Billionaire Bill Ackman has an idea for getting the ultra-wealthy to finally pay a fair share of taxes

The founder of Pershing Square hedge fund suggested on Thursday a tailored approach to ensure people like Elon Musk and Jeff Bezos shoulder more of the burden, arguing against the blunt instrument of a proposed federal tax levied on unrealized capital gains.

In order to avoid endangering America’s entrepreneurial spirit, Ackman argued, the wealthy should be taxed on the basis of how much they borrow against stock in their own companies, closing arguably the most controversial loophole in the tax code.

“If you have $10 billion of stock in a company you founded,” he wrote on social media, “loans secured by the stock should be taxable as if you sold a like amount of stock.” 

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Ackman’s suggestion comes after Democratic presidential nominee Kamala Harris lent her support to a Biden administration plan to tax unrealized capital gains for those households whose net worth is a minimum of $100 million. The tax has met with fierce opposition from the likes of venture capitalists including Marc Andreessen, who believe it will smother the incentive for the innovation founders of tech startups provide. 

How would Ackman’s idea work?

Under Ackman’s proposal, those risking their fortune would only be taxed if they encumbered their businesses with personal debt above and beyond what they put into it. 

Let’s apply that to a practical example. Elon Musk is currently locked in a legal battle with investors to retain his 2018 pay package, which grants him the right to purchase nearly 304 million shares of Tesla at $23.34 each, a steep 89% discount to the current price. 

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

But what if he just wanted to free up a little 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 against his shares up to the amount he invested to acquire them under the plan, but anything on top of that would be taxable. 

If he then ever paid off that loan—unencumbering the underlying shares in the process—that money would be off-limits for the government going forward. That way, were Musk to actually liquidate that stock in the future, Uncle Sam could not tax it twice, first as an unrealized and then once gain as a realized capital gain.

Pandemic-era asset price inflation a boon for the ultra-wealthy

Much like the subprime crisis triggered banker-bashing, the outbreak of COVID has made billionaire-bashing fashionable and, crucially, politically very popular. Even JP Morgan CEO Jamie Dimon has dabbled in it. 

During the pandemic, governments around the world unleashed a tsunami of fiscal and monetary stimulus. Much of that translated into inflation in the price of assets. In 2020, the value of Tesla stock alone soared tenfold, catapulting Elon Musk’s already sizeable wealth into the stratosphere. 

“The pandemic—full of sorrow and disruption for most of humanity—has been one of the best times in recorded history for the billionaire class,” OxFam concluded afterwards. 

In June 2021, a ProPublica investigation revealed some of the world’s richest Americans often paid little to no tax. Instead they pay for everything by tapping loans backed by their equity much like a homeowner would extract value from their house, by borrowing against its rising value.

Musk has 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 meet milestone targets in order to unlock tranches of stock options. No salary means no income tax. (He did pay a windfall tax in late 2021, which he claimed was the most in U.S. history after converting some of his stock options).

The company’s annual proxy statement filed in April indicated he has borrowed against 238.4 million shares as of March 31 worth a collective $50 billion at the current price. And that’s just Tesla—who knows if he has done the same with his privately-owned companies like SpaceX.

Weeks after ProPublica’s revelations sent “shockwaves through Washington”, Senate Finance Committee chair 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 heavily opposed by Musk, who warned it would interfere with his plans to expand civilisation to Mars.

In April, Biden adopted the “sea change” approach, and November’s federal elections will likely determine its fate. If the idea lacks enough support, there’s always Ackman’s proposal.

Musk couldn’t be reached by Fortune for comment.