Tax avoidance with Tesla stock-backed loan US rekindles wealth tax debate

Tesla CEO Elon Musk’s takeover of Twitter has rekindled the wealth tax debate in the US. This is because Musk showed ‘how billionaires can raise money without paying taxes’ by borrowing large amounts of money as collateral to finance the acquisition of Twitter.

Bloomberg News reported on the 26th that “US tax law is playing the role of a ‘quiet partner’ in Musk’s takeover of Twitter.” “Tax-free” property is the Tesla stock owned by Musk. Stocks are not taxed until a gain is made on the sale even if their valuation rises. When you need money, if you borrow stocks as collateral, you can secure an amount of money that reflects the capital gains and avoid paying taxes. Even if he repays the loan, Musk’s money flows only between his ‘securities account’ and his ‘loan account’. Loan interest is also tax deductible. Banks earn interest income, and those who borrow stocks as collateral get tax-saving benefits, but they do not help the country. “It’s a proven method favored by American billionaires who want to avoid taxes,” Bloomberg said.

In the process of Musk’s acquisition of Twitter, a ‘proven method’ appears. According to a plan submitted to the U.S. Securities and Exchange Commission (SEC) on the 21st, Musk secured $25.5 billion (32 trillion won) of Twitter as a bank loan, more than half of the $46.5 billion (58.3 trillion won) in the acquisition. About half of the loan, or $12.5 billion (15.7 trillion won), was borrowed as collateral for his stake in Tesla. According to Forbes, Musk’s total fortune, mostly in the form of shares in Tesla and SpaceX, stood at $257.4 billion (326 trillion won), an increase of 10 billion dollars (about 12 trillion won) from last year, mostly due to stock price rise.

How to raise $21 billion (26.3 trillion won) of equity capital in addition to loans among the money for Musk’s Twitter acquisition is still in the veil. You can raise enough money by selling your Tesla stake or using stock options (stock options) to raise $21 billion. This could affect Tesla’s stock price. Tesla shares fell more than 12% on the news of the Twitter takeover. For this reason, the method of obtaining additional loans or attracting other investors using shares of unlisted companies such as Space X and Boring Company as collateral is also being discussed. This would allow Musk to successfully acquire Twitter without paying any taxes.

Steve Wormhoff, director of policy at the Institute for Taxation and Economic Policy (ITEP), said: “Musk is really wealthy, but based on his taxable income as defined in the tax law, he’s not wealthy enough to buy Twitter.” This means that the US tax system, which does not properly tax stocks, has been leveraged to finance Musk’s acquisition of Twitter. The result is the rich get poorer in the sense that billionaire Musk will have more influence with social media acquisitions.

Senator Elizabeth Warren said: “This deal is dangerous to democracy. Billionaires like Musk act by different rules and amass power for their own benefit. We need a wealth tax to hold the big tech accountable.”
According to a report analyzed by the IRS data by ProPublica, an American investigative media outlet, Musk’s effective tax rate for 2014-2018 was only 3.27%. The average tax rate for a typical household in the United States is about 13%. “Billionaires like Musk pay lower rates than firefighters, teachers and nurses,” said Congressman Bonnie Watson Coleman, a Democrat.