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

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

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Anonymous 0 Comments

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.

Anonymous 0 Comments

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.

Anonymous 0 Comments

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.

Anonymous 0 Comments

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.

Anonymous 0 Comments

To be absolutely clear, they don’t pay “no taxes,” they pay no income tax on a salary.

They’re still paying things like capital gains tax, real estate taxes, sales tax, etc. The businesses that they own also pay a litany of taxes as well. And if they liquidate anything into cash that qualifies as income they *would* pay income tax on that too.

The idea that billionaires pay literally *no tax whatsoever* through super secret 1%-only exclusive tax loopholes is not true but gets bandied about by the “eat the rich” crowd regularly. Should some of these loopholes be closed so they can avoid *less* tax through clever accounting? Yeah, absolutely, but you can’t hold it against them to be taking advantage of every advantage presented. We all do it and it would be silly not to.

Anonymous 0 Comments

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.

Anonymous 0 Comments

**To understand how billionaires evade taxes, you first have to understand how the US tax system works.**

The US system taxes “instances of [1] undeniable accessions to wealth, [2] clearly realized, and [3] over which the taxpayers have complete dominion.” Eisner v. Macomber

“Accessions to wealth” basically means the US does not tax wealth, it taxes income. We are only looking for gains here.

“Clearly realized” means that before a gain is taxable, it has to be more than just on paper. For instance, if you buy a stock of Google for $1000 and a month later it is worth $1100, you technically have a gain of $100. However, you haven’t actually seen a penny of that money yet. To actually access that theoretical $100, you would need to sell your stock, at which point you would be on the hook for $100 of taxable income. Once you turn your paper profits into cold hard cash you can spend, you have “realized” your gains and they can be taxed.

Imma skip the “complete dominion” element since it is mostly irrelevant to our current conversation.

**”Now that we have a basic understanding of how the US tax system works, why haven’t billionaire’s paid a buttload of taxes? They sure gained a lot!”**

Well, because often that wealth is mostly paper wealth that they haven’t actually “realized” yet. It’s usually in the form of stock in a company, and unless they sell that stock there is nothing to tax… yet. In theory this doesn’t matter, because EVENTUALLY those shares will have to change hands in some manner or another, at which point taxes would have to be paid on all the accumulated value in said stocks. In theory it’s a good system – you only pay taxes on something when you are making ACTUAL money from it, not just theoretical. Forcing someone to pay a fortune in taxes for money that only *theoretically* exists would ruin anyone trying to run a business or invest, and we want our tax code to make people MORE productive, not LESS.

HOWEVER there is a big loophole that Republicans refuse to allow Democrats to close (although even Democrats can baulk on closing it depending on how much they fear the donor class).

If the billionaire DIES while still holding those stocks, then all that accumulated increase in value (or “basis,” which would be taxable if the stocks were ever sold or transferred) is zeroed out, and the person inheriting the stocks can sell them and pay no taxes on them. This is called **”stepped-up basis.”**

So billionaires are highly incentivized to just hold everything till they die and the clocks reset and no taxes are paid on their accumulation of wealth.

**”But what if they want to spend their money? Wouldn’t they have to sell stocks?”**

Good question! No!

Rather than sell their stocks to access their immediate value and “realizing” them, what billionaires do is instead take out a loan secured by those same stocks. Remember, the US only taxes GAINS, and a loan is not a gain. You have to pay it back at some point, so there is no actual “accession to wealth” taking place.

And since they have plenty of property to back those loans and plenty of things they COULD sell if they needed to, banks give them AMAZING rates, so they barely pay interest on the loans they take out.

By taking out millions of dollars of loans secured by their “unrealized” and thus currently untaxable property as collateral, billionaires can turn paper money into real cash without running afoul of the IRS or paying taxes on it while they wait out on the clock on their death.

**”Horrifying! Is that the only way they evade taxes?”**

No. The tax code is complicated, and when you have the time and money to hire tax lawyers to make sure the manner in which you do things is optimized within the tax code, even when they do “realize” gains they often pay considerably less than one might expect. For instance even if they did pay taxes on all of that wealth gained before they die, the tax rate for “capital gains” is considerably lower than the tax rate for what people who work for a living pay when they receive income.

That said, it is the most glaring loophole they can take advantage of, and thus the best way to explain it here.

Anonymous 0 Comments

They’re mostly just wrong. Some will be lying/misrepresenting, but many are mistaken because billionaires typically don’t pay the same taxes as average workers, such as income tax, but they’ll pay a lot more of e.g. capital gains tax. This is compounded by people like e.g. Robert Kiyosaki going around bragging about how “you can’t tax us” and “we don’t pay tax”. He’s trying to make out like he has some clever secret, and he’s using it to sell his books and seminars, the income from which he _will_ be paying taxes on.

Assuming they’re doing everything above board and in the spirit in the tax laws, by and large, they will be taxed, a lot, at least in absolute numbers, over the course of their life. You can easily find reported federal income taxes for American billionaires. They are paying hundreds of millions. However, overall, the effective tax rate is a lot lower than the average worker, perhaps a few percent instead of 20-30.

Also, if you ignore the first assumption, some of them cheat.

The main issue people have with billionaires though is that, even after all the tax, they’re still billionaires, and people find it unpalatable to have billionaires existing while some people are living without food, shelter, warmth, or any combination thereof.

Unfortunately, much of the discourse boils down to “they’re not paying their fair share”, without anyone being able to give a number on what’s fair. To which I’ll refer you to my previous paragraph. Until everyone is housed and fed, the billionaires aren’t being taxed enough. Which is not necessarily wrong.

Anonymous 0 Comments

They mean they aren’t getting taxed on the value of their assets raising. Which is actually perfectly fine because you don’t make “money” (and therefore owe a tax) when the value of an asset you own increases.

When a billionaire makes money, as in cashes out on an asset and makes money, he pays a tax.

Anonymous 0 Comments

We mostly tax income rather than wealth.

The Americans with the highest tax burden (as a % of overall wealth), are the middle to upper middle class.

Billionaires not only pay significantly less taxes (as a % of overall wealth) than the middle class, but sometimes pay significantly less than people who are living in poverty. Once you’re wealthy enough to be earning money from just owning assets and wealth, instead of income, your tax burden drops very significantly.

This is part of why the middle class in the US is shrinking year over year and has been for a long time. We are redistributing wealth from the middle/upper middle class to the billionaires and multi-millioniares.

The sad thing is that the average American is still so mathematically and financially illiterate that they see a doctor making $200k/year in INCOME and a CEO who’s worth $200 million in WEALTH AND ASSESTS both as “rich people”, and fail to realize just how drastically different the two are. I truly think this is intentional because it keeps the broader “income earning class” (i.e. the proletariat in commie speak) infighting amongst themselves instead of banding together against their oppressors.