The Tax Fable Surrounding Elon Musk

NEW YORK, NEW YORK – DECEMBER 13: Elon Musk and son X Æ A-12 on stage TIME Person of the Year on … (+) December 13, 2021 in New York City. (Photo by Theo Wargo/Getty Images for TIME)

Getty Images for TIME

Elon Musk’s purchase of Twitter has caused a lot of conversations around billionaires and ultra high-net-worth individuals “playing a game with different rules.” One sticking point has been around Musk borrowing against his owned shares in Tesla

to fund the purchase, while not paying any taxes on that debt. To many, it feels like one of many loopholes that the rich can get away with while the rest of us foot the bill. I wanted to know the truth, so I interviewed Tom Wheelwright, CPA regarding the matter.

What’s the true story here?

  • Well, it’s absolutely true that he’s not paying tax on his debt, but what gets lost in the conversation is that neither do you or I. Nobody in America pays tax on debt, because we’re going to pay back that debt, and we’re paying tax at other ends of the transaction.
  • Look at it this way: When you take out a mortgage, you’re borrowing money to purchase a house. Would you want to pay tax on the debt of that house? You’re paying that debt off, and you’re using your own taxable income to pay it off. Elon Musk will do the very same thing, but with taxable income from Twitter. If anything, you can think about it like a deferral, but it’s certainly not the case that he won’t ever be taxed. He just won’t be taxed twice.
  • Whether it’s a mortgage on a house or a “mortgage” on Tesla stock, tax law treats everyone the same. It’s designed that way, and for good reason.

But what about all the other extensive tax benefits that Elon Musk is already getting, through Tesla, through his other businesses? One common refrain is that you or I pay more in taxes than someone like Elon Musk.

  • Well, there’s a reason big companies get lots of tax benefits: They create jobs. In the case of Tesla, SpaceX, and any other companies Musk owns or founded, that’s tens of thousands of jobs, which means payroll taxes. It’s not that nobody’s paying taxes here. The government allows companies to avoid bigger taxes to make it easier and more beneficial to employ people, and those employees will pay taxes. Elon Musk didn’t make that policy, the government did. And it’s not unique to America. Employees pay the lion’s share of taxes in every country.
  • So if Musk buys Twitter and builds it out, we’re talking additional jobs, likely higher-paying, leading to payroll taxes, Social Security taxes, employment taxes, etc. There are plenty of taxes being paid, they’re just not being paid solely by one man.

Okay, but the majority of Elon Musks’ holdings are in stock or other assets, meaning they aren’t being taxed, while they appreciate in value. Can’t we do something about that?

  • That’s actually an idea that some folks have been talking about lately, the idea of taxing Musk on his Tesla stock or SpaceX stock as it goes up, BEFORE he sells it. But it’s important to remember, he sold $4 Billion of Tesla stock just last month because he needed that money to move forward with the Twitter acquisition. You can be sure he paid tax on that.
  • But really, that suggestion doesn’t hold water. At a certain point, you’d be forced to sell stock just in order to pay that tax. Meaning you’re putting pressure on the stock market, on specific stock prices, and then you’re hurting far more people than just Elon Musk. He’s not the only person that owns Tesla stock. We’re talking 401ks, IRAs, pension plans. It’s easy to forget about the non-billionaires who would be severely impacted by drastic measures like this.

Then what about the wealth tax? What if we limit it to only people in the upper 10 or even 1%?

  • When the 16th amendment was passed (the one that basically created the IRS), the income tax level was set at 7% and it was only levied on people who made the equivalent of $14.2M a year today. Now, everyone’s paying taxes, including people who make much, much less. Once you open that door, you can’t close it. Inevitably that number falls, and you start looking at taxing those with 10 Million in assets. Then1 Million. Then 500,000. If you own a house, you probably have more than $500,000 in assets. Do you want to pay tax on the value of your home before you sell it?
  • But the important takeaway isn’t that the rich are given carte blanche to avoid taxes. You can do the exact same things he does.
  • Elon can let his assets appreciate and borrow against those assets without paying tax. So can you. If your home appreciates, you can certainly sell it. But you can also take out a home equity line of credit. That debt is not taxable. You can borrow against your home at no tax cost.
  • You can then invest that money (in the stock market, real estate) and the interest expense becomes deductible because it’s investment interest expense.
  • Normally home equity line of credit isn’t deductible, but if you use it to invest the way the government wants you to (in energy, for example), you can deduct that interest expense. The interest follows how you USE the money, not how you GOT the money.
  • Think about what the government wants to have done, but isn’t going to do themselves. There’s probably a tax incentive.