A July 13th article in the Wall Street Journal points out that more and more wealthy people are purchasing things they want not by selling their investment assets but by borrowing against their value and using the borrowed funds to make their purchases. They point out:
- Morgan Stanley has $68.1 billion worth of securities-based and other nonmortgage loans outstanding.
- Bank of America has $62.4 billion in securities-based loans.
- Tesla Inc. Chief Executive Elon Musk and cable billionaire John Malone have pledged more than $150 billion of their stock as loan collateral.
- Fred Smith, the founder, chairman and CEO of FedEx Corp has pledged $598 million worth of the company’s stock—about 23.4% of his holdings —for loans as of July 2020.
- By borrowing against their assets rather than selling them, startup founders can monetize their stakes without losing control of their companies.
- If an asset appreciates faster than the interest rate on the loan, the borrowers come out ahead.
- Under current law, investors and their heirs don’t pay income taxes until their shares are sold. Assets passed on to heirs may be subject to estate taxes, but the heirs pay capital-gains taxes only when an asset is sold.
The Biden administration wants to stop this “abuse” by increasing the capital gains tax rates from 23.8% to 43.4%. They are also exploring ways to prevent these wealthy people from borrowing against their assets.
Under present federal tax law, the assets in a person’s estate are valued as of the date the owner dies. Then, when an heir sells an inherited asset, he/she pays taxes only on the appreciation that occurred while the asset was actually in their hands.
For example, a parent buys stock at $30 a share. On the date the parent dies, the stock is worth $100 a share. If an heir holds that stock for a year and then sells it for $110 a share, the heir would owe tax only on the $10 per share the stock rose while he/she actually owned it.
The “smart people” in DC think that this “step up in basis” from $30 to $100 in the above example is abusing the system. They are proposing that this “step up in basis” apply only to the first million dollars of an estate’s value. For estates valued at over a million dollars, those assets above a million dollars would retain their original basis.
Consequently in the above example, if the Biden administration gets its way, it’s possible that an heir selling the stock for $110 a share would owe taxes not on the $10 a share the stock rose while it was in their possession, but on the entire $80 a share the stock rose between the time the parent purchased it and the time the heir sold it. And, of course, the capital gains tax rate would be 43.4%, not the 23.8% it is today.
Home Equity Line of Credit (HELOC)
Of course, the “smart people” only care about punishing the wealthy, but don’t expect them to play by the same rules they impose on other people. It’s this blatant hypocrisy that is most distressing.
According to the Federal Reserve Bank of New York, Balances on home equity lines of credit (HELOC) dropped by $2 billion, to $485 billion.
Why do “ordinary people” have and use HELOC’s? For many of us, the value of our homes, our principal investment, has increased. Consequently, many homes are worth significantly more than the outstanding balance on the mortgage. This difference between how much a homeowner owes on the house and how much the house is worth is the “equity”.
Let’s say that a married couple bought a home in 2010 for $200,000. They made a down payment of $50,000 and financed the balance with a $150,000 mortgage.
Now the home is worth $400,000 and the outstanding balance on the mortgage is $140,000. This means that if they sold the home for $400,000 and paid off the $140,000 loan, they would have $260,000 (less closing costs).
Under current law, if the couple sold their home, they will owe no federal income taxes because gains up to $500,000 are not taxable. However, the couple doesn’t want to sell their home. They want to stay there, but they need $50,000 to remodel the kitchen or put in a pool. If they have $50,000 worth of other assets they could sell, they could get the money that way, but they would have to pay taxes on the profits. What is likely a better solution? Take out a HELOC.
They can go to a bank and obtain a $50,000 HELOC loan. They will likely pay between 2.5% and 6%, depending on their credit rating and the amount of equity in their home. In addition, if the money is spent improving their home, then any interest paid on the HELOC is tax-deductible just like the mortgage interest (in the unlikely event that the couple are in the 10% of federal taxpayers who are itemizing their deductions.)
The couple then improves their home and enjoys it for the rest of their lives. When they pass away, they leave it to their two children. Assume the house is worth $800,000 at the time the two children inherit it. Again under current law, if the children sell the house for $800,000, they would owe no tax since there was no increase in value during the time they owned it.
It seems that the “smart people” have decided that it is unfair that some people can borrow more than others. Therefore, it is up to them to devise a new set of very complicated Internal Revenue Code rules that address this great “injustice.”
Of course, these complicated new rules will require that more bureaucrats be hired to enforce them, while at the same time, providing more lucrative opportunities for tax attorneys and other tax professionals.
All of this is totally unnecessary. It just makes an already incomprehensible tax code even more complicated while doing a lot more harm than good.
THE FAIRTAX ALTERNATIVE
Rather than allow the “smart people” to decide what is “fair” or “just”, why not replace the present corrupt and unworkable federal income tax with the FAIRtax? The FAIRtax lets people, not bureaucrats, decide how much tax they pay and when they pay it.
When people pay their federal taxes when they make retail purchases of new goods and services, then it doesn’t matter where the money to make any purchase comes from. Income, sale of investments, loans, gifts or an inheritance, it’s all the same.
The FAIRtax is based on the simple concept that people should receive everything they earn, and that the government should not have any control over their money.
With the FAIRtax:
- We get our entire paycheck.
- We get 100% of our investment proceeds.
- We can borrow money and use it for anything we want with no tax consequences.
- If we use the borrowed money to purchase used goods, we pay no FAIRtax.
- If we use the borrowed money to purchase new retail goods and services, then we pay the FAIRtax.
The Ruling Class and their minions don’t like it either because they are profiting greatly from the current income/payroll tax system.
St. Augustine said, Hope has two beautiful daughters. Their names are anger and courage; anger at the way things are, and courage to see that they do not remain the way they are.
Isn’t it time for us to get angry at the largely unelected “smart” people who believe it is their right and duty to decide what is “fair” and “just” for the rest of us? Isn’t it time to tell the Ruling Class and their minions in D.C. that the days of making huge profits from the rest of us are over?
We must have the courage to force the “smart people” to quit trying to be our moral and ethical judges and instead, devote their time to making the government more efficient in providing the services that government is supposed to provide—things like infrastructure and defense.
If the Ruling Class and their minions in D.C. don’t like that we are taking huge amounts of money away from them, we should repeat Clark Gable’s famous closing words in Gone With the Wind: “Frankly my dear, I don’t give a damn.”
If you want to prevent the IRS from being further weaponized to punish those of us who may object to the D.C. opinions and dictates of what is good for us, then help us PASS THE FAIRTAX!
The IRS will be gone and we will pay our taxes when we make purchases. WE and not D.C. Elites will decide how much federal tax we pay!
If you have friends who don’t know about the FAIRtax, send them to FAIRtax.org. Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.
Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.
Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:
“If you want a picture of the future, imagine a boot stamping on a human face—forever.”
Is it hopeless? When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?” But I dream things that never were; and I say “Why not?”
Isn’t it time for us to ask, “Why not?”