Elon Musk may be a silent participant in a $44 billion deal to buy Twitter Inc.: US tax code.
The chief of Tesla Inc. and SpaceX announced a deal on Monday to take Twitter private for $54.20 a share, pledging $21 billion to Equity Finance and with its Tesla shares as collateral. 12.5 billion loans were used. Banks are investing another $13 billion in debt financing. Critics, including Senator Elizabeth Warren, say he has been able to do so because billionaires’ taxes have been eased.
“If you look at Musk’s ‘income’ as defined by our tax code, you see that the guy is really rich, but not rich enough to buy Twitter,” said Steve Wammhoff, director of federal tax policy, The Left-leaning Institute in Taxation and Economic Policy, said. “When you look at the more complete definition of his income – including the portions that are not included as taxable income under our tax rules and thus not taxed – you begin to see that How can man buy Twitter.”
Musk is using a tried-and-true strategy backed by several American billionaires who have amassed highly appreciable stock — to borrow and sell those assets and get cash without paying taxes. Musk has taken out margin loans against some of his Tesla holdings for the $12.5 billion deal.
Details of how Musk plans to come up with the $21 billion are not yet clear in the financing agreement. He could sell Tesla or other stock, which would incur a significant tax bill. It’s possible that he could pursue some of this by borrowing against his stakes in SpaceX and The Boring Company, using IRS rules to exploit tax-free cash.
According to the Bloomberg Billionaires Index, Musk is worth $257.4 billion. Much of that fortune is in Tesla and SpaceX stocks, which could grow indefinitely without taxes. For any loan against his assets, Musk also receives a tax write-off for the interest on that loan. Musk faced a multibillion-dollar tax bill last year after selling a portion of his Tesla shares.
“Elon Musk has very valuable Tesla stock that he doesn’t want to sell and pay taxes on. And so he can borrow that stock without selling it,” said a senior fellow at the left-leaning Urban-Brookings Tax Policy Center. Steve Rosenthal said. “Borrowing does not generate any income in our system because the borrowing is offset by the obligation to repay.”
The ability of the mega-rich to choose when they pay taxes — by postponing sales for years in which they incur losses to offset liabilities, or until they avoid levies altogether. hold property until they die – has caused anger among many Democrats. Senators including Warren, Bernie Sanders and Ron Wyden have been working for years on a variety of wealth taxes that go after fortunes that are often untouched by income tax rules.
Warren, who turned the idea of a campaign rally cry to a 2% wealth tax on the richest Americans in the 2020 Democratic primary, said late Monday that Musk’s Twitter acquisition exemplified the need for it.
President Joe Biden joined the fray earlier this month with his “billionaire minimum income tax,” which would tax the annual appreciation of people’s financial and business assets worth at least $100 million. Biden’s plan would be a major blow to someone like Musk who is likely to make big gains. Under that proposal, such people would have to pay a capital gains levy every year on the appreciation, said Kyle Pomerleau, a senior fellow at the right-wing American Enterprise Institute.
A new tax on billionaires is unlikely to become law anytime soon, with a very small margin in the US Senate. Joe Manchin, a moderate Democrat from West Virginia, immediately put a halt to Biden’s plan within hours of it being released as part of the president’s budget request.
However, the idea of taxing unrealized gains is likely to be around. The concept has gone from popular thought to a mainstream democratic policy popular among very progressive lawmakers in just a few short years.