eli5 what do people mean when they say billionaires dont get taxed


eli5 what do people mean when they say billionaires dont get taxed

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Exactly that.

First, if you have enough money you have _many_ options for _perfectly legal_ tax avoidance. You can move income around between companies, locations, etc so you’re not taxed as much, you can get tax credits for all kinds of things, and many, many more methods.

Even before that, a lot of the ways really rich people make more money are taxed at significantly lower rates than “regular” income. Capital gains are one example of this (so making money in the stock market).

Again, this is all perfectly legal.

It’s mostly about not understanding how taxes work. There are very few if any that become billionaires by earning an income. The vast majority get to that status by owning assets, and the appreciation of those assets. You largely pay taxes on realised profits or regular income, of which billionaires have very little and thus pay an appropriate amount. Having a large amount of assets also allows them to take full advantage of any tax code to limit their tax liability.

Most of the most wealthy keep their wealth invested. They don’t keep piles of money in banks accounts nor do they necessarily have huge salaries. To have wealth in the billions typically means significant (fairly permanent or not easily traded) ownership in a company.

These fixed assets when simply held are not taxed as personal income even if the value increases. The corporations are taxed though so, in a sense, the billionaires assets are taxed indirectly.

As a general rule, people who make blanket statements like “billionaires are not taxed” are not being honest, don’t (want to) understand wealth or economics and have an agenda of their own.

Let’s suppose you found a tech company. After a lot of hard work, your company goes public with a valuation of $1 Billion and you own 20%. You suddenly own $200 million worth of stock, and you pay taxes on it, leaving you with ~$150 million.

EDIT: It has been explained to me that Founder’s Equity is treated differently, and there would be no tax bill at IPO time for you as a founder. My apologies for the discrepancy, the rest of the example still holds, just with $200 million instead of $150 million.

Now that you own $150 million in stock, you stop taking a salary. Heck, let’s say you stop getting more stock too. This leaves your yearly taxable income at $0, so you no longer pay any taxes.

Over the next 10 years, instead of selling your stock, you use it as collateral to borrow money to pay your living expenses. You pay a pretty low interest rate, because you have solid collateral.

Meanwhile your company grows like crazy. In the next 10 years, your company goes 10x in value. Now you have $1.5 Billion in stock. You have gained $1.35 Billion in wealth. But you pay no taxes because your wealth is all concentrated in stock that hasn’t been sold.

To pay your daily bills, you continue borrowing. You can do this because your bills are so much less than your total wealth, and you’re better off paying 4% interest or whatever and letting your stock grow at 10-15%.

Then, you die. Your estate sells enough stock to cover your loans, and pays the capital gains tax rate of max 20% (ONLY on what has to be sold to cover your loans!). The rest of your wealth is rolled into trust funds, etc. and assuming competent estate planners your estate pays zero inheritance taxes.

Having enough wealth that it can generate more wealth faster than you can borrow against it means you will essentially pay zero income tax as your wealth snowballs, and instead of the top 35% rate you’ll pay a very nominal interest rate in your line of credit.

Billionaires don’t get that rich with normal salaries. They get that rich because of appreciation in asset values. But asset growth (or capital gains) are only taxed when they sell. And capital gains tax rates are lower than most income tax brackets.

They may sell a tiny portion of their wealth to cover living expenses and pay taxes on that, but it’s a tiny portion of their wealth. Say somebody’s worth $1B and sells $10m in stock to fund their lifestyle. They pay 20% tax, or $2m, which is nothing relative to their net worth.

But billionaires don’t even really need to sell, as they can typically get lines of credit that allow them to borrow at crazy low interest rates, while their assets keep appreciating in value. Someday they may sell assets to cover their loans and pay taxes, but they may wait for advantageous tax law changes, or may just keep rolling debt until they die and let their estate settle up on the debts and taxes.