Let me tell you a story.
Johnny Boom was born in 1960 to incredibly wealthy parents. So wealthy, in fact, that when they bought their first international publication, it ranked them as among the richest 1000 people in the country and named them ‘Couple of the Year’ in the same issue.
What a crazy coincidence!
Johnny Boom was raised right. He was sent to the best schools regardless of his grades and did everything that was expected of him.
He made friends with the children of richer parents. He married a younger, white, gun-toting, Christian woman of proper breeding stock. He invested his considerable wealth in the right areas — real estate, hedge funds, stocks, and politicians.
But in 2020, Johnny realizes he has a problem:
“How can he pass on his entire fortune to his children without paying a dime in taxes to the filthy society that helped him become a billionaire?”
But don’t worry, friends, Johnny found a solution!
He and all his wealthy better-than-us-es realized the perfect way to never have to pay a single penny in taxes — even after death!
The “Buy, Borrow, Die” Tax Loophole
Their adopted plan is clever. A plan that is completely contrary to popular thinking among the peons of society (those filthy vagrants who own less than $10 million — imagine that, hah!).
You see, while the pissants were struggling to pay off mortgages, car loans, and pay 20% interest to Cash N’ Go just to eat dinner twice a week, they had developed a mantra: ‘All debt is bad!’
But our Johnny knew better.
He hired a semi-wealthy financial expert to teach him all about ‘Buy, Borrow, Die’ and now it’s helping him and all his ultra-rich friends keep an estimated $2.7 trillion in untaxed profits!
Perfect.
Especially when you consider their total net worth is only $4.25 trillion. Imagine saving 64% of your taxes that could solve homelessness in America instead!
27 times over.
Here’s How the “Buy, Borrow, Die” Tax Loophole Works
A few decades ago, professor Ed McCaffery created a phrase about how the rich were beginning to abuse the tax system. Most ignored it because the idea sounded so outlandish. The premise was simply contrarian.
Instead of avoiding debt, embrace it!
Embrace it so hard you use debt to buy your morning coffee, to wax your 56th Ferrari, or to even buy your next $100 million yacht for your fourth ex-wife.
This comes from a nifty little loophole in the law. A giant gap that’s being used to protect nearly $1 trillion or more by now.
Here’s the breakdown:
1. Invest!
In 1980, Johnny invests a large portion of his fortune into assets that do not produce income but are very likely to increase in value over the years (stocks, real estate, artwork, collectibles, etc.).
2. Be greedy AF!
Johnny then decides to never pay income tax again.
3. Borrow!
Johnny goes to the investment bank and asks for a ‘security-backed loan.’ Those in the know call it a Securities Backed Line of Credit or SBLOC. So, the bank looks at his $1 billion in stocks and real estate and says, “Sure thing, buddy! Here’s a loan of up to $500 million with only 0.5% interest because we think you’re a good person.”
4. Never pay income tax!
Remember, bank loans are not income by definition, so Johnny never has to pay any income tax on that money. All he has to do is pay a tiny bit of interest every year, which he can easily pay off by increasing the loan or selling a tiny portion of his assets. But then again, most of these assets keep growing in value, so it’s never an issue.
Johnny can buy as many yachts, jets, planes, and politicians as his heart desires!
5. Die rich!
Johnny croaks one day. But luckily, his investment advisor has made provisions for that. Johnny Jr. gets all of Johnny Sr.’s stock and real estate…tax-free.
His father bought these assets in 1980 for only $10 million, and now they’re worth $1 billion. That’s a lot of capital gains tax to pay!
But don’t worry — there’s another loophole.
Wooo! Go Johnny Jr., go!
Johnny Jr. inherits the stocks and real estate on a ‘stepped-up basis’. This means that instead of Johnny Sr.’s $990 million in investment profits being taxed at a 20% rate — and supporting filthy society with taxes — the value is reset to $1 billion for Johnny Jr.
The profits were completely erased.
Johnny Jr. now owns a $1 billion fortune and his family never had to pay a penny of capital gains taxes.
6. Sell tax-free!
Now Johnny Jr. has a choice. He has inherited $1 billion worth of real estate and stocks without having to pay a single penny to ‘the man’. However, he still owes his best friend Mr. Banker.
But Johnny can immediately use a small portion of his $1 billion to pay off that debt. And since the cost basis has been reset to $1 billion, there are no capital gains to be taxed!
Damn Johnny, you is a Smart.
Tax Loopholes Are a Big Problem for Society
The big banks are certainly aware of this loophole. It’s been a major source of growth for them over the past decade.
Morgan Stanley tripled its equity-backed loans from 2012 to 2018 alone. In July 2021, the Financial Times estimated the big banks were lending at least $600 billion in loans of this fashion, a huge increase over ten years ago. If you include all the other similar loans made by smaller institutions like family offices, I’m sure the amount would reach the $1 trillion mark.
This $1 trillion in loans from banks to those least in need of debt is there for a reason. This money essentially represents untaxable income for the wealthy who receive it.
While you or I might make $60,000 slaving away at our jobs every year, we go to our accountants, take our deductions, and pay income tax on the rest of it.
Johnny doesn’t have to.
On paper, he makes $0 every year. That’s because he never sells his assets and lives off super-cheap loans.
He never receives dividends. He never receives any income. And yet he can spend tens of millions of dollars every year as if he does.
In the eyes of the IRS, Johnny is broke.
How to Fix the Rich
There is a flickering light at the end of the tunnel when it comes to this issue. President Biden recently proposed eliminating the ‘stepped-up basis’ tax loophole that is behind half of this strategy.
And not wanting to punish the non-billionaires among Americans, his proposal included a tax exemption of up to $1 million for individuals, $2.5 million for couples, and 100% for charity donations.
Seems fair.
Probably won’t pass though. (Update: It didn’t.)
Buying up politicians is incredibly cheaper than paying taxes if you have tens of millions in wealth saved up.
If the bill passed, at least this problem would not happen again, right?
Right?
Right?!!!
Sigh.
They’d just switch to using the 100% tax exemption for charity instead. And we’d cheer them on for donating while they do it only to save on taxes.
Gone are the days of debating whether the top income tax rate should be 93%, 80%, or even 50%. The truth is, it doesn’t really matter anymore because so many loopholes have formed in the bloated tax system.
Taxing the rich simply will not work until these hidden loopholes are closed.
But hey, at least Johnny Jr. can sleep easy at night on one of his 10 extra yachts that each come with its own mini-yacht installed in the back. You know, for a quick getaway in case the taxman ever comes floating up.
Phew.
J.J. Pryor
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References:
- https://www.ft.com/content/8a328af4-b8f2-48c5-82a9-d7dc1c345e1c
- https://www.cnbc.com/2021/05/27/bidens-bid-to-overhaul-taxes-on-inheritances-could-bring-new-problems.html
- https://www.ft.com/content/8a328af4-b8f2-48c5-82a9-d7dc1c345e1c
- https://www.wsj.com/articles/buy-borrow-die-how-rich-americans-live-off-their-paper-wealth-11625909583
- https://www.bangkokpost.com/business/2147707/rich-americans-borrow-to-live-off-their-paper-wealth
- https://www.investopedia.com/terms/i/inherited-stock.asp
- https://www.bankrate.com/taxes/biden-estate-tax-step-up-basis/
- https://www.smh.com.au/business/banking-and-finance/banks-latest-growth-plan-lend-to-clients-who-don-t-need-the-money-20181019-p50arm.html
