You should only be taxed on income that you actually receive. Matt Levine did an excellent write up of this, but it makes sense. If you don't actually receive the money to do anything with it you should not be taxed on it.
If you read the NPR article, you’ll realize that the issue at hand isn’t about paying tax on income received, but rather, addressing the nuance to what should be defined as income. The Indian investor never sold his initial investment, but there were back door financial transactions that were all-but income, seemingly as a favor for being an east investor.
There's also "more to the story" where the plaintiff appears to have been on the board of the foreign company as well. This almost seems like a case where they are trying to take an extremely complex nuanced tax case, strip away all the "color", and try that component.
This over being taxed on $15K, tells me there are some bigger players in this case vs some farmer who wanted to take this case to the supreme court over "principle"
Well there is one bit about a tax on a one-time transfer of wealth out of the country, and (correct me if I'm wrong here) the value of the transfer seemed to be the value of the stake in the company, not the value of the initial investment.
1. The "investor" was actively involved in the company for some time, so there is an argument that the profits of the company can pass through as personal income, like a LLC or S-corp. The short-term loans (60 days) at high interest rates (12%) that just sat in a bank is definitely sus.
2. The trump tax cuts had a provision to bring these profits home. Previously, if you received profits off-shore, and kept them off-shore, you would not be taxed until you reshored them. The main target here in was the bigger corps, who, according to NPR, have complied
But this case has two points to counter your assertion...
- They were receiving income (via interest payments for loans that weren't actually used).
- They have a controlling interest in the company - your assertion means they can effectively defer income indefinitely? This was the situation Congress was trying to solve - otherwise we go right back to everybody keeping all their money offshore.
once you get into the complexities that apply to investors and rich people, income is a slippery concept. you have a hot dog stand and pay yourself 10k, is it salary, dividend, capital gain, return of capital? maybe you didn't even make money after depreciation, inflation.
"Income, like sausages... are esteemed most by those who know least about what goes into them." - paraphrasing Alvin Toffler
That's why most economists prefer VAT, simple tax based on the value of work when the work is monetized at any stage of production. (you still need to deal with progressivity, income from capital gains / interest / dividends / wealth creation, the cash flows that cause those to arise are subject to VAT if not the animal spirits but that's another matter)
This. It's insane to have to pay huge taxes when exercising stock options as a startup employee when many times the company goes bust. One should only pay taxes on real money received. There are many horror stories.
The same way that a car is not a wealth store, but is, instead, a wealth pit.
Different tax or zoning rules, 99-year-land-leases, etc, can very well turn housing as a whole from a speculative investment into what it ought to be - a depreciating, but necessary-for-life asset.
> The same way that a car is not a wealth store, but is, instead, a wealth pit.
That's not even remotely comparable. A car depreciates because it wears out somewhat quickly. A house can last many lifetimes so it's going to retain value for a very long time.
I don't think you can seriously be suggesting these are equivalent.
You would have to go to extraordinary efforts to keep a century old car running since everything will be a custom built part at that point. Some people do it but it is a labor of love (for the car itself or for preserving history). People who do it are fully aware you could buy a new car for one-tenth (at worst) of the cost of a restoration.
Houses are the exact opposite. Maintaining houses for centuries is normal, you don't run out of parts and the cost to maintain is a tiny fraction of buying a new one.
And I have no interest in a system where a small cabal of speculators are hoarding all the land, and are just collecting rent from me, while providing zero value-add.
Land isn't widgets. Unlike industrialists, real-estate 'Investors'[1] aren't making any more of it. The world would go on just fine, better even, if we got rid of all of them.
[1] Not to be confused with developers, who actually build useful things.
> And I have no interest in a system where a small cabal of speculators are hoarding all the land, and are just collecting rent from me, while providing zero value-add.
According to [1], "the national census identified that owner-occupied households were 60.6% of all household units".
While I'd like that percentage to be higher and would also like to prohibit corporations from owning thousands of housing units, let's also recognize that it is nowhere near a "small cabal" who own all housing, when well over 50% is owned by those who live in them.
Homes are entirely different as primary residences generally aren't taxed upon sale. Also, their value is regularly updated and taxed at the new value in most jurisdictions.
Generally, though, if you're using the value of something, it should be realized (and thus taxable) at that point.
That's basically a recipe for rich people never payping tax again. They pretty much do this already. It's called "buy, borrow, die" [1]. Basically, you borrow money against assets and spend that instead of realizing a profit or gain and being taxed on it. You basically never pay off those loans.
Also, this claim is factually untrue. We tax property based on unrealized gains all the time. There's absolutely no reason why we couldn't do this with other assets.
If you take a broad view that income is an increase in wealth before expenses, then things are hard to calculate.
If you focus narrowly on cash transfers, then you get an unfair tax system, where some forms of wealth accumulation are taxed much more heavily than others.
Progressive tax systems are the headline policy of standard social democrat[0] dogma. But if you happen to own something that increases in value, it isn't usually "visible" to a progressive tax system, so it subverts the intent, and it's just working stiffs who get taxed the most, and not people who are accumulating wealth the fastest.
If taxes were done on a cash basis, I would then be able to defer taxes on investments for years until I liquidate the investment. Governments generally have an interest in receiving tax revenue much faster than that both to ensure that they actually receive the tax revenue as well as they want to fund operations ongoing.
>> If taxes were done on a cash basis, I would then be able to defer taxes on investments for years until I liquidate the investment
You can defer taxes on investments for years until you liquidate the investment. Buy stock in a company or fund that does not pay dividends. You do not owe taxes until you sell the stock.
The US government's interests are constrained by the US Constitution, which limits the type of taxes the government can impose.
There's nothing in the Constitution that says the government has to use a cash basis for levying taxes.
Sixteenth Amendment: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."
The point is that it's not "income" until you actually receive it. Money you've borrowed is not "income". It is a liability, whether or not you've used another asset as collateral. Property you own outright is not "income", either.
It can get tricky quickly. Imo there are two solutions here. First option is to count it as income that then gets written off as a business expense. Second is to flesh out what fully collateralized means to better express it as an alternative to selling something. I think the first option makes sense. There are many scenarios where businesses will take fully collateralized loans and then reinvest the proceeds, that shouldn't be taxed. But if the loans are just turned into profit they should be.
How do you think very wealthy people who subsist on rollover loans, secured against their assets, should be taxed?
For example, an on-paper billionaire whose wealth is stock ... gets a loan, secured against that stock (which they never sell). When the loan is due repayment, they roll it over with more debt and go again. Works fine when the loan is a small enough proportion of their wealth that rolling over is no issue. Should they simply never pay income tax?
I'd personally tax loans on securities and from a HELOC or similar as income.
I don't think it's practical to tax unrealized gains nor do I think that taking stock options should incur a tax until they are sold or borrowed against.
Well, mortgage might be special because you don't outright own the property until you pay off the mortgage. Now using a paid off property as a collateral to buy another property might be considered as realized gain according to OPs argument.
> mortgage might be special because you don't outright own the property until you pay off the mortgage
I don't see how this is different.
From the lender's perspective, the property is just like any other security: it reduces the risk of the lender so they can reduce interest rates and compete. The same with ownership of a company.
From each lendee's perspective, their loan comes at a cost: if the thing they are using as a security falls through, they could go bankrupt paying it back, and lose their home as part of that process.
From the government's perspective: they've written the rules this way so that loans are not taxed, presumably for a good reason. It would be good to know that reason before we start changing the rules.
When you buy a house with a mortgage, you are valuing the property as X, and the lender is also valuing the property as X. That's your cost, and no gain yet. If the value increases in a few years, it's unrealized gain.
Now, if you want to use the increased value to get a HELOC, that would be considered 'realizing the gains'. If eventually you pay off the mortgage and either sell the property or use it as a collateral to buy another property, that is also 'realizing the gains'.
Indeed, now the sticky part of this, user takes a loan out in the same line as a HELOC, either on real property or securities - they pay the loan off, what do they do?
My answer is to give them tax credits, transferrable tax credits, they could sell those credits and then pay the tax again, apply the credits to the tax cost of the underlying asset at the time of liquidation, or even transfer them with the asset to a third party as part of a sale. They could also even apply those credits as a rebate in the event they sell the asset for less than the original taxed amount.
Let me attempt (not sure I agree, but just so I can understand the principle):
You buy a house for $400K and take out a loan of $300K using your $400K home as collateral. There is no gain here. Your net worth has not increased. So there should be no income tax applied.
Later, you want to refinance. Your home is now worth $600K, and you'd like to pay off your existing mortgage and take a new loan out for $500K. This should be considered income! Your net worth has suddenly gained +$200K, and you have realized the gain and are directly benefiting from this through your loan. In principle, you should pay either capital gains or income tax (or something!) on this income. Otherwise, you've found a way to gain income tax-free.
You should pay tax on that gain, and the asset's cost basis should be adjusted to $600K at that point, in case you later sell.
>> You buy a house for $400K and take out a loan of $300K using your $400K home as collateral. There is no gain here
Correct. You have a $400K asset and a $300K liability giving you $100K in equity.
>> Later, you want to refinance. Your home is now worth $600K, and
Nope, no "and". Before you even consider refinancing, you now have an unrealized gain. You have a $600K asset and a $300K liability giving you $300K in equity for an unrealized capital gain of $200K. Whether you take out a new loan or not, your net worth has increased $200K.
>> and you'd like to pay off your existing mortgage and take a new loan out for $500K. This should be considered income! Your net worth has suddenly gained +$200K
No, your net worth increased when the value of the house went up, not when you took out the loan. The loan is not income.
>> and you have realized the gain
No, the gain is still unrealized. You have a $600K asset (the house), a $200K asset (cash out from the refi) and a $500K liability (the new loan) giving you equity of $300K. You have not realized the capital gain. You have not made any income.
What you are trying to do is to use a refi as a trigger for taxing unrealized capital gains.
OK yes, I agree that everything you said is evidently how things work today in the real world, and your correcion about the definition of unrealized. I was trying to articulate into words the principle OP was getting at: That we should use lending activity "as a trigger for taxing unrealized capital gains". I think there are reasonable arguments for either side honestly.
If I roll over a personal loan repeatedly of any amount, should I be taxed? This seems a matter for the lenders' appetite for risk, and nothing to do with the government.
Well, there's also risk. I can remortgage my home and get money now, with the promise of paying it back later. But I might not pay it back if I lose my job.
That seems like it's mostly caused by QE policies/zero interest loans (which is already just giving money to rich people). No one's going to take out a loan at 5% interest to avoid 20% capital gains on 10% growth (i.e. a 2% tax).
For your unicorn growth billionaire, like someone else suggested, you could require realization at the time you value the asset to put it up for collateral.
All taxes are eventually income taxes because you need to pay them somehow. Removing the middleman makes it more clear.
Even the history of property tax is more of an income tax because property was income generating- think back hundreds of years where taxes were things like “1/10the the produce of your fields”.
Having taxes being directly against income means that when your income falters or is stopped, the expense reduces or is eliminated also.
Yes. The occasional high-profile case aside, if you look at the actual records of people who lose their homes based on unpaid property taxes, you're going to see a vastly disproportionate number of moderate- to low-income people. Sometimes people with very low incomes (e.g. the 81-year-old woman who lost her home of 40 years due to ~$500 in unpaid taxes).
I myself have some first-hand experience in this area. A now-deceased relative owned some (quite modestly valued) property in another state. It came within a hairs-breadth of being sold for $12.00 in back taxes. Yep, twelve bucks. It seems she'd neglected to pay the $4.00/year in taxes while she was busy dying of cancer.
Fortunately one of the neighbors took the time to search me out and let me know about this, so I was able to save it. It was a near thing, though.
I disagree, I would actually much prefer taxation on wealth and not distribution of income.
A healthy economy is one that there's a lot of money flowing from hand to hand. It's effectively how _value gets created_. The more people are spending, and the more money is being distributed, the better and more healthy the economy becomes.
An unhealthy economy is one that there's wealth being gathered and concentrated. One where spending, and receiving money is penalized. You can imagine taxes a form of penalization on money.
Furthermore, one of the most important use cases of the government under capitalism is protection of property. If you believe that's one of the most important jobs they're doing, then people with the most property (e.g. wealth), should be paying for that protection.
So, no I fundamentally disagree with you, and it seems like Matt does too if you read that piece. Wealth should be the form of taxation. This also means unrealized gains in stocks. It also means housing.
If we actually taxed wealth at the federal level, and got rid of income taxes, a lot of economic problems we're facing in the US would simply go away. Housing would literally not be able to get as expensive as it is right now because there would be an ongoing cost to maintain that price, driving the incentives to actively build more housing to reduce property values.
If you also did this, you'd really help in leveling the playing field. Having a rich family would still put you ahead of others, but not by the egregious levels it does today.
the unrealized gains can be used as backing for loans, though. and loans aren't income if the loan goes to a business but is backed by the owner/CEO's untaxable holdings because they haven't been converted into income.
https://www.bloomberg.com/opinion/articles/2023-12-04/whose-...