Yup, search for “Buy borrow die” and there are various articles about the technique.
This is basically urban legend at this point; “buy borrow die” is a tiny piece of the ultra-wealthy’s financial strategy, at least when it comes to the “borrow” part, which is what everyone’s focused on:
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In reality, the ultra wealthy do not borrow against a large fraction of their unsold gains. On average from 2004 to 2022, the top 1% of wealth-holders only borrowed 1-2% of their annual economic income.
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Borrowing while holding unrealized gains is, in fact, more of a middle-class activity than an ultra-wealthy one: Americans in the 50-90th percentiles borrowed 42% of their unrealized gains in 2022, compared to just 4% for the top 1% of wealth-holders.
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The primary tax avoidance strategy for the top 1% is not to borrow, but simply not to sell appreciated assets.
Neat doc, thanks for linking. I find this part very sensible in light of what you brought up
In most cases, the ultra wealthy don’t need to borrow, because their liquid, taxable income—salaries, business income, and capital gains—is significantly higher than their annual consumption.
That makes sense… I mean once you’re somehow generating millions or more every year in income, no need to borrow at all really. It’s making it to that upper tier of income vs. expenses that few reach.
Tax the Rich, the Old Fashioned Way: Raise Rates
That’s the key thing.
On average from 2004 to 2022, the top 1% of wealth-holders only borrowed 1-2% of their annual economic income
What’s confusing to me is that there must be a reason they’re borrowing. When you borrow, you have to pay interest. If you’re someone who has a lot of money, why would you pay someone to lend you money? I guess the only thing that makes sense is that they think that whatever makes them rich, say Amazon shares or something, will go up at a rate that beats the interest rate they have to pay for the loan. OTOH, I guess they’re not so sure of that that they borrow in order to buy even more Amazon shares.
The primary tax avoidance strategy for the top 1% is not to borrow, but simply not to sell appreciated assets
I assume this means “not to sell all of their appreciated assets”, because they do spend a lot of money and it has to come from somewhere.
The reason the rich borrow money is to take advantage of tax loopholes. It’s not about being reasonable or what ought to make sense. They are gaming the system, that’s it. So, how does it work?
If they have investments in the stock market, then they get taxed when they sell those. So even though the investments are usually going up in value, they don’t want to sell too often. But they still need to buy things.
So, where do they get money for living, houses, cars, travel, etc? If they get paid for working a job, their income is taxed a lot, meh. If they sell their stocks, they get taxed a little, meh. But if they get a low-interest loan, that money is not taxed.
And you might say hey, money’s gotta be paid back some day. But remember, the goal is to find the loopholes, the places and times where either you don’t pay tax or you pay much less tax. And those loopholes are all over the place. In the end, the details are just boring. Most financial scams have just enough moving parts to look amazing, but if you take an hour to figure them out, it’s nothing exciting.
The reason the rich borrow money is to take advantage of tax loopholes
Ok, what tax loopholes?
A basic one is negative gearing + trusts + cheap loans.
Negative gearing allows you to deduct/combine different income streams together to reduce your taxable income, and hence tax liability.
Traditionally used by middle/upper middle class to deduct mortgage interest payments and reduce their taxable income.
Rich(er) people combine this with trusts to distribute income/expenses among trust beneficiaries for something more tax advantageous. Usually this is someone like a spouse, child, or extended family member.
Add on the fact that rich people get cheaper loans, which often makes it cheaper to finance day to day life with loans, and only draw down (ie realise capital gains) after shuffling around incomes/expenses for a year.
Tax loopholes are basically legal ways to shift the timing and benefiary of income/expenses. There’s a bunch of other ones, like
- choice of depreciation calculation
- purchasing things on behalf of a “trust” or “company”
- getting paid in low tax jurisdictions
- moving money into tax advantageous retirement accounts
None of that explains anything for wealth levels we’re talking about. Negative gearing implies a loss elsewhere, trusts max out at the same rate as all other inheritance they just avoid probate, retirement maxes out way earlier than what they have.
Nope, they definitely do. The specific assets and schemes differ across wealth levels and also across time as laws change, but the general principles of finding and exploiting loopholes remain the same.
The middle class negatively gears property despite the property gaining in capital terms. The ultra wealthy negatively gears sports teams despite the team gaining in capital terms.
The middle class deducts fancy electronics and cars as “hobbies”. The ultra wealthy deducts entire luxury hotels and horse racing clubs as “hobbies”.
The middle class stuffs income into retirement accounts. The ultra wealthy stuffs assets, which are way more fungible in value, into retirement accounts.
The Secret IRS Files Archives — ProPublica - https://www.propublica.org/series/the-secret-irs-files
Ten Ways Billionaires Avoid Taxes on an Epic Scale — ProPublica - https://www.propublica.org/article/billionaires-tax-avoidance-techniques-irs-files
More Than Half of America’s 100 Richest People Exploit Special Trusts to Avoid Estate Taxes — ProPublica - https://www.propublica.org/article/more-than-half-of-americas-100-richest-people-exploit-special-trusts-to-avoid-estate-taxes
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One word: Land value tax.
Every time I see a post like this I am disappointed that NO ONE mentions Henry George.
People, please, go educate yourself. Taxes were solved before ww1.
Technically three words.
I’m german speaking. So for me, this is one word ;)
We Swedes can get in on the verylongcompoundword fun too
Fun fact, in German the entire Bible is just one word!
“The rich pay nintey-”
“They can pay fucken 100 percent, I dont give a shit. You want to be a world pillar? Here you go.”The oligarchs in the US are the utlimate power behind the destruction of our democracy. They have stolen the wealth from us for decades. And yet so many of our citizens defend them because they might be rich one day. Which they won’t. Because the ultrarich already there won’t let them.
Guillotines are long overdue.
We don’t wonder anything. If you were wondering, you never bothered to think about it for more than three minutes.
And your comment has what to do with mine?
Don’t tax the rich. Take more extreme measures.
Join your local communist party and join the revolution to overthrow these fucks and seize their fortune by force.
Folks, please don’t polarize because some rando on social media tells you to. We live in an increasingly polarizing world. I’m with you on taxing the rich and holding them accountable and distributing incomes more fairly again but PLEASE know you can be centrist AND make the change you want to see. Following identity politics in the far right or far left part of the spectrum isn’t the answer but mobilizing peope from the entire spectrum to stand up and build a resistance TOGETHER is. Don’t cut out that many people from your movements because then you’re only fewer. You lack persuasion in numbers, and for these things we need masses. Maybe I may remember you of the “let them eat cake” lady. Different times of course but you get my point
Centrism is the enabler of fascism.
Yes and no. What you say sounds like an oversimplified parole though. I’d argue how far you branch out depends on the political system your country has and the people at the top. Most of the time its good to take a stance rather than staying quiet, so you’re not an ignorant bystander. Talk to people about stuff, friends, family, posts, sign petitions. You don’t need to be far left or far right for that. Though going on the streets demonstrating can block assholes from passing laws that only benefit them and give it more urgency
This doesn’t make any sense. How are the loans getting paid back?
It’s actually a real thing.
Since taxes are paid when an asset is sold, not when it goes up in value, your net worth goes up with no tax liability change. When you die, the purchase price for tax purposes resets. Now the inheritor sells the assets. Since the sale price is essentially the same as the taxation price, there’s no taxes.
You’re borrowing today’s money against tomorrow’s value and taking the difference out of your death messing with taxes to free up the value.
From a financial perspective the time horizon for return doesn’t matter, only that the return is balanced against the time. From that perspective, the people giving the loan have no reason to really care since it makes them look good and they’ll at least not be working there when and if it goes wrong.
