Billionaire Bill Ackman has an idea to get the ultra-rich to finally pay their fair share of taxes

Recognizing the growing number of Americans fed up with gaping income inequality, billionaire investor Bill Ackman found a way to get the ultra-rich to pay their fair share.

The founder of Pershing Square Capital Management on Thursday suggested a tailored approach to ensure the likes of Elon Musk and Jeff Bezos shoulder more of the burden, arguing against the direct tool of a proposed federal tax on unrealized capital gains.

To avoid jeopardizing America’s entrepreneurial spirit, Ackman argued, the wealthy should be taxed based on how much they borrow from their own companies’ stock, closing perhaps the most controversial loophole in the tax code.

“If you have $10 billion in stock in a company you founded,” he wrote on social media, “stock-backed loans should be taxable as if you were selling a similar amount of stock.” .

Ackman’s suggestion comes after Democratic presidential nominee Kamala Harris backed the Biden administration’s plan to tax unrealized capital gains for those households with a net worth of at least $100 million. The tax has faced fierce opposition from venture capitalists, including Marc Andreessen, who believe it will stifle incentives for tech startup founders.

How would Ackman’s idea work?

Under Ackman’s proposal, those who risk their wealth would only be taxed if they saddle their businesses with personal debt over and above what they put into it.

Let’s apply this to a practical example. Elon Musk is currently locked in a legal battle with investors to keep his 2018 pay package, which entitles him to buy nearly 304 million Tesla shares at $23.34 each, a significant discount of 89% compared to the current price.

If he were to win in Delaware court, he could theoretically exercise his options by paying $7.1 billion, then turn around and immediately sell them for $64 billion (minus whatever the resulting drop in price with such a big sale). The difference he will pocket, about $57 billion, would be taxable as a capital gain.

The story continues

But what if he just wanted to free up some cash to buy a megayacht like his rival, Amazon founder Jeff Bezos? Or a small island like his friend Larry Ellison? Under Ackman’s plan, he would be free to borrow from his shares up to the amount he invested to purchase them under the plan, but anything beyond that would be taxable.

If they then ever paid off that loan—without encumbrance of the underlying actions in the lawsuit—that money would be barred from the government from now on. That way, if Musk were to actually liquidate that stock in the future, Uncle Sam wouldn’t be able to tax it twice, first as an unrealized and then again as a realized capital gain.

Pandemic-era asset price inflation is a boon for the ultra-rich

Just as the subprime crisis sparked the bank attack, the COVID outbreak made the billionaire attack fashionable and, crucially, highly popular politically. Even JPMorgan CEO Jamie Dimon took an interest in it.

During the pandemic, governments around the world unleashed a tsunami of fiscal and monetary stimulus. Much of this has translated into asset price inflation. In 2020, the value of Tesla stock alone increased 10-fold, catapulting Elon Musk’s already considerable wealth into the stratosphere.

“The pandemic – filled with sadness and disorder for most of humanity – was one of the best times in recorded history for the billionaire class,” Oxfam concluded.

In June 2021, a ProPublica investigation revealed that some of the world’s richest Americans often paid little or no taxes. Instead, they pay it all off with equity-backed loans, just as a homeowner would extract value from their home by borrowing against the rising value.

Musk borrowed against $50 billion worth of Tesla stock

Musk is a perfect example of someone who profited from unrealized capital gains. He hasn’t earned a salary in years: His entire pay package requires him to hit milestones to unlock tranches of stock options. No salary means no income tax. (He paid a windfall at the end of 2021, which he claimed was the largest in US history after he converted some of his stock options.)

Tesla’s annual proxy statement filed in April indicated it had borrowed against 238.4 million shares as of March 31, worth $50 billion at current prices. And that’s just Tesla – who knows if it’s done the same with its private companies like SpaceX.

Weeks after ProPublica’s revelations sent “shock waves through Washington,” Senate Finance Committee Chairman Ron Wyden, a Democrat, proposed in October 2021 the first federal tax on unrealized capital gains. But the idea was still considered too radical at the time. It was also strongly opposed by Musk, who warned that it would interfere with his plans to expand civilization on Mars.

In April, Biden adopted the “big change” approach, and the federal election in November will likely determine his fate. If the idea doesn’t have enough support, there’s always Ackman’s proposal.

Musk could not be reached wealth for comment.

This story was originally featured on Fortune.com