[SmartCat]

Originally Posted by v1p3r

A lot of US financial institutions offer loans against equity, both listed and unlisted. Most wealthy people use this to fund a lavish lifestyle while reporting near zero income. You can easiliy get a $ 50 m loan against $ 75 m in equity (1.5x). As the stock market climbs 2x, you only need to sell $ 25 m of your equity (previous value) to cover your loan, plus a small interest component. Your cost of capital is zero, your income is zero, your tax liabilities are zero. Elon Musk is a great example, so is Adam Neumann, the scamster formerly of WeWork.

Why is this example used frequently to show that billionaires avoid tax?

1) Billionaires become billionaires not because of their salary income, but because of their holdings in their own company. Why would anybody expect them to draw large salaries & pay income tax on that? After a few years, they simply don't bother to increase their salaries. It will anyway be a tiny speck of their overall networth or their company's revenues/profits. Mukesh Ambani too takes zero salary, since dividend income is in multiple crores every year.

2) Forget promoters or multi-billionaires, even we can get loans against shares. So saying "lot of financial institutions offer loan against equity" sounds conspiratorial, as if they are all conniving to help billionaires avoid taxes.
https://www.icicibank.com/personal-b...nst-securities



3) In your example, the billionaire borrowed $50 million. The loan has to be eventually paid back right? If a billionaire keeps borrowing by pledging more shares, then his liabilities will start climbing rapidly every year. And when shares are eventually sold to pay back the loan, the billionaire has to pay 20% long term capital gains tax.

So a billionaire's federal income tax might be zero, but he still pays taxes on dividends and capital gains. So somebody who became a multi-billionaire because of capital markets is paying taxes related to capital markets. If a hired CEO became a multi-millionaire because of his large salary income, then he will pay large federal income tax.

If you want parity between the two, either reduce federal income tax % or increase dividends/long term capital gains tax %. This is far more logical than loony "billionaire tax" on unrealized gains.

[v1p3r]

Originally Posted by SmartCat

Why is this example used frequently to show that billionaires avoid tax?

1) Billionaires become billionaires not because of their salary income, but because of their holdings in their own company. Why would anybody expect them to draw large salaries & pay income tax on that? After a few years, they simply don't bother to increase their salaries. It will anyway be a tiny speck of their overall networth or their company's revenues/profits. Mukesh Ambani too takes zero salary, since dividend income is in multiple crores every year.

Dividends in the US (qualified, which is most of them) get taxed at 20%. In India they get taxed at slab rates. So if you are talking about the US, there is a perceptible difference.

Originally Posted by SmartCat

2) Forget promoters or multi-billionaires, even we can get loans against shares. So saying "lot of financial institutions offer loan against equity" sounds conspiratorial, as if they are all conniving to help billionaires avoid taxes.

Try getting it against unlisted shares in India. I have standing offers from multiple US institutions for loans against my private equity. That doesn't exist in India. It's why I specifically mentioned Adam Neumann, whose WeWork was not listed.

Originally Posted by SmartCat

3) In your example, the billionaire borrowed $50 million. The loan has to be eventually paid back right? If a billionaire keeps borrowing by pledging more shares, then his liabilities will start climbing rapidly every year. And when shares are eventually sold to pay back the loan, the billionaire has to pay 20% long term capital gains tax.

From the offers I have received, the shares get placed in escrow. At this point, I don't know how tax would work on a margin call. If you are creating a vehicle for escrow and transferring vehicle ownership, then the tax implication is minimal - why people create holding cos for real estate assets for example. The second is that the interest is tax deductible, so you can remove that from the capital gains if you have to pay it at all.

Originally Posted by SmartCat

So a billionaire's federal income tax might be zero, but he still pays taxes on dividends and capital gains. So somebody who became a multi-billionaire because of capital markets is paying taxes related to capital markets. If a hired CEO became a multi-millionaire because of his large salary income, then he will pay large federal income tax.

Yes, but federal income tax is 37% at the highest rate, nearly double the gains and dividend taxes. This is without considering state taxes.

[m8002?]

Originally Posted by SmartCat

Why is this example used frequently to show that billionaires avoid tax?

Originally Posted by v1p3r

Dividends in the US (qualified, which is most of them) get taxed at 20%. In India they get taxed at slab rates. So if you are talking about the US, there is a perceptible difference.

v1p3r is right.

i remember listening to a Podcast on this. This is a loophole in the US tax where billionaires get away paying little to no tax by borrowing against the stocks. Also, the wealth/stock is gifted/passed through inheritence with 0 tax liability.

https://www.npr.org/transcripts/1140465961

VISWANATHAN: You would pay tax maybe never.

GUO: You might never pay taxes because you could live on borrowed money for the rest of your life. If you have enough stocks, you can just get new loans or the bank will extend your old loans. And here comes the final piece of the strategy. When you die, all those taxes on your stock market profits get wiped away. It's called a step up in basis. Your basis is like what you originally paid for your stocks, and it's how you calculate your profits. That gets stepped up when you die. And so the people inheriting your stuff, they get a clean slate. They don't have to pay any federal income tax on all of your stock market profits.

Why? Why do we do this?

VISWANATHAN: It's just easy to do. That's the argument. If you bought the stock a long time ago, maybe it's hard to find records of what you paid for it.

GUO: If I have, like, billions of dollars in stock, the argument is I might have forgotten how much I paid for it.

VISWANATHAN: That's right.

[SmartCat]

Originally Posted by v1p3r

Try getting it against unlisted shares in India. I have standing offers from multiple US institutions for loans against my private equity. That doesn't exist in India. It's why I specifically mentioned Adam Neumann, whose WeWork was not listed.

Obviously, US markets are in a different league when it comes to both private equity & private debt. But market in India exists for private credit. Do a Google search for 'private credit India' or 'private debt India'.

That's how Byju founder ended up with zero networth. His personal debt was equal to the value of his Byju shares, which he had taken a loan against.

Originally Posted by m8002?

i remember listening to a Podcast on this. GUO: You might never pay taxes because you could live on borrowed money for the rest of your life. If you have enough stocks, you can just get new loans or the bank will extend your old loans.

This makes very little financial sense (from billionaire's PoV):

v1p3r pointed out that if a billionaire pledges $10 million worth of shares, he will get 75% of that as loan ($7.5 million). But that is only half-truth. Actually, financial institutions give 50% to 75% of share value as loan, depending on the billionaire's company/stock and also market conditions.

Now this podcaster says billionaire will just get new loans by pledging more stock every year forever till he dies. And never payback the loan. But whenever he does that, he has to give away stocks worth $10 million to get $5 million to $7.5 million cash.

Now just think about it for a moment. Why on earth would a billionaire give away 25% to 50% of his shares value to financial institution, when he can just sell shares in the market and pay just 20% as capital gains tax?

[m8002?]

I have not much idea about Indian Tax, let alone US taxes :-). I just put in what I heard in the podcast.

My limited understanding is that the Billionaire is not giving away the shares. He is only pledging it. The loss happens at the time of sale of the shares.

An analogy might be reverse mortgage in US. You dont give away your house when you do reverse mortgage. You get to live there till the end and also may get some monthly income from the lender as well.

In this case, there is also a risk of the stock price crashing. In which case, the banks will liquidate the shares and take back the loan amount.

[SmartCat]

End of the day, people are just complaining that multi-billionaires are NOT taking any salary and working for free!

When a billionaire pledges shares, he is essentially getting a multi-million dollar overdraft facility. It is not to "save taxes", but to keep the shareholding constant for now. Any funds used from this overdraft facility will eventually be paid back with future cash flows. On which he will eventually pay some sort of taxes. Bill Gates said he has cumulatively paid $10 billion in taxes!



A multi-billionaire might use this overdraft facility for run-of-the-mill expenses or buying real estate and also boostrapping a new company or investing in others. For eg: Along with Tesla, Elon Musk also founded or owns SpaceX, Boring Company, Neuralink, Twitter, OpenAI/xAI etc.

Meanwhile, Indian promoters pledge their holdings too. For the same reasons mentioned above:
https://www.screener.in/screens/3513/promoter-pledges/

[Fuldagap]

Originally Posted by SmartCat

Now just think about it for a moment. Why on earth would a billionaire give away 25% to 50% of his shares value to financial institution, when he can just sell shares in the market and pay just 20% as capital gains tax?

Maybe I'm missing the context of your response and I assume you are well aware about why it happens, I'll still try to answer.

They do so majorly because:

1. Avoid capital gains tax which are substantial.
2. To retain ownership while minimizing tax implications.
3. Access cash without relinquishing shares
4. Maintain voting rights
5. Pledged stocks can fund charitable causes or foundations.
6.To ensure their wealth benefits future generations.

Also:

1. Collateral for loans: Pledged stocks serve as collateral for loans, potentially at favorable interest rates.
2. Increased borrowing capacity: Pledging stocks enhances creditworthiness.

Even further:

1. Pledging stocks facilitates estate planning and wealth transfer.
2. They can pledge stocks to secure funding for new ventures.

Maintaining control over the company while enjoying liquidity, now who will not want that.

Plus, a lot of crooks (many billionaires) defraud the public inflating their shares by illicit means and then securing loans worth billions pledging those artificially inflated shares, while their company may not be doing anything substantial in any sort of business.

Eg: Jaspal Bhatti's PP water balls company

It happens all the time, everywhere.

[kiku007]

“Tax avoidance is a key skill to building wealth,” Scott Galloway

said

on Steven Bartlett’s “The Diary of a CEO” podcast. He then made a striking comparison: “If you’re a prisoner of war, you have an obligation to escape. If you’re trying to build wealth, you have an obligation to pay as little tax as possible. Do it legally.”

If I'm being brutally honest, my/most people's problem is not Billionaires getting away with tax avoidance, but rather I/we can't as much.

[tsk1979]

Originally Posted by SmartCat

Now just think about it for a moment. Why on earth would a billionaire give away 25% to 50% of his shares value to financial institution, when he can just sell shares in the market and pay just 20% as capital gains tax?

. So when your salary goes to the bank or you open an FD, does it mean you have given your salary to the bank?

And if I can buy a 100 million dollar yatch for 3% interest instead of 20% tax that makes far more financial sense.

[SmartCat]

Originally Posted by Fuldagap

Maybe I'm missing the context of your response and I assume you are well aware about why it happens. They do so majorly because:

Originally Posted by tsk1979

And if I can buy a 100 million dollar yatch for 3% interest instead of 20% tax that makes far more financial sense.

As I pointed out, you and me can do this too, if you want to avoid paying capital gains tax. It is not a "billionaire special" scheme. You can pledge not just shares but mutual funds and ETFs too. Sure, you can't buy a $100 million Yacht, but you can buy a $50,000 car! As long as shares/MF/ETF value covers whatever you are trying to buy.

But before you explore this option, do understand the Terms & Conditions and also its unique risk factors. There is no free lunch.

- To buy a $50,000 car, you have to pledge shares/ETF/MFs worth $75,000 to $100,000.
- You will just pay 4% APR probably, since you are not as credit worthy as the billionaire, instead of 3% APR.
- Unlike a car loan, you don't have to pay back the principal.
- However, just like the billionaire, if you want the shares/ETF/MF back, you have to pay back the principal ($50,000)
- If the stock market tanks like in 2008 or 2020, you will asked to pledge more shares/ETF/MF. Or pay up $50,000 cash within 24 hours. That is the infamous margin call (which is literally a phone call from the financial institution).
- If you do neither, they will sell off your shares/ETF/MFs.

Congratulations. Because now you paid $75,000 to $100,000 for your $50,000 car! Plus interest paid so far.

Most brokers/banks in India/Europe/US will offer this facility, but they are marketed under different names. Even an entity like Robinhood!
https://robinhood.com/us/en/support/...in-withdrawal/

So when your salary goes to the bank or you open an FD, does it mean you have given your salary to the bank?

Confusion because when you open a FD, you are the lender and bank is the borrower. For a bank, customer FDs are called "liabilities" and customer loans are called "assets".

More appropriate analogy is if we are "giving away" a few grams of our gold jewellery/bars/coins to a local pawnshop or a financial institution every year. And getting cash. They will typically give us 75% of Gold value. You can do this if you want to avoid paying capital gains tax on gold.

Originally Posted by kiku007

If I'm being brutally honest, my/most people's problem is not Billionaires getting away with tax avoidance, but rather I/we can't as much.

There are no billionaire specific tax avoidance schemes. It is open to all. It is just that they get the right advice. Also, for smaller wealth, it is not worth doing all the circus most of the time.

[DigitalOne]

First, this is not a Billionaire tax, but more of a wealth tax. It will affect anybody whose net worth is more than 100 million USD. Net worth includes real estate, stocks, jewellery, cash etc. So, it is applicable not just for "evil-stock-pledging-avoiding-taxes billionaires" but every Musk, Buffett, and Taylor Swift (estimated net worth 600 million). (Calling it a billionaire tax triggers emotions and may hamper your reasoning )

This is a fundamentally new type of direct taxation, beyond the scope of income tax or capital gains tax.

Right now, VP Kamala Harris and team are claiming that it will affect 0.01% of the Americans. This is probably true. But once a precedent is set what prevents future presidents/congress to lower the threshold to 10 Million (Only 1% affected, 99% support this !!) or to 1 million USD (only 5% affected!!). We have seen enough examples (in India also, though this is out of scope of current discussion) of how taxation once introduced (only for the rich!!) seeps into every class.

This is how the start of a slippery slope looks like. God save America!

[tsk1979]

Originally Posted by SmartCat

- To buy a $50,000 car, you have to pledge shares/ETF/MFs worth $75,000 to $100,000.
- You will just pay 4% APR probably, since you are not as credit worthy as the billionaire, instead of 3% APR.
- Unlike a car loan, you don't have to pay back the principal.
- However, just like the billionaire, if you want the shares/ETF/MF back, you have to pay back the principal ($50,000)
- If the stock market tanks like in 2008 or 2020, you will asked to pledge more shares/ETF/MF. Or pay up $50,000 cash within 24 hours. That is the infamous margin call (which is literally a phone call from the financial institution).
- If you do neither, they will sell off your shares/ETF/MFs.

Congratulations. Because now you paid $75,000 to $100,000 for your $50,000 car! Plus interest paid so far..

No. If I have 2,000,000 in stocks and bonds, and take out a margin loan at 3%-4%, I only have to make sure I have enough value in the account and dont get margin called.

I don't have to pledge anything. The shares will sit in my account just like they were sitting earlier. If my broker has a 3X margin requirement (worst case) it means I have to maintain a minimum balance of 150,000$. If stocks crash below that I will get margin called as in the broker can sell my shares.

But as long as I dont go below my margin, I earn the dividends, and stock appreciation.

I can slowly pay back the loan from my salary which is taxed at normal rate and instead of paying 6.99% I pay only 3.45%.

Many people I know did this for the house down-payments. they had over 1-2 million in their accounts so could easily do a 8% down payment using the margin loan.

So this way they effectively shave of 1/2-2% from their overall tax liability had they sold these shares.

but Billionares take this to level 10. Their effective tax rate goes much lower as they do not have much salary just taxes.

This is a big loophole. You are using capital to live the same lifestyle without paying income taxes.

[Fuldagap]

Originally Posted by SmartCat

But before you explore this option, do understand the Terms & Conditions and also its unique risk factors. There is no free lunch.

- To buy a $50,000 car, you have to pledge shares/ETF/MFs worth $75,000 to $100,000.
- You will just pay 4% APR probably, since you are not as credit worthy as the billionaire, instead of 3% APR.
- Unlike a car loan, you don't have to pay back the principal.
- However, just like the billionaire, if you want the shares/ETF/MF back, you have to pay back the principal ($50,000)
- If the stock market tanks like in 2008 or 2020, you will asked to pledge more shares/ETF/MF. Or pay up $50,000 cash within 24 hours. That is the infamous margin call (which is literally a phone call from the financial institution).
- If you do neither, they will sell off your shares/ETF/MFs.

Congratulations. Because now you paid $75,000 to $100,000 for your $50,000 car! Plus interest paid so far.

While, in theory, this is correct, there are a few other factors to consider.

An individual can not muster enough prowess over the entity that extended the loan facility. A billionaire can.
Suppose the shares tank by 60% suddenly (which has happened with shares recently in the case of Adani); the situation becomes complex. SBI - Adani's case was not much in the media about what really ensued regarding securing SBI's assets.

Pledging more shares in case the price plummets further reduces the value and price of shares.
When the shares tumble so much, the entity might not be able to recover even if it sells the shares. Also, the loan-extending entity must follow many safeguards and SOPs to sell off the shares. It can't be done at a whim.

While SBI mentioned that the Adani asset was even secured by cash flows from other Adani sources, not much is known publicly.

If there is really an issue that makes it impossible for the money to come back to the bank, the bank may just write off the loan, given political pressure. The government might also infuse public money to handle such a crisis or make arrangements to balance the situation. Some pledged Adani shares tanked even to the tune of 83%.

A billionaire could also just relocate to another country, a haven for such people, in case he cannot handle the situation and avoid paying back altogether.

This is a nice article on how billionaires have access to cheap yet mammoth sized liquidity through pledging shares.
https://www.forbes.com/sites/johnhya...g-their-stock/

Even if a billionaire is straight in paying back timely, the cheap access to liquidity and the potential gain in share prices/value are substantially high compared to an average Joe. The payback period of the loan runs into decades, by that time share prices generally sky rocket for him which allows him the comfort to borrow even more at even cheaper rates. If the stocks plummet too much and the lending entity sells them, the billionaire has no real downside. It is still equal to or better than selling the shares in the first place and spending money.

A billionaire could also cut his spending by a large margin to momentarily put his spending on hold and take care of the pledged shares, the payback of principal, and the interest. He could sell some assets or rent a yacht instead of buying new ones for a temporary period.

An average Joe, on the other hand, who pledged his shares, gold, or real estate might go broke in such a case and never recover from the loss as he has no real spending cutback options to take care of the principal and interest.

There are grey areas when it comes to billionaires while for an individual, it is pretty straight forward, payback in time or the lending entity will do what is required.

My response is not to argue or find faults in the theory; it is just observations.

On a different note, officegoers who emigrated to a foreign country on a good salary take a lot of credit in that country because their salaries give them a good credit score. They can borrow a lot of cheap money. After several years of everything going well, they decide to suddenly go back to their own country, cashing out the limits of their loan facility/credit cards, never to come back to that foreign country and just escape paying back. A lot of Southeast Asian people do that, including our own. It's not that people in other countries don't do it.

Central banks have safeguards in place for such incidents and individuals. Still, humans, being humans, are almost always able to find loopholes, take risks, risk their reputations/careers/creditworthiness, and even face legal proceedings. The temptation of getting cheap/free money is too great to stop them from caving in.

[SmartCat]

Originally Posted by Fuldagap

While in theory this is correct, there are a few other factors to consider. My response is not to argue or find faults in the theory, it is just observations.

Yes, most people who closely follow the stock markets already know this. But there is really no difference between a multi-billionaire and an individual. Both carry the exact same risks when they indulge in these shenanigans.

Absolute number of shares is immaterial. We should talk in percentage terms. It all depends on what % of shares the individual or a billionaire pledges. Higher the percentage, higher the risks. See screenshots in post #1686 (which mentions the percentages)

This is a nice article on how billionaires have access to cheap yet mammoth sized liquidity through pledging shares.

My screenshot too is taken from the same article

Don't miss the part about how pledging of shares by owner-billionaires is frowned upon or outright banned by the Board of Directors. And finally, this billionaire pledging stuff is not as prevalent as these podcasters/youtubers/articles have you believe. Because from the same article:

the aggregate value of these pledged shares is $239 billion

$239 billion value is a tiny amount relatively speaking, and most of it comes from Musk/Ellision etc (Top 5). As pointed out in post #1686, the core purpose of the pledges is to invest in ventures/real estate (appreciating assets). It doesn't mean entire $239 billion has been deployed either. Think of it more like an overdraft facility.

[kiku007]

Originally Posted by SmartCat

There are no billionaire specific tax avoidance schemes. It is open to all. It is just that they get the right advice. Also, for smaller wealth, it is not worth doing all the circus most of the time.

Agreed. The bottom line is that most people/businesses just want to pay the lowest taxes as possible.

Portugal for example is proposing something radical.

• Portugal will attempt to stem the country’s brain drain by offering young people a decade of progressive tax breaks that would see them paying nothing at all in their first year of work.
• The centre-right minority government of Luís Montenegro is ditching a proposed 15% cap on income tax for 18- to 35-year-olds and replacing it with a progressive scheme similar to one supported by the opposition Socialists after some last-minute wrangling.
• Under the scheme, which forms part of the country’s 2025 budget, young people earning up to €28,000 (£23,500) a year would have a 100% tax exemption in the first year of work, dropping to 75% from the second to the fourth year, 50% between the fifth and the seventh and 25% from the eighth to the 10th year.

Source: https://www.theguardian.com/world/20...em-brain-drain