I've been loosely keeping up with some of the news about Elon Musk selling TSLA shares to pay for an upcoming tax bill (for exercising options from 2012). There is a lot of discussion surrounding this news, much of which is political (regarding whether Elon Musk and other billionaires are taxed highly/fairly enough).
Ignoring the topic of whether or not there should be taxes on unrealized gains (e.g. unsold shares of TSLA), some argue that even if Elon Musk is paying a large amount of taxes this year on his capital gains, there is a loophole that the he and other ultra-rich people exploit to pay as little as possible.
This "loophole" seems to be generally described as:
- Rather than Elon Musk selling shares (and thus paying taxes) to pay for his "life" (like buying houses, vehicles, food, luxuries, etc.), he takes out loans using his shares of TSLA as collateral.
- Because taxes aren't paid on loans taken out, he is paying no taxes on his income (which is coming in the form of loans).
At first, I thought it made sense. But when I thought about it a little more, I saw a few errors:
- Even if Elon Musk takes out loans, he is paying interest on them.
- The loans will have to be repaid sooner or later, and to do so, he will have to sell shares (and thus pay the taxes).
- So overall, Elon Musk gets to avoid paying taxes sooner, at the expense of having to pay more money later (due to the taxes on his capital gains + the interest from his loans). So overall, Elon Musk isn't really avoiding paying taxes.
I don't have a strong understanding of economics, finances, or the tax code, so there might be mistakes in my thinking. However, if my understanding is correct, is it fair to say that billionaires like Elon Musk can't really avoid taxes as is claimed by many? Or is there some other "loophole" that wealthy people use to pay less taxes?