Elon Musk Cannot Spend His Entire Net Worth (And Neither Can You)

Let’s clear things up right off the bat: this is not a defense of anything Elon Musk has ever done. This article serves as an exploration into how the economics of Billionaires actually function. I’m going to start with some of the more basic financial principles and hopefully show how all of this compounds to make this a much more complex situation than many actually think it is.

Liquidity

Most of a billionaire’s net worth is not money, it’s mostly in stocks. This means that they can’t just spend billions of dollars on a whim, that would require careful planning and a lot of risk for the market in general.

The Problem With Large Selloffs

If a billionaire were to suddenly sell off their stocks, that would cause a huge hit to the market. The principle of supply and demand means that, should a whole ton of shares hit the market, the price of that stock drops sharply. If a major stock like Nvidia, Tesla, Apple, or anything up there were to do that, we’d see a ton of money basically vanish (not literally, but it would cause many unintended consequences that I’ll get into later). Because there’s a much higher supply, there’s a much lower demand, and a much lower price as a result.

The other element of this is that large sell-offs usually signal some uncertainty in the market. If a prominent individual is offloading a ton of stock, then people start to wonder what they’re thinking is going to happen. This means that more people are going to worry about what to do with their stock, causing more people to sell.

The Effects

You may be thinking that this doesn’t affect you at all since you don’t have any stocks, but that’s not true. There are a lot of things tied into the stock market that you may not think about. University endowments, insurance funds, pensions, 401(k)s, IRAs, and more would all be affected by this sharp market drop. Banks would become strained as interest rates fluctuate wildly and it would cause prices to skyrocket more than they already have, all of which being an effect of reduced spending across the market as people’s retirement savings take a hit. Obviously this is a worst case scenario, but the financial markets are way more intertwined into our lives than most people think since it usually operates behind the scenes.

Taxation on Unrealized Gains

So the thing about this is that there’s simply no money to actually collect—the value these gains have isn’t cash, it’s a part of the value of some other thing (usually a company). The gains are unrealized—they’re all just value in companies, real estate, etc. and aren’t just sitting around. Like I said: you can’t just sell off a ton of stock because of the larger ramifications of it I just discussed.

The other thing is: a lot of people who aren’t billionaires have unrealized gains as well. If you’re paying a mortgage and the value of your house increases, then you have unrealized gains, if you have a 401(k), IRA, or other retirement account, you have unrealized gains. You also likely don’t have the money just sitting around to pay the taxes on those and you’re not really doing anything with it right now, it doesn’t make sense to tax it.

Pushing the minimum for unrealized gains taxes also doesn’t solve the problem that would unfold due to a large sell-off of stock at the high end in order to pay for taxes on money people don’t have.

Wait, How Do These People Spend Money Then?

So the fun thing about having that much stock in a company is that you can use that stock as collateral for a line of credit. The easiest way to think about this is a credit card—you have to tell credit card companies how much money you make annually in order to apply for a credit card. What you’re doing is using your annual income as collateral for a line of credit: your credit card.

You can also do this with different asset classes (things that are worth money). If you’ve been paying down a mortgage for a while, then you own real estate. You can get a Home Equity Line of Credit (a HELOC) that is basically the bank saying “I know you’ve got this much money in your house, so I’m going to let you borrow a certain amount of money and pay me back over time with interest. If you fail to pay me back, then you will pay off your debt with the collateral [the money you have invested in your house].”

Most people don’t have the ability to get a Securities Backed Line of Credit (SBLOC), but large shareholders do, and it operates in much the same way. They can effectively use this like a credit card and pay things down over time. The interest rates on things like HELOCs and SBLOCs are usually lower than that of a credit card as well, so it’s a little safer to run a balance for a little while.

Okay: So What Can Billionaires Do

Well, they don’t have to donate cash to various causes. They can transfer stock to non-profits and the like instead of just giving them the money. This would allow organizations to access those same kinds of lines of credit that they have access to—or in a more likely scenario due to bylaws and the like, to be able to sell off these stocks over time to extract the value. This allows them to be more effective without hurting the market (and without cutting out a large portion of the donation for taxes since the transfer of stock isn’t a realized gain).

What Can We Do

Obviously we can’t just sit around hoping that billionaires suddenly decide to start donating these stocks. They haven’t been doing it so far (at least not en masse, awarding stock to non-profits is a thing that people do), why would we expect it all of a sudden?

Taxation At Death

One of the things that billionaires have access to is generational wealth. If we prevent the transfer of large sums of stock without realizing the gains, then we can cut down on people who just inherit millions or billions. This is a little easier to avoid the issue of large sell-offs because this is a one time deal: a person is awarded the assets upon the death of the original owner. They can pay these taxes over time with interest, which would reduce the amount they have to pay at once, cutting down the risk associated with large sell-offs to pay for the tax.

Taxation at Borrowing

We could also start considering the collateral used as realized gains, which would mean that we could tax the gains that they’re taking out lines of credit for. Again, since this is a one time thing at the opening of the line of credit, this could be paid over time with interest as well.

Buyback Taxes

The other thing we could do is tax stock buybacks. Basically a sales tax on a company buying its own stock. Companies will do this for a multitude of reasons, but the big one is just to keep the stock price higher by lowering the amount available in the market.

Brackets/Minimums

We can also treat this much like income tax: there’s a standard deduction that isn’t taxed, then we tax progressively as you make more money. The same thing can happen here.

Overall Thoughts

So the thing is: these billionaires can’t spend even a fraction of their net worth—it’s not actual money. Their value is in things like companies and real estate. There are a lot of different levers that can be pulled, but many of them would lead to unintended consequences due to how intertwined the world is with the global financial market. By being smart about it, we can increase impact while mitigating the risk of destabilizing the global economy or unfairly taxing the middle class who owns some of the same asset classes (though in a much smaller quantity). I don’t want this to sound like a “there’s nothing we can do” kind of article, I just want to discuss some smarter ways to handle the situation than just blindly throwing wrecking balls at the global financial market.