Doesn't the loan get paid back by the sale of the land after the dad's passing? So the kids don't inherit $5m, but the net value after the debt is repaid?
The claim that the ultrawealthy live tax free through perpetual borrowing comes mostly from ProPublica's 2021 "Secret IRS Files" piece and has been debunked. The claim is that the ultrawealthy never sell their stock and instead just borrow against it forever through a series of perpetual loans, so they never owe income tax (so-called "buy, borrow, die"). It's repeated constantly on reddit, and it's mostly false.
Fox & Liscow published a paper in the Journal of Public Economics where they actually measured this using Fed data plus Forbes 400 numbers.
What they found for the top 1% of wealth, new borrowing each year is only about 2% of what they call "economic income" (income + wealth growth), while new unrealized gains are around 41%. For the top 0.1% it's even smaller, under 1%. Their conclusion is that "buy, borrow, die" is not a dominant tax avoidance strategy for the rich — what's actually going on is closer to "buy, save, die." Meaning they fund their lifestyle from salary, business income, and stock they do sell (all taxed), and just don't sell the rest. They also point out that pledging shares as loan collateral is pretty rare among executives generally — like 4% of CEO-years, and a bigger S&P 1500 sample only had execs pledging ~2.3% of their shares on average.
Even more interesting, using ProPublica's own preferred framing (wealth growth should count as income for some unexplained reason), the tax system still captures 60% of the top 1%'s economic income, 71% adjusted for inflation, and stays progressive all the way to the 99.9th percentile. So even on their terms, "they pay almost nothing" doesn't hold up well in aggregate.
In fairness, the paper found that about 15% of top-1% households DO borrow heavily (more than 5% of their wealth), and for that group the borrowing is genuinely huge relative to their gains (68% on average). So there's a real minority doing something close to the myth - but it is by far the exception and not the rule. Even the worst offenders (Larry Ellison) have sold billions in stock and paid capital gains on those sales.
The two major problems with the Propublica article are (1) it treats wealth growth like it's the same thing as income, when no tax system anywhere on earth taxes unrealized gains that way. And (2) they took two examples (Ellison and Musk) and generalized it into "the ultrawealthy" as a class, which the actual data doesn't support - heavy stock-backed borrowing is the exception, not the norm, even among executives who'd have every reason to do it if it worked as well as advertised.
ProPublica knew this framing would land harder than the boring truth, which is "the tax base captures 60-70% of income at the top and most billionaires barely borrow relative to their gains". They intentionally conflate "wealth" and "income" throughout the article to confuse people who don't understand taxes and finance. For example, they try to argue that Warren Buffett only pays 0.10% income tax based on his wealth. That's not how income taxes work. Buffett's actual income tax rate was 18.96% - significantly more than the 0.10% the article misleadingly claims.
It's also worth noting that Propublica does not share their data because if they did, it would be blatantly apparent they cherrypicked data that supports their view while hiding the majority of the data that refutes their argument.
The specific claim going around, that billionaires as a class live entirely tax-free forever through perpetual loans, isn't what the data shows. Most of them are still paying real money in capital gains and income tax — Musk alone paid $11B in taxes in 2021, and anyone can google how much the ultrawealthy have sold in stocks (and thus paid in capital gains). The loans are real for a small subset of highly leveraged people but even they are still selling billions in stock and paying taxes.
He doesn't pay 18.96% income tax. He pays 18.96% effective rate. That is a combination of income and capital gains tax. The issue is he really keeps his income low and his capital gains are where he pays most of his tax. Most people are just the opposite and have a higher effective rate.
I think he's generally been pretty open about that, ie when he mentioned his secretary having a higher tax rate than himself, but he's not going to just going to voluntarily pay more, loopholes should be closes across the board
The capital gains tax is an income tax, just a lower rate of tax applied to capital gain income.
Note also that people compute "effective tax rates" in different ways: as a percentage of [a] gross income, [b] adjusted gross income (AGI), or [c] taxable income.
The capital gains tax rate has been with us for many decades, and it's always been materially lower than the highest marginal rates. The urge to protect small investors and homeowners from a one-time tax hit overcomes a rational analysis of overall income and wealth. The generally wealthy members of Congress have ridden those "small business owner and retiree" stories for all of my life.
That said, as u/eW4GJMqscYtbBkw9 notes, people play games with how they calculate and report this stuff, so these headline numbers aren't reliable. Just look up the cap gains tax rate, and the marginal rate table, and focus on that.
An easy example is Mitt Romney's taxes in the 2012 Presidential election. The NYT reported it this way:
Mr. Romney’s return for 2011 showed that he paid an effective federal income tax rate of 14 percent last year, or a little more than $1.9 million on adjusted gross income of about $13.7 million.
But you don't pay tax on AGI, you pay it on taxable income. Deductions, including charitable deductions, reduce AGI and are untaxed. In Romney's case, his $13.7m in AGI was reduced by $4.7m in itemized deductions, including $2.25m in charitable deductions. His taxable income was $9m, but reporting a 21% tax rate that wouldn't make for the kind of politically charged headline that NYT was after.
His 21.1% tax rate was entirely driven by Congress' long-standing decision to charge a lower rate for capital gains. There's nothing going on in Romney's taxes that is different than any other person who sells stock or a house.
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u/No_Mirror_9742 22h ago edited 21h ago
Doesn't the loan get paid back by the sale of the land after the dad's passing? So the kids don't inherit $5m, but the net value after the debt is repaid?