The wealthiest individuals in America have always been adept at finding ways to evade tax obligations. However, in recent times, they have discovered a major loophole known as the “Buy, Borrow, Die” strategy. This three-step process enables them to accumulate a substantial fortune, spend a significant portion of it as they wish, and transfer the remainder tax-free to their heirs. This technique is so intricately designed that even proposed progressive tax reforms would not affect it.
Step one involves buying assets that appreciate in value, rather than relying on traditional income sources like wages. For example, Elon Musk and Warren Buffett have built their wealth primarily through owning stock in their companies. Unlike wages, asset appreciation is only taxed when the assets are sold, a concept known as “realized” taxes. The justification behind this is that unrealized assets are only on paper and do not equate to immediate spending power.
Step two entails borrowing against these assets rather than selling them to finance luxury purchases. By using their assets as collateral, the ultra-rich can secure loans without incurring taxable income. This allows them to maintain their extravagant lifestyles without triggering tax liabilities. This borrowing trend is on the rise among top wealth-holders, signaling a growing reliance on leveraging assets for cash flow.
Step three completes the cycle, as eventually, the wealthy must sell off assets to repay the loans. This step is aptly named “die,” as upon their passing, the remaining assets can be passed on to heirs without incurring taxes. By utilizing this trifecta of buying, borrowing, and passing on wealth, the superrich can perpetuate their financial legacies while minimizing tax obligations.
The tax code includes a provision called the “stepped-up basis,” also known as the “angel of death” loophole. When an individual passes away, any increase in the value of their assets during their lifetime is shielded from taxation. This allows the billionaire’s heirs to sell these assets to pay off debts without worrying about taxes. The rationale behind the stepped-up basis rule is to prevent double taxation, as the U.S. already imposes a 40 percent inheritance tax on estates exceeding $14 million. However, numerous loopholes exist that enable the wealthy to avoid this tax, often involving complex legal trusts to transfer assets across generations seamlessly. This strategy, deemed “Buy, Borrow, Die,” is considered legal but has essentially nullified the concept of income tax for the wealthiest individuals.
The result is a tax system with two tiers: one for the majority, who earn wages and pay taxes, and another for the few who amass wealth through assets and evade taxes. The focus of tax policy debates often centers on income tax rates for the ultra-rich, yet much of their wealth does not qualify as taxable income. Investigations have revealed that the wealthiest individuals pay minimal effective tax rates on their total wealth gains, further exacerbating wealth inequality.
One proposed solution to address this disparity is to tax unrealized assets. In 2022, the Biden administration introduced a “billionaire minimum tax” targeting households with over $100 million in wealth, imposing an annual levy on asset appreciation. However, the political feasibility of such a policy remains uncertain, as public opinion and legal challenges pose significant obstacles to implementation.
One approach to consider is addressing the issue of borrowing. Liscow and Fox proposed a tax on households with assets over $100 million that borrow, estimating it could generate around $10 billion annually. However, this solution falls short as it does not cover wealthy Americans who do not heavily rely on borrowing but do benefit from the stepped-up basis loophole. Another option is to focus on the “die” step. Many tax experts agree that eliminating the “stepped-up basis” rule, which would tax unrealized assets at death, is a viable solution. This approach has more political support compared to imposing a billionaire’s minimum tax on unrealized assets during life. Despite the widespread backing for this change, overcoming the challenge of concentrated benefits and dispersed costs in democratic politics remains difficult, especially when it involves the wealthiest individuals. The Biden administration proposed removing the stepped-up basis rule in its Build Back Better legislation, which faced opposition from special interest groups and politicians who portrayed it negatively. While these claims were unfounded, they were effective in rallying enough Democratic opposition to prevent the proposal from moving forward. The reality is that the wealthy can find ways to exploit any tax system. In an ideal democratic system, adjustments should be made to ensure the rich pay their fair share. However, in a world where money equals political power, the superrich have the means to prevent such changes. Taxing the rich is crucial for promoting equality, but achieving this goal requires a more equitable society.
