Newsom Targets 'Buy, Borrow, Die' Tax Strategy Amidst Debate on Wealth Inequality

California Governor Gavin Newsom has ignited a debate over wealth inequality by targeting a tax strategy colloquially known as "buy, borrow, die." Newsom is urging lawmakers to eliminate what he terms a loophole that benefits the ultra-wealthy, allowing them to avoid significant tax liabilities.

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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.

The strategy involves a three-pronged approach: first, wealthy investors purchase assets expected to appreciate, such as stocks or real estate. Second, they leverage these assets as collateral to secure loans, funding their lifestyles without selling the assets and thus avoiding capital gains taxes. Finally, upon the owner's death, these assets are transferred to heirs with a "stepped-up tax basis." This means heirs inherit the assets at their market value at the time of death, effectively wiping out any capital gains tax on the appreciation that occurred during the owner's lifetime.

This tax avoidance method has reportedly been utilized by high-profile figures like Tesla CEO Elon Musk and cable billionaire John Malone. Newsom, in a recent Substack post, characterized it as a "tax-free lifestyle loan" accessible only to the wealthiest Americans, and he implored Congress to close this perceived loophole.

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The 'billionaires exploit buy-borrow-die more than anyone else' narrative isn't well supported.

However, the extent of the strategy's use is contested. An analysis by the nonpartisan Tax Policy Center indicates that the "buy, borrow, die" approach is not as widely employed by the nation's richest families as often suggested. According to their research, based on borrowing patterns of the top 1% of U.S. households over two decades, this strategy accounts for only 1% to 2% of their economic income. Adam Michel of the Cato Institute commented that the narrative of billionaires extensively exploiting this method is "not well supported," suggesting the problem is more limited than often portrayed.

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The super-rich generally consume less than their taxable income, so they don't need to borrow against gains.