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