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