Why do U.S. billionaires pay low taxes?

You might hear phrases like “tax the rich” by politicians and voters in the U.S. — but how do billionaires like Elon Musk and Jeff Bezos not pay tax in the first place if they are worth so much? We’ll explain below. 

Firstly, it’s important to note the typical mechanisms used by billionaires in the U.S. are completely legal, and are using the tax code exactly the way U.S. Congress wrote it.

So how does it work? 

Let’s take Mr Bezoszuckgates, Founder and CEO of a huge company. His salary from Amazonbooksoft is a bit over USD$81,000 per year? That figure is not by mistake. Almost all of his wealth is actually in Amazonbooksoft stock (click here for our stock explainer), not in the form of financial wealth that you and I would receive from our jobs. When Bezoszuckgates first started Amazonbooksoft, most of his compensation was receiving stock in Amazonbooksoft, and as the company grew in value, so did the value of the stock Bezoszuckgates had in his possession. 

Let’s hypothetically say that Bezoszuckgates needed a bunch of money to purchase a house. One way he could buy the house is to sell some stock to get the necessary money. However, the profit he made from selling the stock is taxed (known as capital gains tax). The more profit an individual has, the bigger the tax bill — for someone like Bezos, that tax bill is quite big. 

To avoid paying capital gains tax, Bezoszuckgates can go to a bank and request a low interest rate loan. The bank is willing to give him a loan due to his wealth (even if it’s tied up in stock — which is then used as the collateral for the loan). When Bezoszuckgates receives that loan, he can then pay for the house with the loan. This way, he never had to pay tax because he never sold any stock in the first place. Additionally, the interest on the loan is a tax write off. 

That tax-free loan is now his spending money, instead of a taxable salary. In the U.S., you only pay taxes on the assets you sell and make a profit from (in Bezoszuckgates’ case, it’s stock). But he never had to sell stock meaning: he never pays tax. 

But then how does he pay off the loan? 

He does have a salary of just over USD$81,000 per year, that he can use. But there’s nothing stopping him from getting another loan, to pay off the first loan. He uses loans on loans. Plus, the more loans he takes out, the less tax he pays because the interest payments are tax deductible. It is understood that Bezoszuckgates, by using this practice, would have quite a bit of debt, but in the grand scheme of his wealth, he is better off borrowing money (tax-free) than selling stock (taxable) to pay for purchases.

This practice in the U.S. is usually done by top billionaires who have the assets (and the accountants) to do it in the first place.  

How did we learn all this? 

A report came out recently by news organisation Propublica that detailed all this. You can read the report here.