Closing Tax Loopholes: A Policy Proposal to Ensure the Ultra-Wealthy Pay Their Fair Share
Executive Summary
The ultra-wealthy have access to sophisticated tax avoidance strategies that allow them to accumulate and pass down wealth across generations while paying little to no income, capital gains, or estate taxes. These strategies—including "buy, borrow, die" schemes, grantor retained annuity trusts (GRATs), stepped-up basis exploitation, and dynasty trusts—create a two-tiered tax system where ordinary workers pay their full tax obligations while billionaires pay what they choose, when they choose, or often nothing at all.
This proposal closes these major loopholes through legislative reforms that would:
Tax loan proceeds against appreciated assets as constructive income
Restrict and reform abusive trust structures used for tax avoidance
Eliminate the stepped-up basis loophole for capital gains at death
Increase transparency and enforcement for high-net-worth individuals
Generate substantial revenue to fund public services and infrastructure
These reforms restore tax fairness, strengthen the middle class, and ensure the ultra-wealthy contribute their equitable share to the society and infrastructure that enabled their wealth accumulation.
The Problem: How the Ultra-Wealthy Avoid Taxes
The "Buy, Borrow, Die" Strategy
The "buy, borrow, die" strategy is a clear-as-day tax dodge that allows billionaires to consume wealth without triggering income or capital gains taxes[1]. Here's how it works:
Step 1: Buy. An ultra-wealthy individual purchases appreciating assets—stocks in their tech company, real estate, or other investments. These assets grow in value over time.
Step 2: Borrow. Rather than selling the asset (which would trigger capital gains taxes), the individual borrows money using their appreciated assets as collateral. Under current law, loan proceeds are not taxable because they are technically "temporary transfers of cash that will be repaid," not income[1].
Step 3: Spend. The billionaire uses the borrowed proceeds to fund their lifestyle, make new investments, or transfer wealth to heirs—all while avoiding taxes entirely.
Step 4: Die. When the original asset owner dies, the assets pass to heirs with a "stepped-up basis," meaning heirs inherit the assets at their current market value, erasing all accumulated gains from taxation[1].
The Result: Wealth appreciation that would cost an ordinary American hundreds of thousands or millions in taxes disappears tax-free. A billionaire can access billions in wealth over their lifetime without triggering a single capital gains tax.
Current tax law creates approximately a 12-percentage-point tax rate advantage for borrowing compared to selling, making this strategy irresistible for the ultra-wealthy[1].
Abusive Trust Structures
Ultra-wealthy individuals exploit sophisticated trust mechanisms to dodge income, gift, and estate taxes:
Grantor Retained Annuity Trusts (GRATs). A billionaire transfers appreciating assets (like rapidly growing tech stock) into a GRAT, receives an annuity payment, and then passes the remainder to heirs tax-free[2]. If the asset appreciates faster than the IRS assumed, the excess appreciation avoids taxation entirely—a "heads I win, tails you lose" tax dodge[2].
Dynasty Trusts. These trusts are explicitly designed to protect wealth across multiple generations while bypassing estate taxes. Wealthy families have moved trillions into dynasty trusts to avoid taxation indefinitely[3].
Valuation Discounting. Families use artificial valuation discounts to transfer family businesses or real estate partnerships at artificially reduced values, minimizing gift and estate tax liability[3].
These strategies allow billionaires to sign papers and move money around while tens of millions of dollars in appreciation avoids taxation—a privilege unavailable to workers who must pay taxes on their labor and savings.
Stepped-Up Basis at Death
The stepped-up basis loophole allows capital gains to simply vanish at death. When an asset owner passes away, heirs inherit assets at their current market value (the "stepped-up basis"), erasing all accumulated gains from the tax code[4].
Example: A billionaire buys a stock for $1 million that grows to $100 million over their lifetime. Under stepped-up basis, the heir inherits it at $100 million with zero tax liability on the $99 million gain. That $99 million in wealth appreciation is never taxed—not during the original owner's life, not upon death, never[4].
This loophole costs the federal government an estimated $18–$30 billion annually by 2030[4].
Revenue Impact and Economic Justice
Closing these loopholes generates substantial revenue while improving tax fairness:
Stepped-up basis reform alone would generate $110 billion to $204 billion over a decade[4]
Buy, borrow, die restrictions would generate significant additional revenue by taxing borrowing above minimal thresholds
Trust reform would recapture billions currently escaping taxation
By 2030, stepped-up basis reform alone would raise $18–$30 billion annually[4]
These resources could fund critical needs: education, healthcare, infrastructure, climate action, and affordable housing. Importantly, this revenue comes from asking the ultra-wealthy to follow the same tax rules as everyone else—not from raising taxes on working families or small businesses.
Proposed Reforms
Reform 1: Tax Borrowing Against Appreciated Assets
Problem: Borrowing against appreciated assets allows billionaires to access unlimited wealth tax-free, while ordinary Americans who borrow against modest home equity pay taxes on income.
Solution: Treat loan proceeds above a reasonable threshold as a "deemed realization" of unrealized capital gains, subjecting them to capital gains taxation[1].
Implementation:
Annual threshold: Households may borrow up to $200,000 per year without tax consequences (de minimis threshold to minimize compliance costs)
Lifetime threshold: Households with less than $1 million total borrowing are exempt from the tax (to avoid burdening middle-class borrowers)
Taxable borrowing: Any borrowing above these thresholds against appreciated assets triggers capital gains taxation at current rates
Asset scope: Apply to "major assets" (stocks, businesses, real estate investments) rather than primary residences or personal items
Rate: Tax the deemed gain at applicable long-term capital gains rates
Rationale: This reform closes the tax arbitrage that gives billionaires a 12-percentage-point tax advantage over ordinary sellers while maintaining fairness for middle-class borrowing[1].
Reform 2: Close the GRAT Loophole
Problem: GRATs allow ultra-wealthy individuals to transfer hundreds of millions or billions in appreciation to heirs tax-free through a simple legal structure.
Solution: Implement the "Getting Rid of Abusive Trusts Act" framework to restrict GRAT abuse[2]:
Implementation:
Minimum term requirement: GRATs must have a minimum 15-year term (not the current 2-5 years that allow aggressive tax planning)
Stability requirement: Prohibit decreases in annuity payments during the GRAT term
Minimum remainder value: Require that the remainder interest in a GRAT have a minimum value for gift tax purposes, eliminating "zeroed-out" structures
Transfer taxation: Treat transfers of property between a GRAT and its deemed owner as sales or exchanges, subjecting them to income and capital gains taxation rather than allowing tax-free transfers
Rationale: These requirements impose legitimate costs on GRAT usage for pure tax avoidance while preserving legitimate estate planning tools for normal families[2].
Reform 3: Eliminate Stepped-Up Basis for Capital Gains
Problem: When ultra-wealthy individuals die, trillions in accumulated capital gains simply disappear from the tax code—a benefit unavailable to working Americans who must leave behind realized gains.
Solution: Tax unrealized capital gains at death or implement carryover basis, as proposed by the Biden Administration and supported by cross-party fiscal hawks[4].
Implementation Option A: Tax Capital Gains at Death
Unrealized gains at death are subject to capital gains taxation at current rates
Exemption: First $1 million of gains per person ($2 million per couple) are exempt
Exception for illiquid assets: Special rules for real estate, farms, and closely held businesses allow installment payments or deferral to avoid forced sales
Heir adjustment: Heirs receive a stepped-up basis on the remaining amount after taxation
Implementation Option B: Carryover Basis
Assets pass to heirs with the original owner's cost basis rather than a stepped-up basis
Exemption: First $1.6 million per person is exempt
Ordinary income treatment: Gains are taxed as ordinary income (higher rates) rather than capital gains
Documentation: The IRS provides tools to track basis through inheritance
Rationale: Eliminating stepped-up basis would raise $18–$30 billion annually by 2030 while treating wealthy heirs the same as working Americans who must report capital gains[4]. This single reform has broad support, including from Republican and independent fiscal hawks[4].
Reform 4: Restrict and Eliminate Dynasty Trusts
Problem: Dynasty trusts allow families to pass unlimited wealth across generations while completely avoiding estate taxation—a structure unavailable to ordinary families.
Solution: Implement federal limits on dynasty trust duration and generation-skipping transfer taxation:
Implementation:
Duration limits: Establish a maximum 150-year duration for all trusts (many states currently have no limits)
Generation-skipping tax: Strengthen enforcement of generation-skipping transfer (GST) taxes to prevent multi-generational tax avoidance
Valuation discounting restrictions: Limit or eliminate valuation discounts for gifting family businesses and real estate partnerships, requiring transfers at fair market value
Rationale: These restrictions align state trust law with federal estate tax policy while preventing artificial wealth preservation structures.
Reform 5: Increase IRS Enforcement for Ultra-High-Net-Worth Individuals
Problem: The ultra-wealthy face minimal audit risk and can engage in aggressive tax planning with little fear of consequences. Meanwhile, ordinary Americans face higher audit rates.
Solution: Invest in IRS capacity to audit and monitor billionaires and ultra-high-net-worth individuals:
Implementation:
Dedicated IRS unit: Establish a specialized task force to audit individuals and families with net worth above $50 million
Transparency requirements: Require annual reporting of borrowing above specified thresholds, trust assets, and beneficial ownership of complex entities
Penalties: Increase penalties for tax avoidance schemes to make them economically unviable
Funding: Allocate resources to modernize IRS systems and hire experienced tax attorneys and financial specialists to audit complex wealth structures
Rationale: Currently, the IRS lacks resources to audit high-net-worth taxpayers, creating a two-tiered system where billionaires pay what they choose. Enforcement capacity is an essential complement to closing legal loopholes.
Implementation Timeline
Year 1:
Enact Buy, Borrow, Die reform and stepped-up basis elimination
Establish IRS enforcement task force
Begin regulatory implementation
Year 2:
Enact GRAT reform and trust restrictions
Implement reporting requirements
Begin enforcement actions
Year 3+:
Full implementation of all reforms
Ongoing enforcement and refinement based on taxpayer response
Revenue Projections
Based on current economic analysis:
Stepped-Up Basis Elimination
10-year revenue: $110–$204 billion
Annual Revenue (2030): $18–$30 billion
Buy, Borrow, Die Tax
10-Year Revenue: $50–$100 billion (est.)
Annual Revenue (2030) $10–$15 billion (est.)
GRAT and Trust Reform
10-Year Revenue: $20–$40 billion (est.)
Annual Revenue: $3–$5 billion (est.)
IRS Enforcement
10-Year Revenue: $30–$50 billion (est.)
Annual Revenue: $5–$7 billion (est.)
Total
10-Year Revenue: $210–$394 billion
Annual Revenue: $36–$57 billion
Table 1: Estimated 10-year revenue from comprehensive tax loophole closure
Addressing Common Arguments
"This will hurt job creation and economic growth."
These reforms target only the ultra-wealthy's use of tax avoidance strategies, not productive business investment. A small business owner investing in their company is unaffected. A billionaire using GRATs and stepped-up basis to avoid taxation while contributing nothing is the target. Moreover, countries with higher wealth and capital gains taxation (Denmark, Sweden, Canada) maintain robust economic growth.
"This is too complicated to implement."
The mechanisms are already understood by tax professionals and have been proposed by Treasury Departments across administrations (both Republican and Democratic). The complexity argument is often a defense of the status quo that disadvantages working people.
"The ultra-wealthy will just move their assets offshore."
Current proposals include provisions for worldwide taxation and reporting. Additionally, the ultra-wealthy often cannot simply leave without abandoning their citizenship or renouncing access to U.S. markets—a cost most will not bear. International coordination (as emerging through recent OECD minimum tax agreements) makes tax avoidance increasingly difficult.
Conclusion
The ultra-wealthy enjoy a tax system that allows them to sign papers and move money around while millions in appreciation avoids taxation forever. Meanwhile, ordinary Americans pay their full tax obligations from wages, savings, and modest investments.
This is not about punishing success—it's about ensuring fairness. The ultra-wealthy should follow the same tax rules as everyone else. By closing the buy, borrow, die loophole, restricting abusive trusts, eliminating stepped-up basis, and enforcing the tax code against billionaire tax dodges, we can:
Generate $200+ billion over a decade for public investment
Restore faith in tax fairness
Fund critical priorities: education, healthcare, infrastructure, and climate action
Strengthen democracy by reducing wealth inequality
Ensure everyone pays their fair share
The ultra-wealthy built their fortunes using American workers, capital markets, and rule of law. They should support our communities at least as much as our teachers and first responders do.
References
[1] Yale Budget Lab. (2024, October). Buy-Borrow-Die: Options for reforming the tax treatment of borrowing against appreciated assets. Retrieved from https://budgetlab.yale.edu/research/buy-borrow-die-options-reforming-tax-treatment-borrowing-against-appreciated-assets
[2] U.S. Senate Finance Committee. (2024, March 19). Wyden, King introduce bill to close major tax loophole involving high-value trusts. Retrieved from https://www.finance.senate.gov/chairmans-news/wyden-king-introduce-bill-to-close-major-tax-loophole-involving-high-value-trusts
[3] Monteforte Law. (2019, December). Estate tax loopholes are closing in 2024 no matter who wins. Retrieved from https://www.montefortelaw.com/blog/estate-tax-loopholes.cfm
[4] Committee for a Responsible Federal Budget. (2021, September). Closing the stepped-up basis loophole. Retrieved from https://www.crfb.org/blogs/closing-stepped-basis-loophole
[5] Equitable Growth. (2024, September). Closing the billionaire borrowing loophole would strengthen the progressivity of the U.S. tax code. Retrieved from https://equitablegrowth.org/closing-the-billionaire-borrowing-loophole-would-strengthen-the-progressivity-of-the-u-s-tax-code/