Gavin Newsom wants to ban the “buy, borrow, die” tax strategy. Here’s what it is.

The debate over wealth inequality has been reignited by a tax strategy known as “buy, borrow, die,” which has caught the attention of California Gov. Gavin Newsom. He recently called on lawmakers to eliminate this loophole for the ultra-rich, sparking a discussion on how the wealthy use this strategy to lower their taxes.

The “buy, borrow, die” strategy involves three steps. First, wealthy investors purchase appreciating assets like stocks, real estate, or art. Then, they use these assets as collateral to borrow money for personal expenses, avoiding income taxes by not selling the assets. Finally, when the owner passes away, the assets are passed on to heirs with a “stepped-up tax basis,” eliminating capital gains taxes on the increase in value.

While this strategy has been utilized by individuals like Elon Musk and John Malone, a recent analysis from the Tax Policy Center found that it is not widely used by the nation’s richest families. According to Adam Michel from the Cato Institute, the super-rich typically consume less than their taxable income, reducing the need to borrow against gains.

Newsom’s call to close this loophole may face challenges, as he cannot eliminate it as governor, and Congress may be reluctant to change the federal tax code. One proposed solution is to repeal the step-up at death, which has been suggested by lawmakers like Sens. Chris Van Hollen, Bernie Sanders, and Elizabeth Warren.

The wealthy often build their fortunes by holding onto assets and allowing unrealized gains to accumulate over time without triggering taxes. By deferring taxes until assets are sold, the rich can continue growing their wealth. However, lawmakers are considering new taxes to target unrealized gains, such as a proposed tax on billionaires in California and new income taxes in other states.

In his Substack post, Newsom suggested a federal tax on the nation’s richest citizens as a more effective approach to reducing wealth inequality. Lawmakers like Sen. Elizabeth Warren have introduced bills for wealth taxes, which could generate significant revenue. However, implementing a tax on unrealized gains may face legal challenges, and some experts suggest raising tax rates as a simpler alternative.

In conclusion, the debate over wealth inequality and tax strategies like “buy, borrow, die” continues to be a hot topic in the political landscape. While efforts to close loopholes and impose new taxes on the ultra-rich are being considered, the path forward remains uncertain.