The Big Ugly Loophole: When the Wealthy Borrow, the Middle Class Pays

Washington missed its chance to close a billion-dollar tax loophole that lets billionaires live tax-free—and now the budget pain is rolling downhill.

By Joe Palaggi

Most Americans work for a living, pay taxes on their income, and try to build something for the next generation. But at the top of the economic ladder, there’s another way to live: don’t sell anything, don’t pay capital gains taxes, and borrow against your wealth instead. It’s perfectly legal. And it’s costing the country billions.

This is the “Big Ugly Loophole” few in Washington want to talk about—especially now that the political oxygen is being consumed by fights over spending, safety nets, and budget ceilings.

The loophole works like this: if you’re sitting on millions (or billions) in stock, real estate, or other appreciating assets, you simply avoid selling. That way, you don’t owe any capital gains taxes. Instead, you go to the bank, use your assets as collateral, and borrow whatever cash you need, tax-free. It’s called “Buy, Borrow, Die,” and it’s not a fringe strategy. It’s become a mainstream wealth-preservation tool for the ultra-rich.

The middle class doesn’t have that option. Your house is for living, not for leverage. Your 401(k) is locked up until retirement. And your paycheck is taxed before it even hits your bank account.

Meanwhile, the wealthy take out low-interest loans against their portfolios, use the money to fund their lifestyles, and pass on their assets with a stepped-up basis, so their heirs never pay taxes on the gains either. It’s the ultimate deferral scheme—and in many cases, a permanent one.

This isn’t new, but it is growing. According to ProPublica’s reporting, some billionaires pay effective tax rates in the single digits or lower. In fact, between 2014 and 2018, Jeff Bezos, Elon Musk, and others paid zero in federal income taxes in multiple years, despite their net worth surging. Not because of shady offshore tricks, but because of this very structure.

President Biden floated the idea of fixing this loophole during his first term by proposing a “billionaire minimum tax” and changes to the way inherited assets are taxed. But despite Democratic control of Congress in 2021–22, the effort fizzled. There was no appetite to go after asset-backed borrowing. The lobbying was too fierce, and the politics too fragile.

Now we’re watching the consequences unfold. Congress just passed the “Big Beautiful Bill” with new caps on discretionary spending, renewed work requirements for Medicaid and SNAP, and tighter limits on broadband and energy subsidies. These are real sacrifices—visible, painful, and immediate—and they land squarely on the working and middle class.

But where’s the shared sacrifice from the top?

According to the CBO, closing the stepped-up basis loophole alone could generate over $100 billion in revenue over the next decade. Tackling asset-backed borrowing would likely yield even more. And yet Washington looked away.

It’s hard to argue that we need to claw back a few hundred dollars in food assistance from struggling families while billionaires are effectively living tax-free. It's not about punishing success—it’s about restoring fairness and credibility to a system that increasingly looks rigged.

To be clear: borrowing against assets is not illegal. But the tax code’s refusal to recognize it as income is outdated, especially in an era where wealth is no longer defined by salary, but by unrealized gains. The result is a system where wealth and work are taxed on entirely different terms.

There are reasonable ways to fix this without blowing up investment incentives or punishing entrepreneurship. Congress could limit interest deductibility for personal loans backed by unrealized gains. Or impose a minimum tax floor for ultra-high-net-worth individuals, regardless of how their income is structured. There’s no shortage of ideas. What’s missing is the will.

In a moment where every dollar counts—where working families are being asked to accept less—it’s time to revisit who’s really pulling their weight. Fixing the “Big Ugly Loophole” isn’t just good tax policy. It’s a matter of integrity.

Because a country that tells the working poor to tighten their belts while letting billionaires borrow their way to tax-free luxury isn’t just unbalanced—it’s unsustainable.