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Acknowledging the growing number of Americans fed up with yawning income inequality, billionaire investor Bill Ackman has an idea to get the ultrawealthy to pay their fair share.\u00a0<\/p>\n
The founder of Pershing Square hedge fund suggested on Thursday a tailored approach to ensure people like Elon Musk and Jeff Bezos shoulder more of the burden, arguing against the blunt instrument of a proposed federal tax levied on unrealized capital gains<\/a>.<\/p>\n In order to avoid endangering America\u2019s entrepreneurial spirit, Ackman argued, the wealthy should be taxed on the basis of how much they borrow against stock in their own companies, closing arguably the most controversial loophole in the tax code.<\/p>\n \u201cIf you have $10 billion of stock in a company you founded,\u201d he wrote on social media, \u201cloans secured by the stock should be taxable as if you sold a like amount of stock.\u201d\u00a0<\/p>\n The way to fix this problem is to make borrowing an amount in excess of your basis in a stock taxable. In other words, if you have $10 billion of stock in a company you founded with zero basis, loans secured by the stock should be taxable as if you sold a like amount of stock.\u2026 https:\/\/t.co\/uOcfYYfAAP<\/a><\/p>\n \u2014 Bill Ackman (@BillAckman) August 21, 2024<\/a><\/p><\/blockquote>\n Ackman\u2019s suggestion comes after Democratic presidential nominee Kamala Harris lent her support to a Biden administration plan to tax unrealized capital gains for those households whose net worth is a\u00a0minimum of $100 million<\/a>. The tax has met with fierce opposition from the likes of venture capitalists including\u00a0Marc Andreessen<\/a>, who believe it will smother the incentive for the innovation founders of tech startups provide.\u00a0<\/p>\n Under Ackman\u2019s proposal, those risking their fortune would only be taxed if they encumbered their businesses with personal debt above and beyond what they put into it.\u00a0<\/p>\n Let\u2019s apply that to a practical example. Elon Musk is currently locked in a\u00a0legal battle<\/a>\u00a0with investors to retain his\u00a02018 pay package<\/a>, which grants him the right to purchase nearly 304 million shares of Tesla<\/a> at $23.34 each, a steep 89% discount to the current price.\u00a0<\/p>\n Were he to win in\u00a0Delaware court<\/a>, he could, in theory, exercise the options by paying $7.1 billion, turn around and immediately sell them for $64 billion (minus whatever the resulting drop in price would be with such a large sale). The difference he would then pocket, roughly $57 billion, would be taxable as a capital gain.<\/p>\n But what if he just wanted to free up a little cash to buy a\u00a0megayacht<\/a>\u00a0like his rival, Amazon<\/a> founder Jeff Bezos? Or a\u00a0small island<\/a>\u00a0like his friend Larry Ellison? Under Ackman\u2019s plan, he would be free to borrow against his shares up to the amount he invested to acquire them under the plan, but anything on top of that would be taxable.\u00a0<\/p>\n If he then ever paid off that loan\u2014unencumbering the underlying shares in the process\u2014that money would be off-limits for the government going forward. That way, were Musk to actually liquidate that stock in the future, Uncle Sam could not tax it twice, first as an unrealized and then once gain as a realized capital gain.<\/p>\n Much like the subprime crisis triggered banker-bashing, the outbreak of COVID has made billionaire-bashing fashionable and, crucially, politically very popular. Even JP Morgan CEO Jamie Dimon has dabbled<\/a>\u00a0in it.\u00a0<\/p>\n During the pandemic, governments around the world unleashed a tsunami of fiscal and monetary stimulus. Much of that translated into inflation in the price of assets. In 2020, the value of Tesla stock alone soared tenfold, catapulting Elon Musk\u2019s already sizeable wealth into the stratosphere.\u00a0<\/p>\n \u201cThe pandemic\u2014full of sorrow and disruption for most of humanity\u2014has been one of the best times in recorded history for the billionaire class,\u201d OxFam\u00a0concluded<\/a>\u00a0afterwards.\u00a0<\/p>\n In June 2021, a ProPublica investigation<\/a> revealed some of the world\u2019s richest Americans often paid little to no tax. Instead they pay for everything by tapping loans backed by their equity much like a homeowner would extract value from their house, by borrowing against its rising value.<\/p>\n Musk is a\u00a0perfect example<\/a>\u00a0of someone who profited from unrealized capital gains. He hasn\u2019t earned a salary in years: his entire pay package requires him to meet milestone targets in order to unlock tranches of stock options. No salary means no income tax. (He did pay a windfall tax<\/a> in late 2021, which he claimed was the most in U.S. history after converting some of his stock options).<\/p>\n The company\u2019s\u00a0annual proxy statement<\/a>\u00a0filed in April indicated he has borrowed against 238.4 million shares as of March 31\u00a0worth a collective $50 billion at the current price.\u00a0And that\u2019s just Tesla\u2014who knows if he has done the same with his privately-owned companies like SpaceX<\/a>.<\/p>\n Weeks after ProPublica\u2019s revelations sent \u201cshockwaves through Washington<\/a>\u201d, Senate Finance Committee chair Ron Wyden, a Democrat, proposed in October 2021 the\u00a0first federal tax on unrealized capital gains<\/a>. But the idea was still considered too radical at the time. It was also heavily opposed by Musk<\/a>, who warned it would interfere with his plans to expand civilisation to Mars<\/a>.<\/p>\n In April, Biden adopted the \u201csea change<\/a>\u201d approach, and November\u2019s federal elections will likely determine its fate. If the idea lacks enough support, there\u2019s always Ackman\u2019s proposal.<\/p>\n Musk couldn\u2019t be reached by\u00a0Fortune<\/em>\u00a0for comment.<\/p>\n<\/div>\n\n
How would Ackman\u2019s idea work?<\/h2>\n
Pandemic-era asset price inflation a boon for the ultra-wealthy<\/h2>\n
Musk has borrowed against $50 billion worth of Tesla stock<\/h2>\n