The “Billionaires Aren’t Liquid” Argument is BS
Billionaires are more liquid than you, me, or the Pacific Ocean, so, please, stop using this asinine argument.
Whenever the topic of taxing wealth is mentioned, someone will end up saying that we can’t tax billionaires’ wealth because “they are not liquid.” The reasoning goes that since billionaires’ wealth is “in their company, not yachts,” levying a tax on their wealth would force them to sell stocks, reducing their control over their company. If you believe the anti-taxxers, this would, in the end, remove all incentives towards entrepreneurship, work, and the pursuit of happiness itself.
Obviously, the only reason we all work is that we hope to become a billionaire one day. If that’s why you wake up in the morning, I have a bridge for sale you might be interested in.
You don’t have to trust my word for it. Just look it up anywhere. Here is a quick Twitter search:
People seem to miss (whether by ignorance or bad faith) that billionaires have access to financial tools that allow them to leverage their wealth beyond common measure. While it is true that most of their fortunes are tied to stockholdings, this does not mean that they are not liquid, far from it! They are more liquid than you can imagine. They’d have no trouble paying Elizabeth Warren’s 3% wealth tax, should it come to pass.
Don’t believe me? Let me show you.
In this article, we’ll look at how billionaires can achieve liquidity without selling any share at all with Lombard credit, how these credits are even more efficient in terms of taxes, and how, in the end, they wouldn’t feel a 3% wealth tax because, when numbers reach three commas, percentages don’t matter anymore.
What are Lombard credits?
Lombard credits are bank loans that are backed by pledged assets, mostly securities or life insurance policies. Banks require that the securities pledged be “readily marketable.” In the case of most billionaires, the stocks they own fall under this category, but let’s be real: when you’re a billionaire, there isn’t much a banker wouldn’t do. Since it is backed by assets and therefore rather safe, a Lombard credit usually bears a low-interest rate.
Now, let’s say you’re Jeff Bezos. You own 11% of Amazon and other investments, which we'll ignore for this example. This 11% stake is made up of 53 million shares worth north of $166B as of writing.
You’re living the life, and you spend $1M a day, or $365M a year. How are you going to pay for this cosy lifestyle? You have two options to finance a full year:
Option 1: you can sell 116,427 shares (0.22% of your holding); or
Option 2: your can pledge some of your shares and get credit from a bank. Let’s say the bank only gives you 90 cents on the dollar. You would therefore have to pledge 129,363 shares (0.24% of your holding).
If the credit bears a 3% interest rate per annum, this will amount to $10,950,000 (or 3,492 shares at today’s value).
Now, I know what you’re thinking: “But, Nicolas, I can’t go on indebted forever. At some point, I’ll have to pay and will need to liquidate some assets.” You’re kind of right, except not really.
You see, the value of the shares you’ve pledged to the bank will increase over time (at least, this is the assumption). Assuming Amazon share price goes from $3,135 today to $3,500 in a year, the value of your pledged assets would then be $452,770,500. Enough to cover the interest, which you can choose to accrue and not pay, and even part of your next year’s lavish lifestyle.
To put it in perspective, this is an 11.6% appreciation in a year. Historically, Amazon share price has grown by an average of 72.6% per year since its IPO.
By using Lombard credit, you never actually chip away at your wealth. You merely pledge it to get credit from a bank or, more realistically, many banks. And you know the best thing about this? It’s better for your taxes!
Living on credit lowers your taxes
If you had sold 116,427 shares to pay for your yearly expenses, you’d have paid a capital gain tax on those. Since you’ve borrowed money against your shares, you haven’t sold anything. Therefore, no capital gain tax!
Even better, you are indebted, and you owe interest on this debt. The debt itself lowers your taxable wealth while the interest is deductible from your income. By borrowing money, you not only avoid some taxes, but you also lower those you can’t avoid!
Now, this is all fun and lighthearted, but what about the real stuff, you might ask? What about a 3% wealth tax above $1B. I understand your concern, Jeff. However, they are unfounded once again.
Billionaires won’t even feel a 3% wealth tax
Now that we’ve seen that billionaires are, indeed, quite liquid and how this liquidity even lowers their taxes, let’s talk about the wealth tax. Elizabeth Warren’s plan provides a 3% annual tax on all wealth beyond $1B (it also includes lower tiers, but let’s focus on this one in our example).
With your current wealth, my dear Jeff, you’d be liable to pay $5B a year. That’s where the “they are not liquid” crowd jumps out of their shrubberies and start rehashing their arguments.
They will say that if a billionaire has to sell 3% of their stock holdings each year to cover the wealth tax, they’ll lose control over their company. The primal fear isn’t that they would become broke one day (even though this will never happen). It’s that such fiscal policy would remove all incentives towards entrepreneurship and innovation.
To quote the tweets above, they fear that a wealth tax would “dismantle the strongest economy in the world.” I’d argue that a country in which a third of the population (100 million people) can’t afford shelter, food, or healthcare isn’t a strong economy at all, a strong stock market at best, but that’s not the point of the article.
How would a 3% wealth tax really affect people like Jeff Bezos or, in our example, you? An enlightening Forbes article has done the job for us and modelled what the wealth of a few billionaires would have looked like had Warren’s tax been enacted ten years ago and assuming they had paid it out by selling shares:
Jeff’s wealth drops from over $120B to a “measly” $100B. While a nearly 20% drop in wealth is non-negligible, it makes no difference when you’re up in the hundreds of billions. What our brains fail to understand is the sheer scale of these people’s wealth. And don’t believe that billionaires aren’t playing on our inability to measure their wealth.
By focusing the debate on the liquidity of their assets (we’ve seen that this is irrelevant) and on relative instead of absolute values, billionaires hide the reality of their situation.
Let’s compare two scenarios to illustrate.
Jeff Bezos could lose 99% of his wealth and still have $1.7B, more than anyone could spend in a lifetime. The 30-year treasury pays 2.5%. If you invested these $1.7B, you’d get $41.5M per year before tax, every year, for 30 years. That’s more than $100,000 a day.
Jeff would still make $100,000 a day after losing 99% of his wealth. He’d still make $1,000 a day after losing 99,99%.
If you are lucky enough to have accumulated $1M in savings at some point, losing 99% of it will leave you with $10,000. Losing 50% of it would change your life.
After three commas, percentages become irrelevant.