Wealth‑tax proposals that target unrealized capital gains have resurfaced in several Western economies. The idea is to levy a tax on the increase in value of assets that have not been sold, effectively taxing “paper” wealth. A related, more radical suggestion—advocated in a recent Forbes article by Eric Sherman—calls for taxing the loans that wealthy individuals take against those assets.
Wealth taxes and unrealized capital‑gains taxes
- Concept: Tax the appreciation of assets (stocks, real estate, crypto) even if the owner has not realized the gain by selling.
- Recent push: Politicians in the United States, Canada, Australia, South Africa and Germany have placed such measures on their legislative agendas.
- Historical performance: Wealth‑tax regimes have failed or been repealed in roughly a dozen European countries, yet some lawmakers (e.g., U.S. Senator Elizabeth Warren) continue to champion them, arguing that citizens cannot “escape” taxation.
The borrowing‑tax proposal
Sherman’s article argues that instead of taxing unrealized gains, governments should tax the borrowing that wealthy people do against their holdings. The rationale is:
- Collateralised loans: High‑net‑worth individuals frequently obtain large loans using their portfolios as security (e.g., Elon Musk borrowing against Tesla shares to fund the Twitter acquisition).
- Tax avoidance: By borrowing, they can access cash without triggering capital‑gain events, thereby sidestepping ordinary income tax rates (the U.S. top marginal rate is 37 %).
- Proposed mechanism: Impose a tax on the amount borrowed, possibly providing a credit for interest paid, effectively treating the loan as a taxable distribution.
Why the borrowing‑tax idea is problematic
- Complexity: Implementing a tax on loans would require detailed tracking of every credit line and its purpose, creating a heavy administrative burden.
- Economic distortion: Ordinary borrowers (mortgages, consumer credit) would remain untaxed, while only the ultra‑wealthy would face a new levy, raising fairness concerns.
- Potential for capital flight: If borrowing becomes costly, high‑net‑worth individuals may relocate to jurisdictions that preserve the ability to leverage assets without additional tax.
- Policy feasibility: The proposal has not been adopted by any government; it remains a theoretical suggestion without legislative backing.
Political context
- Data leak: ProPublica published a dataset (2013‑2018) showing incomes and effective tax rates of the 400 wealthiest Americans, highlighting disparities between reported earnings and taxes paid.
- International trends: While some countries contemplate new wealth‑tax measures, others are competing for capital by offering zero‑tax regimes or long‑term foreign‑income exemptions (e.g., 0 % tax for 15 years, or perpetual exemption for foreign earnings).
Practical considerations for high‑net‑worth individuals
- Assess jurisdictional tax rates: Compare the effective tax burden in your current country (often 30‑50 % for top earners) with jurisdictions that currently levy 0 % on foreign‑source income.
- Leverage existing incentives: Some nations provide foreign‑income exemptions, reduced withholding, or citizenship‑by‑investment programs that can lower overall tax exposure.
- Monitor legislative developments: Stay informed about proposals for wealth taxes, unrealized‑gain taxes, and any emerging borrowing‑tax concepts, especially in the U.S., Canada, Australia, South Africa and Germany.
- Diversify financing structures: While borrowing against assets remains a common wealth‑preservation tool, consider alternative financing (e.g., offshore credit facilities) that may be less vulnerable to future tax changes.
- Plan for long‑term stability: Prioritise jurisdictions with clear, stable tax policies rather than those that may introduce new levies as political sentiment shifts.
In summary, proposals to tax wealth—whether through unrealized capital gains or by targeting loans against assets—are gaining attention but face significant practical and political hurdles. For affluent entrepreneurs and investors, the most reliable strategy remains to position themselves in tax‑friendly environments while staying vigilant about evolving policy debates.
