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Yeah, so two separate things going on here: first, yes, the stock might appreciate faster than the interest... but it also might not. (You already understand this, clearly, but just to make it explicit.) Putting aside the loophole, this is really equivalent to taking out a loan to buy stock in a single company which is also your employer, which no sane financial advisor will tell you to do. From low to high (hopefully): there's a theoretical guaranteed safe rate of return (which is not literally the rate on treasury bonds, but it's close enough), then there's the rate the bank will offer you a loan at (since if they were only getting treasury returns, they'd just buy treasuries), then there's return from a well-diversified stock portfolio, and then there's the return from your controlling interest in a single company which:
The last has a substantial risk premium because it's a very substantial risk. But of course the people for whom this doesn't work out aren't on any lists of the world's richest people, so we don't talk about them.
Second: the government can borrow at the treasury rate. If they can (effectively) loan you money at the higher bank rate (which is how the math works out), they'll do so happily, issue more treasuries to cover the temporary shortfall, and pocket the difference in rates. They're not impatiently waiting for you to finally stop deferring your tax burden and pay the whole bill, they're coming out ahead every day this state of affairs continues (until you die and the principal vanishes due to the cost basis step-up).
(The point about deferred interest is more potentially problematic, but it still would eventually get paid if not for the step-up.)
Well, it might or might not be a large portion of their income, but I don't think that's really the relevant factor here. The real problem (in terms of satisfying populists) is that:
But then populists compare the bullshit (high) net worth figures to the bullshit (low) tax figures and get mad about it. Taxing savings is a terrible idea -- if you tax something, you get less of it, and capital is the main driver of economic growth -- but taxing consumption will never give a satisfactory number.
Yeah, possibly. I don't have a good answer for this problem. I do think we should fix the cost basis step-up issue, but that's probably too complicated to satisfy the (large and growing number of) people who get very angry about this subject.
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