason.
So here, too, this is just complaining about things that aren't actually happening in order to get a justification for complaints about "injustice". It's a lot of very angry people applying who/whom logic rather than getting the details right about how much is paid.
Now, if you want to talk about real tax loopholes -- for example, carried interest, mortgage interest deduction, differences in tax rates on long term versus short term gains, charitable deductions - yes, by all means let's get rid of these loopholes. Bezos pays too little taxes, not because he borrows, but because the long term cap gains rate is so low. Let's not treat LTCG differently from wage income. But trying to infer the money borrowed should be taxed at the amount borrowed is just insane. Borrowed money is not income. Bezos is not doing this to evade paying taxes, he is doing it to take advantage of spreads.
(1) It's not really double taxation, because what is taxed is the income received by the inheritor, who never paid any taxes on it before.
(2) Yeah, inflation is a legit complaint for both
It's not irrelevant if Bezos spends his borrowed money on real estate and generally vacuuming up other assets that are likely to appreciate in value faster than his loans. It's not like he consumes all of it (or even most? I don't know, but I doubt it. How on Earth do you consume a billion dollars?).
> Thus there is no double taxation for you or for Bezos(2).
As I already explained there is for me if I don't consume all of my taxed gains before I die, or if I use it to purchase assets that outlive me.
> Bezos is not doing this to evade paying taxes, he is doing it to take advantage of spreads.
He's clearly doing it for both reasons. At least to avoid, not evade. I accept that he's legally not required to pay tax in this situation, but the whole point is I'm saying that should probably change!
> So here, too, this is just complaining about things that aren't actually happening in order to get a justification for complaints about "injustice". It's a lot of very angry people applying who/whom logic rather than getting the details right about how much is paid.
Dismissing this as "just complaining" is really missing the wider point. That is that "buy, borrow, die" is a well documented strategy that the ultra-wealthy use to avoid paying tax and that is widely considered a tax loophole (even by those familiar with basic accounting and tax economics). Whether it's a loophole or not isn't even really the point, rather that we should change things such that people who "buy, borrow, die" actually pay something like CGT.
The average Joe can't do that. The average Joe shouldn't do that.
Why should Bezos?
Why are you even defending him? Your position is morally untenable.
So yes, you can borrow to pay taxes. And you can borrow to defer taxes. But that is limited by how many assets you have. Households across the country do something similar when they borrow to buy a house -- they do not pay taxes on the mortgage loan as if it was income. And, unlike Bezos, the mortgage interest paid by households is often tax deductible.
But Bezos' loan does not deprive the government of taxes, because the rate on government borrowing is always going to be lower than the rate charged to Bezos. So if Bezos defers by 10 years, with the debts accruing at some rate r, then the government makes up for that by deficit spending with its debt accruing at a lower rate. Thus when these are settled, the government will make a profit.
> Why are you even defending him? Your position is morally untenable.
I guess the first mistake here is to try to view public policy from a "moral" perspective first and "not caring" about the details of what is actually happening.
The second mistake is automatically decide who is good or evil based on some atavistic criteria and deciding the details don't matter if you are sufficiently outraged.
Because at that point you've already lost. I suggest it's better to actually care and run the math before deciding whether something is good or bad for the Treasury. And questions about what is good or bad for the Treasury should be the ones you ask when determining tax policy, not whether you are really angry at a public figure or not.
Bezos' motivation is not to pay fewer taxes across his lifetime, because he doesn't. It's that the interest rate he is charged is less than the rate of return on his stock. This has absolutely nothing to do with tax avoidance but exploiting spreads.
>He bought it mainly because you don’t pay death duties on land. “That’s the critical thing. So rather than just have money in the bank, and get a statement with numbers written on it that gives no one any pleasure at all, you could derive a great deal of pleasure and pass it on to your children.”
It seems that Clarkson is trying to take advantage of https://www.gov.uk/guidance/agricultural-relief-on-inheritan... which is a "family farm" exemption; you absolutely do pay inheritance tax on land in general.
Just borrowing against assets that have gone up is different and pretty normal.