The difference is that the local monopoly on violence forces demand for their fiat on the people and organizations within their sphere of influence, explicitly and implicitly.
It remains to be seen if an entirely voluntary money can be a major player in the modern world.
Then again, raw fiat is a very new experiment as well. It's only been about 50 years since the US broke the pretense of the dollar being constrained by gold reserves. So from that context, bitcoin's 13 years doesn't actually seem that radically young, especially if compared to gold's 5000 years.
If people (specifically, the police and soldiers) stopped believing in the local monopoly on violence, it wouldn't exist either. Historically, this is a thing that happens pretty often, every few decades.
Gold in coinage is only about 2700 years old, btw, not 5000, and that was really electrum. Gold, silver, or electrum by weight may go back significantly further.
"Long before" and "commonly" is a matter of perspective. It was first struck as coins about 2700 years ago, and was definitely used as money in a few countries at least 300 years earlier, and possibly as much as 3000 years earlier. There is no evidence to suggest that it was in wide use as money until about 2200 years ago, only in a few places like the Mediterranean. Then again, maybe there wouldn't be, since not many places had writing.
Well, by definition a stable country is one without a collapse every few decades!
It happens somewhere quite often, and the number of countries with 100-year uninterrupted continuity of government is shorter than you'd expect - basically the unoccupied Allies, Switzerland, and a few microstates.
I meant that it happens in a given country on average every few decades. I took a somewhat slapdash sample last year and the median time of last violent collapse of government was 01945, 76 years ago. On average it happens in a few countries every year.
Raw fiat is NOT a new experiment, the Yuan dynasty in China printed paper money in the 13th century, not backed by any precious metal or commodity. They printed too much and had inflation problems, so that's not a new problem either.
The difference is that the government will (implicitly) point a gun at you and demand a tax payment from you next April, and they'll want that payment in fiat. Everyone knows that everyone else will be coerced into coming up with some U.S. dollars in a few months, so they have a lot more to rely on than everyone else's mere belief in money.
Amen to that. Incidentally this is not just a crypto tax avoidance play. It's an asset-rich tax avoidance play. Do you think Bezos sells stock to buy the latest mega-yacht? Of course not. He'd realise a substantial capital gain. Instead he borrows against his stock. No capital gain = no CGT.
I really wish people would think systematically about these issues before jumping on their soapbox, as this strategy does not eliminate tax payment, it merely defers it, with some interest cost.
Consider the following scenario:
Say the interest rate for a wealthy individual like Bezos is 1% per period.
Case A: Bezos sells $100 of stock. He pays 20% and consumes $80. NPV of tax liability is $20.
Case B: Bezos borrow borrows $80 to spend in a period and then at the end of the period sells $101 of stock to pay back the loan and (and pay taxes on it). Thus his tax liability at the end of the period is .20*101, which in present value terms = .20*100 = $20. Exactly the same amount of taxes he would have paid if he didn't borrow.
Case C: Bezos sells only $80 of stock and then borrows $16 to pay his taxes, ending with a debt of $16.16 at the end of the period, and he will need to sell $20.2 in stock to extinguish his total liability ($16.16 due the bank and also the $4.04 in taxes on the sale), which in present value terms is the same payment as before, namely $20.
The real reason people like Bezos borrow to pay their taxes is because the interest rate charged to them by the bank is less the growth rate of their assets. Therefore they are acting like a bank, borrowing at one rate and investing at another rate, making money on the spread. Thus keeping the stock is worth more to Bezos than borrowing to pay the tax, which is effectively what is happening.
At least, this is what they believe. Of course this type of balance sheet expansion comes with risk - risk that they bear that if the stock price falls, they will end up paying much more than if they hadn't levered up and borrowed to pay their taxes. But that's a risk they are willing to take.
So you don't need to pull your hair out worrying that Bezos is not paying taxes. He is effectively borrowing to pay taxes so that he ends up with a bigger payment down the road, which in present value terms is the same tax liability as if he didn't borrow. The treasury will receive not only all the tax money as if Bezos never borrowed, but all the tax money with interest, namely whatever interest Bezos needs to pay. However Bezos is betting that the growth rate of his assets is even higher. So now you understand why everyone is borrowing to pay taxes -- because interests are so low. So thank the Fed that this type of arbitrage is possible. It's not tax arbitrage, it's interest rate arbitrage.
So I should rest assured that the rich people are all wrong, and fully plan on eventually paying more taxes? And I’m just supposed to believe that? They are purposely doing all of this to intentionally pay more taxes? And they’re just too dumb to realize it? You don’t think they haven’t thought this through? First, there’s the death loophole in capital gains taxes. Two, assets are reliably outpacing interest rates and inflation, so even if it’s simply deferred taxation, that’s a de facto reduction (and yes that’s a problem, ask Piketty). Three, I’d imagine the billionaire class recognizes the trend of their increased power and influence, and could even just be betting on re-writing the rules before their bill comes due, fueled by the outsized influence bought by their lifetime of not paying taxes. So excuse me if I’m not OK with an upper echelon of society simply excusing themselves from taxation via mechanisms that are not available to regular wage earners.
You should rest assured that it's not a good idea to invent grievances to justify personal hate.
It is just not true that because there is a carried interest loophole, for example, that you can just make up arbitrary other tax loopholes that don't exist and blame "the rich" for abusing them, and then when confronted with being wrong on the facts, cite the carried interest loophole as a justification. "Piketty" isn't some magic word you can use to waive away reality.
You forgot to mention that if Bezos holds shares until he dies, the people who inherit them will not pay capital gains tax on them even if they do cash out. And the treasury will not get anything in that scenario.
I didn't mention it because it's not true. I am amazed you think collateralized loans are just forgiven when someone dies. Remember that these are personal loans to Bezos. If they were loans to some business entity Bezos created, then whatever payment he received from that entity would be taxable income.
The debts will need to be paid to the banks as part of the settlement process of Bezos' personal assets, which will require asset sales, and these sales will incur a tax liability and all of the above calculations will take effect.
And don’t you think that the bankers and heirs wouldn’t simply agree to have the heirs pay the loans back after they inherit the assets? Why wouldn’t they? I’d even assume it’s written into the loan documents or maybe even through the individuals will or something. And why wouldn’t an heir agree to that? By paying the loan after inheriting the assets the heirs will get to keep the capital gains. “Hey Bezos Jr., do you want to inherit 20% more money, or 20% less? Because all we have to do is sign this stack of papers in a different order to avoid all capital gains.” Or even simpler still is just to pay the loans back with the assets directly. Or any other number of maneuvers to make sure the bankers are happy and simply call the debt settled. There’s myriad ways of doing this, and I’m absolutely 100% sure that the billionaires and their ‘family offices’ of likely dozens or hundreds of highly skilled accountants and attorneys haven’t figured out some way out of this.
> And don’t you think that the bankers and heirs wouldn’t simply agree to have the heirs pay the loans back after they inherit the assets?
OK, at this point you are just speculating wildly, right? You are inventing tax loopholes that don't exist, and when this is pointed out, more loopholes are invented which also don't exist. Point is, that's not how consumer lending, tax law, or inheritance law works. Those loans will be settled requiring asset sales at his death. If banks forgive a loan, that debt forgiveness is counted as income and is taxable.
Actually it is likely they will be wound down before his death as he will want to reduce his personal asset holdings and put them in a trust, because the inheritance taxes on all of his wealth are much stricter than any income taxes. But reducing his asset holdings will require de-leveraging because loans against equity require quite a bit of collateral.
> You are inventing tax loopholes that don't exist
Are you aware of "step-up in basis" [1] that is widely considered a loophole around CGT for inherited assets? Any gains on assets up to the point they are inherited will not be subject to CGT.
So now we are in the weeds about inheritance tax, but the idea is that you pay 40% on your inheritance which clears your tax obligations for that inheritance and resets all the cost basis calculations, and then after that you pay gains when you sell from the time you inherited.
That is not a tax loophole.
E.g. if someone buys stock for $10, then the share price grows to $100 and they die, so that a family member receives $100 of stock, and then the share price goes up to $110 and the inheritor sells, then in the current system, the inheritor pays:
$40 on receipt of shares at $100 (cost basis for him is zero)
$4 on sale of shares at $110 (cost basis is now 100)
for $44 in taxes paid on that stock.
RSUs also work in the same way -- you pay taxes the moment you get them, and then if you keep them, when you sell your cost basis is the price of the shares when you were given them. That is important to know if you like to hold onto your RSU shares for a while -- know that your cost basis is not zero, but whatever the price of the shares were when you paid taxes for receiving them as income.
In your opinion. However, some people clearly believe it _is_ a tax loophole, presumably including those you're discussing with upthread.
One of the talking points against inheritance tax is that it taxes the same money twice. If I'm a middle earner I pay taxes on my income, and I pay CGT when I dispose of assets to pay for my car or retirement or whatever. Taxes are then levied a second time on what's left when I die.
People above are pointing out that, in contrast, extremely wealthy people manage to avoid the income/CGT part by borrowing against their assets tax-free and repaying the loans once they die and after the assets can be stepped up. So yes, inheritance tax may still be paid, but a great deal of their day-to-day income while alive is untaxed. Inheritance tax should be _in addition to_ income/CGT rather than instead of it, and part of the perceived injustice is that the ultra-wealthy get to dodge this in ways "ordinary" people can't.
Based on that I personally would call it a loophole.
> In your opinion. However, some people clearly believe it _is_ a tax loophole
Only people who are not familiar with basic accounting or tax economics can believe this.
> One of the talking points against inheritance tax is that it taxes the same money twice. If I'm a middle earner I pay taxes on my income, and I pay CGT when I dispose of assets to pay for my car or retirement or whatever.
OK, you are mixing two different things here. One is the "double taxation"(1) on assets in the inheritance tax. First, don't worry, only a handful of families pay this tax. But ignoring that, the double taxation applies to income not spent. It is irrelevant to this discussion, in which Bezos borrows to spend. If he didn't borrow and sold assets to spend, then those sold assets still wouldn't be taxed as an inheritance tax. So that double taxation unfairness complaint is again just a confusion about what is happening and has nothing to do with whether borrowing to spend is somehow tax avoidance.
Now as to the second point: "If I'm a middle earner I pay taxes on my income, and I pay CGT when I dispose of assets to pay for my car or retirement or whatever."
No, you only pay taxes on the gains. Think back to what we were discussing before -- you get $100 of stock, then it goes up by $10 and you sell. So you have two taxable events in which income is recognized - the income of getting $100 and then the income of getting $10. When you sell for $110, your cost basis is $100, not 0, because you already paid taxes on the $100. Thus there is no double taxation for you or for Bezos(2).
No one is treated differently here. It is the exact same re-upping you were complaining Bezos being given -- that re-setting is available to everyone else for any other kind of asset they have for any reason.
So here, too, this is just complaining about things that aren't actually happening in order to get a justification for complaints about "injustice". It's a lot of very angry people applying who/whom logic rather than getting the details right about how much is paid.
Now, if you want to talk about real tax loopholes -- for example, carried interest, mortgage interest deduction, differences in tax rates on long term versus short term gains, charitable deductions - yes, by all means let's get rid of these loopholes. Bezos pays too little taxes, not because he borrows, but because the long term cap gains rate is so low. Let's not treat LTCG differently from wage income. But trying to infer the money borrowed should be taxed at the amount borrowed is just insane. Borrowed money is not income. Bezos is not doing this to evade paying taxes, he is doing it to take advantage of spreads.
(1) It's not really double taxation, because what is taxed is the income received by the inheritor, who never paid any taxes on it before.
> But ignoring that, the double taxation applies to income not spent. It is irrelevant to this discussion, in which Bezos borrows to spend.
It's not irrelevant if Bezos spends his borrowed money on real estate and generally vacuuming up other assets that are likely to appreciate in value faster than his loans. It's not like he consumes all of it (or even most? I don't know, but I doubt it. How on Earth do you consume a billion dollars?).
> Thus there is no double taxation for you or for Bezos(2).
As I already explained there is for me if I don't consume all of my taxed gains before I die, or if I use it to purchase assets that outlive me.
> Bezos is not doing this to evade paying taxes, he is doing it to take advantage of spreads.
He's clearly doing it for both reasons. At least to avoid, not evade. I accept that he's legally not required to pay tax in this situation, but the whole point is I'm saying that should probably change!
> So here, too, this is just complaining about things that aren't actually happening in order to get a justification for complaints about "injustice". It's a lot of very angry people applying who/whom logic rather than getting the details right about how much is paid.
Dismissing this as "just complaining" is really missing the wider point. That is that "buy, borrow, die" is a well documented strategy that the ultra-wealthy use to avoid paying tax and that is widely considered a tax loophole (even by those familiar with basic accounting and tax economics). Whether it's a loophole or not isn't even really the point, rather that we should change things such that people who "buy, borrow, die" actually pay something like CGT.
>The thing is, who freaking cares. He can literally go to his grave without paying taxes. That shouldn't happen.
So yes, you can borrow to pay taxes. And you can borrow to defer taxes. But that is limited by how many assets you have.
Households across the country do something similar when they borrow to buy a house -- they do not pay taxes on the mortgage loan as if it was income. And, unlike Bezos, the mortgage interest paid by households is often tax deductible.
But Bezos' loan does not deprive the government of taxes, because the rate on government borrowing is always going to be lower than the rate charged to Bezos. So if Bezos defers by 10 years, with the debts accruing at some rate r, then the government makes up for that by deficit spending with its debt accruing at a lower rate. Thus when these are settled, the government will make a profit.
> Why are you even defending him? Your position is morally untenable.
I guess the first mistake here is to try to view public policy from a "moral" perspective first and "not caring" about the details of what is actually happening.
The second mistake is automatically decide who is good or evil based on some atavistic criteria and deciding the details don't matter if you are sufficiently outraged.
Because at that point you've already lost. I suggest it's better to actually care and run the math before deciding whether something is good or bad for the Treasury. And questions about what is good or bad for the Treasury should be the ones you ask when determining tax policy, not whether you are really angry at a public figure or not.
Bezos' motivation is not to pay fewer taxes across his lifetime, because he doesn't. It's that the interest rate he is charged is less than the rate of return on his stock. This has absolutely nothing to do with tax avoidance but exploiting spreads.
I find amusing that the same people (from my perspective) will argue that Roth savings vehicles are terrible because the government gets its $20 now and then all this growth happens untaxed and the government never gets its cut of that 40 years from now. “Uh, you did, back on the first day, remember?”
Example? I'm a UK taxpayer and as far as I know you can still do basically that. You can also avoid inheritance tax is you buy a farm to borrow against rather than crypto. See J Clarkson for example.
>He bought it mainly because you don’t pay death duties on land. “That’s the critical thing. So rather than just have money in the bank, and get a statement with numbers written on it that gives no one any pleasure at all, you could derive a great deal of pleasure and pass it on to your children.”
The loans thing you linked to is a bit of a different thing I think - "People who use these schemes have their salary paid in loans, instead of being paid in the usual way."
Just borrowing against assets that have gone up is different and pretty normal.
It doesn't matter whether or not you believe fiat is valuable or not. I know that tomorrow, I can buy a Big Mac for $4, and McDonald's knows that the person who makes it will go to work for $10/hour. There are way too many transactions that take place for people to "believe" that fiat is worthless. The same cannot be said about cryptocurrency.
But imagine that a secondary ecosystem emerges because of these crazy cryptocoiners, who start using crypto for everything (just out of principle) (see https://99bitcoins.com/bitcoin/who-accepts/ for viability).
They also insist on getting paid in crypto (not every country puts capital gains on crypto).
This basically means we could have a small parallel ecosystem.
Imagine this thing growing to a few % of all transactions.
Now the question comes to people holding fiat: are you sure your fractional reserve money will keep its value? Only a small percentage of fearful people could cause serious issues for that fiat system.
So I agree that you are right for now. But I wouldn't rule out the possibility of it taking a shift in the future.
Yes, inflation is a thing. The numbers aren't important to my argument. My point is that the value of fiat is baked into virtually every transaction. As such, even if you don't believe in fiat, so long as you want to participate in the economy, you'll still use it all the same.
This is most likely one of the most unintelligent statements I have ever heard. Value is subjective, period. End of story. The US dollar literally only has value if people have confidence in it. Because we are still bartering and trading, the US dollar is simply a standardization of value. Again, value will always differ from person to person. In fact, I think commodity based tokens would be interesting. Cryptocurrency, as it is, has no value to me. The dollar bill is a standard that will certainly change. Hopefully we can have a utility/commodity based currency in the future. We used to have that when the Dollar was actually backed by bars of gold. LOL
There's an interesting contrast: the technical security of crypto relies on not trusting and not believing anyone or anything but the value relies on social belief.
You say, "the technical security of crypto relies on not trusting and not believing anyone or anything," but I don't think that's quite right. I think it's more accurate to say that the purpose of the technical security of crypto is to permit you to not trust anyone (or, in some sense, "anything").
However, by "anyone", we mean "any single person", in the same way that science or money permits you to not trust anyone. For example, fake ivermectin covid studies are eventually found to be fake, so in that sense we "don't trust anyone" to not fake their studies. But if everybody publishing ivermectin studies is actually in a grand conspiracy to promote ivermectin, this fails; at least some honest people have to run studies with ivermectin to find out that it doesn't cure covid. In fact, probably even a majority. This is still a great improvement over the medieval system where the Pope decided whose opinions could be published on whether the Earth moved or not.
Similarly, the great thing about money is that it gives you autonomy; if you have money, it doesn't matter that much that the Soup Nazi banned you from his restaurant, because you can just go buy soup elsewhere. You won't starve, the way a child abandoned by their parents often will.
But it isn’t. Fiat currency is tied to a _countries_. What tanks are going to line up to save an attack on crypto? What standing militaries defend crypto? Exactly.
The government, you know, that thing that has a million other uses, will always want control over the currency.
If the crypto point of view is that no one should control currency, first of all, that's super naive and secondly, that puts it on a collision course with governments.
I do not understand why one would fetch stacks of paper from the bank if one believes toilet paper is the more valuable type of paper you should hoard and maybe also trade with.
Seriously, why would the end of fiat cause a bank run? I would expect it would cause a switch back to trading physical goods directly, or the emergence of another currency-like thing or good (like cigarettes might have been in the past).
When bank runs were common it was normal for a bank to go out of business while nothing really happened to devalue the currency so you'd essentially be racing other customers to withdraw first. The Fed's guarantee to cover accounts in the event of a bank failing stopped bank runs entirely.
Because fiat is created in 2 ways: central bank and bank. Cash in hand means it's central bank money, numbers on your bank account are the multiplied variant. Both are part of the fiat system.
If people stopped believing in fiat, there would be a major bank run.
So yes, the value of crypto, just as like the value of fiat, is based on belief.