Why do I see this so much, and how is it possible?
In: Economics
They basically have enough money to pay for people to go to Washington and pay off enough congressmen/women and senators to pass legislation that will give them tax breaks or tax exemption.
Often when a billionaire doesn’t pay taxes, or any significant taxes, it is simply because they didn’t have any income in the taxation period. No income, no income taxes. Surely it isn’t surprising the very wealthy can live off their own wealth over many years, right?
But they can still get way more wealthy without any income. How does that work?! Consider if this wealthy person owns a lot of a huge growing company. As the company grows and becomes more valuable the wealthy person’s share of the company becomes more valuable, meaning they become more wealthy. But even though their wealth is increasing they aren’t paying taxes on that growth because it isn’t “realized”; owning something that is worth $1 one day and $1000 the next doesn’t mean that there is any more money in your pocket if you haven’t sold it! The next day it might drop right back down to being worth $1 so if you held it the whole time what would be the justification for taxing you for the brief period you *might* have made $999 in profit?
For the very wealthy you can assume basically all their wealth is in the form of such investments. For daily expenses they likely just have an unlimited line of credit with any bank they want, they are definitely good for settling up whenever. They don’t live off paychecks, they don’t even get paychecks (maybe a symbolic $1 or whatever), so they don’t pay taxes like normal people do.
There are many ways to evade taxes in the short term.
One way is to shift where you get paid or store your money to a place where there is little or no tax – that’s what the Panama Papers was all about.
Another is to convert money into things that are not taxable or taxable at a lower rate.
And finally in the long term, use your vast resources to lobby for changes to tax law which will allow you to pay far less in taxes.
Remember, taxes are paid on income and property. If you make it so that you have no income or property in the strict legal definitions of those terms then you cannot pay tax on them. So your property might actually be owned by an offshore company you yourself own so you don’t personally pay tax on it . Or your income might be actually money classified as something other than income by the letter of the law.
Legislators often want things to happen which they can’t directly do themselves. For example, they might want jobs for people in a poor area in their district. Other than government jobs, they can’t directly employ these people. What they would like better would be if some business would open in their district and then hire the people. Since that hasn’t happened already, it must not be profitable. So, they can offer tax incentives to a business, and make an unprofitable location profitable. This is much, much less expensive than giving the people government jobs.
Then the business that did what the legislator wanted, and hired people at a location that wouldn’t be profitable without the tax break, gets in the news for being a robber who doesn’t pay their fair share of taxes. Well of course not, the government agreed they could pay less tax as a scheme to get more jobs for people. Otherwise those people wouldn’t have jobs. All those “loopholes” are there because legislators put them there on purpose.
So typically in the US, we tax income. When you get money from your job or other sources, a portion of that is taxed then you are free to spend your money as you please.
This includes stocks, but that is a little different. For stocks, we tax capital gains. This means that when you sell a stock, you get taxed on the profit of that sale (you get taxed on the gains, which is the difference of the buy and sell price, if you buy a stock for 5 dollars and sell it for 15, then you get taxed on 15-5=10 dollars).
Most billionaires are rich from stock. No one is a billionaire from their 9-5 income. The billionaires typically created a company and when someone creates the company, they have all the stock for that company initially as they are the owners of that company. Jeff Bezos for instance is rich over the 20% of Amazon shares he owns. He once owned 100% as the founder but sold some for himself, sold some to finance his business, and now its at 20%.
People mention all sorts of tax loopholes and what not and yes to some extent that happens, but the vast majority of the “no taxes” they pay is because **they don’t sell their stock, they just hang onto it.** You only pay taxes on stock that you sell, if you don’t sell stock you pay no taxes. The general justification for this is that the tax code is patient and the tax will be paid eventually, since stock will eventually be sold. This is by far the number one reason they do not pay significant taxes in any given year.
So you see news headlines that “billionaires got x billions this year and paid no tax,” that refers to how much their shares increased that year, which they didn’t sell. They don’t often sell those shares because they just usually do not need anywhere near as much money.
Now on top of this, the tax code also taxes capital gains significantly less than income, 20% at its maximum compared to the 40% income is taxed at, so its also minimal in that sense.
Sometimes though they do need money. Often rather than selling their shares to get that money, they will ask for a loan from the bank for an absurdly low rate and the bank accepts because they know that they can pay it off with their shares if it comes to that. This is for instance how Zuckerberg was able to finance his massive house in Hawaii. You do not pay tax on loans, the idea is that they are not really income as you must repay them.
Typically tax tricks tend to be vastly more fancy for businesses but for individuals this is the majority of the “no taxes paid” thing.
The tax code is very generous about deferring the taxes you are to pay, particularly if you are rich you can defer the taxes paid to the future. Often the idea behind this is to see and wait if there is a more favorable tax code in the future to do this but otherwise this is done just because why not defer it. But its still designed to catch up at some point. Usually upon death but there are some loopholes there that need to be patched.
Instead of getting paid by your own company (or selling stock) and paying income taxes, you get a loan for your expenses and give your stock as security.
This delays paying taxes to the point where you would like to pay off your debt. Which you simply don’t, you keep the debt till you die. Dead people don’t pay taxes, and the debt will be paid back from the security (also no taxes here, at least no income taxes).
Only works if your security is worth much more than your desired income for the remaining lifetime.
In addition to the other things, sometimes billionaires don’t owe taxes because they *lose* money.
Suppose some casino magnate runs his business into the ground, suffering a capital loss of a billion dollars. He can offset that against his income from other ventures, so he has less income for that year, reducing his net taxable income. If his loss exceeds his income, he can report zero net income, and owe no income tax for that year. He can carry the difference forward, applying it to next year’s income, and the next several after that. There’s some limit, after which any remaining loss evaporates.
*tl;dr* Billionaires are not rich from the work they themselves do (income) but from the wealth they control, especially to make other people work (capital). Unfortunately, the tax system has been upended by technology, global finance, and legal loopholes, which currently allow really rich companies and the billionaires who control them to hide their wealth and profits from being taxed fairly.
…
The US and many other countries have historically made political decisions to tax income and not wealth.
Many posters responding to your question have described the mechanics of this in the tax code. These are all technically correct.
However, it is important to note that there is nothing inherently better or economically more efficient about taxing income (which usually comes from labour, i.e. work) rather than wealth (which usually arises from capital, i.e. extracting rent from others who actually work). In fact, many economists like Saez or Piketty would point out that our current bias in taxing income rather than wealth is likely to be economically inefficient, discouraging hard work and competitive enterprise and rewarding political corruption, cronyism and nepotism (which favor rent extraction in unequal societies).
Wealth taxes are nothing new or surprising to anyone: Taxes on land based on its appraised value are way older than the history of the US and most Americans who own their home are used to these taxes.
What the tax code has not yet caught up with is how to effectively tax other forms of wealth (for example the vast quantities of data and social networks that make up the value in a huge monopolistic tech firm, which are to a large extent generated by users rather than founders or even developers).
Additionally, in modern globalised finance, lots of laws have been rewritten for short-term national or jurisdictional gains (cf tax havens in Delaware or Ireland or the Caymans) that end up screwing over all of us in the long run.
For example, one of the classic ways that businesses avoid paying taxes is “transfer pricing” through different subsidiaries in different countries that arbitrarily charge “fees” for the use of the firm’s own technology. Imagine I am a fancy biotech company. If I create an entity in Luxembourg or Switzerland that technically owns the patents supporting a lot of my drug development work and then I charge really high fees to my subsidiaries in other countries like the US or France. This is a brilliant if devious accounting trick: legally speaking my Luxembourg operations are very profitable and happen to pay very low taxes because that country sets very low business tax rates, whereas the US and France operations have deflated profit margins and might even operate at a “loss” so that I can claim back refunds from those governments. Under current laws, it doesn’t matter if the vast majority of my actual paying customers are in the higher-tax countries, or even if the original technologies were developed (including with taxpayer-funded university research) in the higher tax countries. It’s still perfectly legal to book the vast majority of profits in Luxembourg (and then pay it out to shareholders) even if my office there has something like 10 of my 100,000 global employees. Because the vast majority of my company’s money passes digitally in € through bank accounts in Luxembourg and that is how “value” is assigned under current laws.
This kind of “tax efficiency” is very common by very large companies today, and of course benefits the shareholders in those companies, including extremely wealthy billionaires. That wealth often comes at the expense of customers, suppliers, and employees, who would receive net benefits (eg better universities or other public services) if tax rates reflected business operations and requirements more realistically, rather than based on documentation and legal fictions.
This is why global tax reform is so important, because otherwise governments will never catch up to these legal loophole “innovations” and we will lose the ability to mobilize the huge public funds that are needed for vastly important coordinated efforts like fighting climate change or responding to pandemics or caring for the ageing population, which are all public goods and services that only governments can procure efficiently.
The inequality of wealth in the modern age is truly unimaginable. That is politically useful. Otherwise too many people would question why they slave away and pay off ever-mounting debt to make rich people richer, even while a large part of that wealth ends up making global problems (cf environmental pollution, global mental illness) more prevalent and worse.
Edits: detail, tldr, fixed typo.
There are two answers:
The “why is it like this” answer is that because for half a century, politicians have fetishized wealth and *allowed* the ultrarich to go untaxed, because it was somehow felt that it’d be unfair if they had to pay taxes, or that paying taxes would remove the incentive for them to become richer and then somehow hundreds of thousands of jobs would vanish overnight.
Literally none of that is objectively true, but it has been an article of faith among those making the laws, and the laws are shaped to reflect this belief.
The more practical “how does it work” answer is that we tax people on their income, but not on capital gains such as if you own stocks which increase their value. Multibillionaires of course usually have a decent enough income, but the vast majority of their wealth comes from owning stocks in some big company, and they pay no taxes on those stocks until they sell them, which they rarely if ever do. The thing is that even if they need to extract money out of those stocks, they don’t sell them (because then they’d have to pay taxes). Instead, they take out loans, because you don’t have to pay taxes on those. In fact, you get a tax rebate for the interest you pay, which helps cancel out the bit of tax they’d otherwise have paid on their *actual* income.
The end result is that they pay no taxes on the hundreds of millions worth of stocks they own, they never need to sell them to fund their lifestyles because banks will lend them money, and this plus a few other tricks means that even if they do have a decent-sized “regular” income as well from their CEO job or whatever, they pay little or no tax (and certainly much less than you would) even on that income.
Everyone dies, the government will take a huge chunk eventually. Except for the Walton’s and a few others, most of the top American billionaires are new money, and they did without massive corruption like most foreign billionaires. They won the game, good for them.
I don’t get upset at the billionaires when all of us try to minimize our taxes. They don’t make the rules. They give money to politicians who make the rules, but it is mostly transparent and generally used for campaigning. It is basically advertising money. The public elects those politicians. If they get re-elected even if the representatives don’t do what you think is “right”, then I can’t blame the billionaires.
Either the public is smart enough to pick the best politicians in the long term, or they are too dumb to have the right to vote. If it is the latter, then maybe we need to re-think the whole system.
Latest Answers