Eli5 How does billionaires evade paying tax and not get arrested?.
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Generally, taxes work like this:
* If you perform services in exchange for money (aka “have a job”), you get taxed on the value of the services when you perform them.
* If you own things and you sell them to get money, you pay taxes when you sell them.
You probably make your money doing the first thing and so you pay lots of taxes because every time you do your job, you owe taxes on that. But no one ever become a billionaire by doing a job.
Since you only pay taxes on things when you sell them, the trick to becoming a billionaire without paying taxes is to buy things that are cheap and then make them very expensive. When Jeff Bezos acquired one Amazon in 1994, it was not worth very much. In 2023, one Amazon is worth a lot. Jeff Bezos will owe taxes if he sells his Amazon, but he doesn’t owe taxes until he sells it. He’s a billionaire because he owns more than $1 billion worth of Amazon, not because he sold his Amazon and has $1 billion in the bank.
The next trick they play is how to have money to buy things like houses and fancy cars without having to sell their stuff. They can do that by taking out loans using their stuff as collateral. You don’t owe taxes for taking out a loan. Since the banks know they own lots of stuff, they’re more than happy to loan them as much money as they need. The billionaires can then choose when to take out more loans to pay off the existing loans and when to sell some of their stuff to pay them off, essentially getting to choose when they pay taxes and how much.
All of this is perfectly legal- they haven’t skipped paying taxes that they owe, they just haven’t done the thing that triggers the government saying “you owe taxes now”.
Short answer is they offset their “income” which can be taxed with either taking on debt (not taxed) or receiving dividends instead of income which are taxed differently (and less).
If I own 10 homes totally 1 milllion and they double in value I pay ZERO taxes on that but I am now worth 2 million. Now I can LEVERAGE 1 million of that value and buy 5 more homes and now have 3 million in total Home value and still pay zero tax.
They generally do pay taxes. But taxes are applied to cash events such as getting paid, a payout, or when selling an asset. They don’t pay taxes on anything that’s increased in value until it is sold (in the US).
If you take the founders of Amazon for example, they didn’t have net profit for well over a decade as all revenue was poured back into growing the business. When the business matured and started earning profits, taxes were paid by the corporation and any of those profits distributed to the owners were also taxed. When those owners started selling their stock, they paid a tax on that.
Edit to add:
The tax code recognizes that business cycles can be multi-year, so businesses that had huge losses may be able to offset that with gains in other years. Depending on the losses, there may be little or no tax in “good” years.
What do you want to arrest them for? Buying tax free municipal bonds is legal. Buying a solar panel and taking a legal tax credit is legal.
Most ways that a billionaire avoids taxes is legal. For everything else they try hard to make it look legal.
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