Comment by AaronM
16 days ago
If someone takes a loan out against an unrealized gain, that should immediately trigger a tax event.
The real solution though is for the legislative branch to not be beholden to those same people and be able to quickly and effectively close tax loopholes as they are discovered.
That would instantly wipe out most leverage from the stock market, and from a casual bystander perspective, it would be a great thing.
It wouldn't do that. But even if it did do that, this would not be a good thing.
The majority of leverage (debt) in the stock market is not people making wild bets, its just basic functions from institutions.
But even if we narrow the definition to the boogeyman image you have in your head about "leverage," if you remove it you've just made the market radically less responsive to information and arbitraging prices nearly impossible, and ultimately the economy less efficient in broad strokes.
You'll say "fine, who cares cause it'll stop [insert historical bubble example], and also I saw a reddit comment that said all economists are dumb!"
But most people have no idea how big a role leverage (aka debt) plays in just the basic functioning of the capital markets.
Putting a brake on the market might also sound good to you in theory. But the stock market is how the most important capital flows through the private economy, slowing this down is defacto slowing down the economy. Most people don't understand what slower economic growth means for your quality of life over the long term. Just 1-2% slower growth than the average, and the US's entire system collapses in 15 years (France is currently dealing with this reality in slow motion, their debt is now rated worse than Greek debt).
An easier example to understand: a pie that isn't growing is a zero sum pie. Ambition in a zero-sum world requires violence.
> If someone takes a loan out against an unrealized gain, that should immediately trigger a tax event.
How does that work when a house is used as collateral on a loan? Or artwork?
The loans are just a symptom, the problem is in the Estate Tax, and those loans are being used as a tool to wait out the clock and then dodge dynastic taxes entirely.
Remove the final loophole, and they'll stop playing weird games to get there all on their own. Plus it'll be way less-disruptive to everyone involves in regular loans for regular reasons.
There is not a loophole. When you die your loans get paid off first. The money to pay off these loans would be taxed. It could delay paying taxes until you die, but you can't escape it.
> There is not a loophole. When you die your loans get paid off first. The money to pay off these loans would be taxed.
You're missing the loophole, it's the the "step-up basis" rule, which dramatically affects the amount of tax on that liquidate-to-repay event.
1. Repaying 1 day before the owner dies: Liquidate $X, of stock, which 90% of it are capital-gains, heavily taxed.
2. Repaying 1 day after the owner dies: Liquidate $X of stock, which is now considered ZERO gains, almost no tax.
This massive discontinuity also applies when it comes to the transfer of stock to inheritors, and any taxes they might pay for liquidating it. A day before, they get a stock that "has grown X% in Y years." A day later, they get a stock that "has grown 0% in 0 days."
> It could delay paying taxes until you die, but you can't escape it.
But they did escape the taxes, or at least the "gains" portion of them! For decades, the unrealized gains in growing assets were "eventually" going to happen someday... Until, poof, all gains have been forgotten.
The taxable value is exactly how much you borrowed against it!
> The taxable value is exactly how much you borrowed against it!
I'm not sure what you mean by that term, since we're not talking about property taxes. With respect to capital-gains tax, the amount you liquidate is not the same as the gains being taxed.
> is exactly how much you borrowed
You're mistaken, the tax depends on the history of the item being liquidated. Suppose you need to repay a loan, and you have two options:
1. Sell 1 share of Acme stock for $20, that you originally bought for $20. Your $0 gain leads to $0 tax. Net cash: $20.
2. Sell 1 share of Acme stock for $20, that you originally bought for $5. Your $15 gain leads to $3 tax. Net cash: $17.
It's obvious you'd prefer the first one, right? Even though they're stocks from the same company being sold on the same day for the same market-price to service the same debt.
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Agreed. This would get rid of borrow against gains to spend tax free. But also just get rid of the income tax, it is the worst way to tax, and do a land value tax.