Dylan Matthews and a few others have been saying this on Twitter, so I thought I should answer this question. Maybe we all understand words differently, but my answer is a simple “no”. At least not without a base mount that is updated on death, which I can change (like many others). Even that is not a direct benefit yours.
First, I define zero interest as when you can increase your spending today by “k,” and later return only uk, rather than returning a large sum of k adjusted by the appropriate exponential relationship.
Second, let’s say you’re a wealthy person with a startup business now worth $100 million, under the current tax regime. But you’re illegal, and you don’t want to sell for a number of reasons, one of which is to avoid immediate capital gains tax liability.
So you borrow – let’s say $50 million – backed by stock. Of course that helps you eat more today.
But is it a zero interest loan? No, you have to pay the actual borrowing amount to raise that $50 million. I don’t see where the zero interest loan is supposed to come from. (Yes, real interest rates may have been zero to begin with, but that is a separate issue from how the rate of return on capital is constructed.)
It is true that you are delaying payment the government. But the rich person, to eat more now, still balances impatience with the real level of interest in the common fashion. And let’s say you don’t have a lot of cash at all. You still have the option to borrow (if you can), eat more today, and not pay the government anything extra! That’s built into the nature of borrowing, and how it interacts with our current tax system, which is often tax-inefficient. Like it or not, don’t blame yourself for the ownership of big assets. The main example people are citing is not much different than this example of a poor person who borrows and eats a lot, except we give the subject an extra $100 million in collateral, so this somehow sounds very offensive.
If someone wants to limit or tax that loan, I would consider that proposal, as long as I avoid the worst policies. But what’s happening in this situation doesn’t seem too bad to me – “I borrowed more to be more liquid” is an old story, appearing in many different settings. So I will not personally limit or tax that loan.
Another important factor is that the rate of interest is not indexed to inflation. So if you just hold an asset and mortgage it for twenty years, the tax system treats your twenty years of capital gains as if they were real gains, and charges you accordingly. Wow! That in my opinion is bad, and also wrong. It also limits the extent to which wealthy people, or very poor people, will pursue this strategy.
Also, the government can largely avoid these problems by shifting the focus of taxation from income to consumption, in a progressive manner if necessary. And that is not an opinion, it is actually what many rich countries in the world have done.
If you feel that this part of the debate may be semantic, perhaps that is correct. But that judgment also means that the idea of a “zero interest loan” is not some kind of argument for imposing an unrealized capital gains tax. However, it is an argument for shifting the tax system to a higher consumption tax.
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