Nation’s wealthiest have for too long exploited tax-avoidance loophole

America’s tax system is built on the idea that all people should contribute their fair share to fund the services and infrastructure we all rely upon. In reality, some of the wealthiest people in the country have found ways to live lavishly without paying taxes like the rest of us.

Democratic presidential nominee Kamala Harris has proposed a solution to close the “buy, borrow, die” loophole — one of the most commonly used strategies to avoid income taxes among the uber wealthy. Known as the billionaire minimum tax, it would require Americans who have accumulated assets of $100 million or more to pay a 25% tax annually on unrealized capital gains.

We applaud Harris for her willingness to speak honestly about the unfair tactics used by some of America’s wealthiest families — including her own donors — and to close a loophole that could saddle middle-class Americans with as much as $500 billion in additional tax burdens over the next 10 years.

Most Americans increase their wealth by working hard and earning income via a salary or hourly wages or building businesses or owning real estate. These wages are taxed universally to pay for things like Social Security, Medicare and other essential government services. The businesses and property are taxed based on their growth.

However, for some of the richest Americans, significant wealth comes not from earned income but by making investments in assets such as stocks, bonds or art that increase in value over time but are not subject to regular capital gains assessments.

Under current tax law, there is no income tax owed on the increased value of an asset unless it is sold. This is because, in theory, until the asset is sold, the increase in value is only theoretical and is not realized. Current tax law assumes that eventually, the owner of an asset will sell it and pay taxes on the increase in value.

Here’s where the tax loophole comes in. Instead of selling their investments and paying taxes on the profits, billionaires can borrow money against the value of their assets completely tax free and use the money to pay bills and support their lifestyle.

For example, if a person owns $200 million in stocks, they might go to a bank and take out a loan for $50 million using those stocks as collateral. The loan isn’t considered income, so it’s not taxed, yet it can still be used to pay expenses and make purchases. Meanwhile, their investments continue to grow in value, which they can use as leverage for future loans, continuing the cycle until they die. With certain tax maneuvers, the asset can be passed to heirs at tax rates vastly lower than income tax.

As long as a family is never forced to actually sell the asset, they can continue this cycle for generations, using borrowed money to invest in new ventures, buy more assets, and continue the cycle of wealth accumulation without ever having to sell anything or pay more than minimal taxes. Even if some portion of the assets must be sold to repay the loans taken out by the deceased, they are taxed at long-term capital gains tax rates that are typically lower than income tax rates.

Adding insult to injury, some executives even use this tax avoidance strategy as the basis for public relations campaigns touting how virtuous they are. They make big public announcements touting how they will only accept a symbolic $1-per-year salary while obtaining the rest of their compensation in company stock that ties their financial fate to the company’s success. This allows them to only pay income tax on the $1, while borrowing against the shares to pay for the rest of their lifestyle tax free.

The result is less money for schools, roads, health care and other public services that benefit everyone. Ordinary Americans, who don’t have millions of dollars in investments and can’t use these complex financial tricks, end up either suffering from underfunded services and infrastructure or are asked to pay even more to make up the difference.

Critics of Harris’ plan argue that it could discourage investment and harm the economy. But remember, the tax only applies to assets that increase in value, meaning the owner has already made money, and it only applies to those whose assets total more than $100 million dollars. That means that more than 99.999% of the U.S. population will be completely unaffected by the proposal.

But even for those billionaires who are impacted by it, it’s hard to imagine that they would stop investing simply because they only get to keep 75% of the increased value of their assets instead of 100%, especially when we’re talking about increases worth hundreds of millions of dollars. Based on current estimates by the Biden administration, Americans with more than $100 million in assets would pay a collective $50 billion in annual taxes while keeping $150 billion in profits.

Clearly, the issue at stake is not whether the rich will stay rich, but whether they’ll contribute fairly to the society that makes their wealth possible. Plus, there are ways to refine this proposal to more precisely target the loophole itself. For example, only those assets used as collateral for loans destined for personal use might be exposed to the unrealized capital gains tax because those loans are specifically designed to finance a tax-free lifestyle by avoiding income and capital gains taxes.

Taxing unrealized gains on assets used as collateral and/or debt service on loans for personal use would make it harder for billionaires to live tax-free and would help ensure that beloved government programs like Social Security, Medicare, the National Park Service and NASA, not to mention the roads and bridges we all travel in our neighborhoods, have stable and secure funding for generations to come.