Analysis of income, capital gains, and borrowing of Americans finds 40% of the income of “1% wealth holders” is unrealized capital gains not subject to taxation and 1%-2% is borrowing, suggesting that the “Buy, Borrow, Die” is not a dominant tax avoidance strategy among the rich
https://www.sciencedirect.com/science/article/abs/pii/S0047272725002178
Posted by quiplaam
19 Comments
Since proposed by McCaffery the “Buy, Borrow, Die” strategy, where rich individuals borrow against the unrealized gains of their wealth, then use that income to live on rather than realizing gains, has been proposed as a method for the rich to avoid paying taxes. This paper analyzes the new concept of “total economic income” of Americans, including salaries, business income, realized and unrealized capital gains, dividends, and borrowing. The paper finds that around 60% of “1% wealth holder” incomes is currently part of the tax bases, falling to 50% for “0.1% wealth holders” and the vast majority of income for lower wealth groups. Using total economic income rather than taxable income lowers the measured average tax rate, and lowers the progressivity of the tax system, but the average tax rate still rises as economic income rises until the top 0.1% is reached. Borrowing, though large in absolute dollar amounts, is only a small portion of income for high wealth individuals. Additionally, consumption among high wealth individuals is less than taxed income suggesting that the need for borrowing is low, and the “Buy, Borrow, Die” is not a major tax avoidance strategy.
If you don’t have access to the full paper and want to read more, there is a working (preprint) version of it here: [https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1397&context=law_econ_current](https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1397&context=law_econ_current)
Anybody in the wealth management industry could have told you this isn’t as widespread as Reddit believes, and Reddit will continue to believe everyone rich is doing this despite this study. Such is life. The only thing I’m a doomer on is people’s ability to educate themselves.
This study suggests that the “borrow” step in “buy borrow die” is just not nearly as important as the other two steps. It’s still the case that very wealthy households achieve huge tax savings by not realizing capital gains. If you have $1 billion in unrealized gains, you only need to borrow a tiny fraction of this to maintain a lavish lifestyle.
This makes sense. The ultra wealthy don’t need to borrow to buy because they aren’t spending more in a year than they generate via taxable income.
It also lines up with their mentality. Borrowing is an inconvenience. It’s time consuming and it reduces flexibility. If my business is making me 500k/yr it’s just easier to keep things simple.
No, it’s something that is repeated like an echo on reddit. The people repeating it generally have no understanding of the subject beyond “rich people avoiding taxes, bad!”
The fact that raising taxes generally would be more effective at raising revenue than taxing a specific, niche tax avoidance strategy is so plainly obvious that it’s laughable it needed to be put to paper.
That being said, the result assumes behavior is held constant. If taxes are raised generally, it will result in changes in behavior, which could potentially increase the use of the buy, borrow, die loophole.
The obvious solution to this is to both raise taxes and close this loophole at the same time.
I think this study still confirms that wealthy people are gaming the system. I mean even with a lavish life style this numbers work really well for them. The misunderstanding is in the borrowing rate this wealthy people need versus what the general public thinks they need. At some point the amount of money you can spend per day slows down or stops. Shure Elon Musk and the prince of Saudi Arabia have different expenses, Elon does not have a bunch of relatives that want him gone, while the prince worries about this all the time.
**Authors:** “Buy, Borrow, Die” is not a dominant tax avoidance scheme.
**Reader:** How’d you come to that conclusion?
**Authors:** Mainly by relying on self-reporting surveys.
I like the topic, but those sources feel very flawed.
Top 1% is folks with 11 million in the bank. BBD wouldnt make a ton of sense there. When we start approaching $100M I imagine the data changes quite a bit
If you were 50 years old in 2009 with $1m in the market and continued to contribute $50k per year, you would have $10m right now as you hit retirement age.
That is enough to live off $400k/yr and still leave $10m to your heirs.
And that doesn’t include any real property or other assets you own, such as private business interests.
It’s been pointed out again and again that the theory of people borrowing against assets doesn’t work, they still have to pay tax when they take in the income to service those loans. But I can assure you, some guru who “knows the rich” will make a post within a few days of how they all do this to avoid paying taxes.
The hope by many people is that there’s a large amount of money sitting around, and that if it was taxed, would fix a lot of problems. The reality is that tax revenue as a share of GDP almost never budges anywhere and budget deficits can almost never be fixed by finding new taxes.
As a matter of smart tax policy, we really should eliminate the capital gains step up on death. It does create a crazy loophole in the tax code for rich people.
“ Over 2004–2022, for the top 0.1 % (excluding Forbes), average tax rates drop from 24 % using AGI to 12 % using economic income as the benchmark, while rates fall only from 10 % to 9 % for the 50-90th percentiles. Still, average tax rates as a share of economic income rise across the wealth groups until the top 0.1 %, after which average tax rates then fall. Adjusting for inflation increases progressivity somewhat.”
This right here is the point that abstract readers are going to miss. Our system is progressive until you hit a threshold of stupid wealthy
^(***Borrow*** is the capital-gains **tax-*deference*** part of the strategy. Even if you think it is low-priority to close this loophole, it’s easy to do it, so we should do it. Using an asset as collateral should constitute a capital-gains *taxable event*. In other words, only gains-realized assets should be eligible as collateral.)
***Die*** is the capital-gains **tax-*avoidance*** part of the strategy. Upon death, the “Stepped-up basis” is the loophole which means unrealized gains are forgiven/reset. The alternative “Carryover basis”, how all other gifts or asset-transfers are taxed, is the correct way to collect capital-gains tax.
Buy, borrow, die makes a hell of a lot more sense when interest rates are super low. Instead of focusing on that we should create more brackets in capital gains to capture more revenue from the ultra sellers like Bezos, Zuckerberg, Musk and the like.
The number one tax strategy for the rich is the thousand ways they have to shift assets out of their estate and avoid the 40% estate tax for money over about $30 million (married couples, half for single). If you think about it “Buy, borrow, die” is a stupid strategy for anyone who has any tax common sense.
Unrealized capital gains are not income. If Bezos dumped all of his Amazon stock tomorrow, he would never get whatever its nominal value is. And it could well go down rather than up in value before he sells it.
The reality is that if you want to be truly wealthy, you need to own equity in a business. If the business does well, you become very wealthy on paper, but it doesn’t really change your lifestyle after a certain point.
Hampton did a survey of their members (it’s a community of high wealth people like founders, they also have a podcast called Moneywise), and they found that after a net worth of 50M, motivation for working is no longer about money, it’s about other things. Ofc this is biased bc most of their community is ‘new money’, perhaps the old money families have different lifestyle requirements.
In general though, there’s a huge disconnect especially for people on Reddit on how wealth and rich people operate. Wealth is like an endowment. In the same way universities have endowments that they try to grow (often via giving to private equity or VC funds), rich people do the same.
Lately there has been a lot of talk re: wealth taxes paying for health care in the US. While this might work, the thing that concerns me is that universal healthcare is not a new thing, and most countries are able to provide this service without a wealth tax. Indeed, the model we probably should be following is the one of sovereign wealth funds. Capital grows if managed well (as we’ve seen with rich people), and well managed endowments can pay for a lot. For example, Alaska has a wealth fund, and is the reason why they have universal basic income.