You can choose not to realize capital income. Borrow against assets.

If we're treating that as income too, then this is a different conversation.

Personally I feel that by using an asset as collateral the person is essentially “realizing” the gain (the person is formally and contractually saying the asset is worth at least this much and using it to exchange something of value, even if only in case of default) and should pay capital gain tax for however much the gain was based on assessed collateral value minus the cost basis. And the cost basis steps up to the assessed collateral value.

Yes, let's discuss this. By the way, for the r=g, head on over to measuringworth.com, which has long term GDP and interest rate data, and run the calculations, you'll see how r = g over long periods but swings above and below, it doesn't track it exactly. I used to be fascinated by this stuff and generated lots of charts and even had an econ blog but that was a long time ago. The data is out there.

In terms of borrowing against assets to "escape" paying taxes, I wonder if you have a problem with someone who borrows to pay their taxes. It's the same thing. At the end of the day, they will need to pay interest on the loan, and that rate will be more than the risk free rate.

What is strange is that you never hear the opposite argument:

If you want taxation to be based on spending rather than income, then you want consumption taxes. Now a lot of economists hate income taxes as a group and think only consumption should be taxed, in which case you make a billion but only pay taxes on what you spend.

Overall, do you think billionaires would fare better with consumption only taxes or with income only taxes? How many assets pay no interest ever? It's a weird argument to be making, that billionaires escape consumption taxes when they spend down their savings.

But even here, people are making a mistake, because eventually you need to sell assets to dispose of the loan, and that's when you pay taxes on the realized gains, with interest. And the interest rate charged to the billionare will be more than the risk free rate which the government can use to borrow, so if the government just borrows the expected amount of taxes and rolls over the loan, the government will outlive the billionare and when the estate is settled, all that spending, plus interest, will be realized gains (100% gains, remember) and the tax bill will be paid in full.

This is really no different than borrowing to pay your taxes. Sure, in a sense you "avoid" paying taxes, but not really.

So what you really want is to close the income tax loopholes. Treat inheritance income as income. Ban non-profits. Ban "foundations" that don't pay tax, etc. All you need to do is treat all income equally for tax purposes and you are fine. No one can escape taxes, even if they borrow to pay their taxes.