A tax strategy known informally as “buy, borrow, die” is the latest flashpoint in the debate over wealth inequality after California Gov. Gavin Newsom last week called on lawmakers to eliminate what he describes as a loophole for the ultra-rich.
The strategy gets its name from what boils down to a three-step approach to lowering taxes. First, wealthy investors buy appreciating assets like stocks, real estate or art. Next, they use the assets as collateral to borrow money to fund their lifestyles, thereby avoiding any sales that would trigger income taxes. Finally, when the owner dies, those assets are passed on to heirs on a “stepped-up tax basis.”
Because loan proceeds aren’t considered taxable income, a borrower can use the debt without triggering capital gains taxes.
Death provides another tax benefit — known as “step-up in tax basis” — because heirs generally inherit those assets at their market value at the time of the owner’s death. That wipes out capital gains taxes on any increase in the value of the assets over the owner’s lifetime.
The loophole has been employed by Tesla CEO Elon Musk, who became the world’s first trillionaire last month with the initial stock sale of SpaceX, and cable billionaire John Malone, according to the Wall Street Journal. In a June 26 post on Substack, Newsom described the strategy as a “tax-free lifestyle loan” only available to the richest Americans and urged Congress to close the loophole.
“The wealthy have their own private tax code full of loopholes and exemptions that most people have never heard of, and they’re counting on politicians in Washington to maintain it and keep quiet,” Newsom wrote in a June 26 post on Substack.
However, a recent analysis from the nonpartisan Tax Policy Center found the strategy isn’t widely used by the nation’s richest families. Based on the annual borrowing of the top 1% of U.S. households for net worth over two decades, the strategy accounted for 1% to 2% of their economic income.
“The ‘billionaires exploit buy-borrow-die more than anyone else’ narrative isn’t well supported,” Adam Michel, director of tax policy studies at the nonpartisan Cato Institute, told CBS News. “The super-rich generally consume less than their taxable income, so they don’t need to borrow against gains.”
As a result, this approach to evading taxes represents a “limited problem,” he added.
How the rich build their fortunes
The fact that the “buy, borrow, die” strategy isn’t widely used shows that the rich aren’t extensively borrowing against their wealth, said Edward Fox, a University of Michigan law professor, and Zachary Liscow, a Yale law professor, wrote in a June 15 Tax Policy Center analysis.
Instead, the ultra-rich often hold onto their assets, allowing unrealized gains on stocks, bonds and other investments to compound in value for years without triggering taxes. Under the U.S. tax system, capital gains aren’t taxed until an asset is sold. By holding onto their investments, investors can continue building their wealth while deferring taxes, helping their fortunes grow over time.
“So the dominant tax strategy of the super-rich isn’t some exotic loan-against-stock scheme,” Fox and Liscow wrote. “Instead, they save a large share of their liquid, taxable income while unrealized gains on their assets compound, untaxed.”
The rich are certainly getting richer. As of September, the nation’s 905 billionaires were worth a combined $7.8 trillion, an increase of more than 25% from a year earlier, according to progressive think tank Institute for Policy Studies.
Because of the growing wealth of the nation’s richest people, some lawmakers are calling for new taxes to target unrealized gains. In California, for instance, a proposed tax on billionaires would apply a 5% tax to the value of their stocks and other holdings; in other words, the tax would take a bite out of all their assets, including those they hold but haven’t sold.
Other states are subjecting their wealthiest residents to new income taxes, rather than taxing assets. For instance, a 2023 Massachusetts law applies a 4% tax to people earning over $1 million a year, while Washington state implemented a new tax on income over that amount earlier this year.
Calling for a federal billionaire’s tax
Newsom wrote that a state-level billionaire’s tax could drive California’s wealthiest residents to flee to other states. Instead, he said, a more effective approach would be to add a federal tax on the nation’s richest citizens.
“The system America’s founders built was designed to prevent the concentration of power in a few hands, but we have allowed that concentration to happen anyway, slowly, in plain sight, over decades,” he wrote. “It is time for a national billionaires’ tax.”
Lawmakers have already floated such a tax, although any bills would face obstacles in Congress. In March, Sen. Elizabeth Warren, a Democrat from Massachusetts, introduced a bill that would impose an annual 2% tax on the net worth of households and trusts over $50 million, and an additional 1% tax on billionaires.
To deter the ultra-rich from leaving the U.S. to avoid the new tax, the bill proposes imposing a 40% “exit tax” on anyone worth more than $50 million who renounces their American citizenship.
Warren’s wealth tax could raise $6.2 trillion over the next decade, according to an estimate from University of California, Berkeley, economists Emmanuel Saez and Gabriel Zucman.
But adding a tax on unrealized gains is likely to face legal challenges, with opponents arguing that it violates the Constitution, the Tax Policy Center has said. A simpler approach would be to raise tax rates, Fox and Liscow wrote.
“Pushing up ordinary and capital-gains rates on those top earners would collect serious money without requiring Congress to design a constitutionally contested wealth tax or a mark-to-market regime for illiquid assets,” they said.
Alain Sherter
