Secret IRS files show richest Americans pay nothing in taxes. How do they get away with it?
Some of these revelations are jaw dropping, like the fact that between 2014 and 2018, these 25 Americans experienced an increase of more than US$400 billion in their net worth, despite paying less than 4% of that in taxes.
What’s the deal with these IRS files?
- Recently, ProPublica came out with tax profiles for the 25 wealthiest Americans, including Mark Zuckerberg, Elon Musk, Bill Gates and Jeff Bezos.
- The report explains exactly how much money the ultra wealthy make, how much they report to the IRS and how much they actually pay in taxes.
- Some of these revelations are jaw dropping, like the fact that between 2014 and 2018, these 25 Americans experienced an increase of more than US$400 billion in their net worth, despite paying less than 4% of that in taxes.
- To compare, over the same period the average American saw an increase of US$65,000 in their net worth and paid US$62,000 in taxes – more than 95% of it.
So how do the rich avoid paying taxes?
- First, we have to understand the difference between wealth growth and income.
- Wealth growth happens when the value of assets goes up. For most people, this means the value of a house or a person’s belongings, which can go up over time. But for the ultra rich, wealth growth happens when the stock value of their company goes up.
- Income, however, is how much you take home at the end of the day.
- Most people’s income is split between three things. First, some percentage of it gets taken as a tax by the government. Much of the rest then gets used for things like food, electricity, water and other necessities. What’s left might get used for wealth growth, like if you decide to upgrade your kitchen, which, in turn, increases the value of your home.
- But the wealth growth of the ultra rich is entirely separate from their income because their wealth is based on stock value. As for a salary, which is the average person’s main source of income, most of the ultra rich don’t even take much of a salary, since they would need to pay taxes on this income.
So how do they pay for the things they need?
- Most of the ultra rich take out loans to pay for their basic needs.
- Normal people like you and me take out loans to pay for things like college, a house, or a car, but these are all generally seen as necessary because most of us don’t have thousands of dollars lying around to pay for these things in cash.
- For the ultra rich, loans are a little different. They can put up some amount of stock they have in their company as collateral for a loan and then use the loan money for what they need – or what they want, like a US$25 million yacht.
- In the United States, loans are seen as borrowed money and aren’t taxed. If the ultra rich paid taxes on what they took out in loans, they would be paying around 37% of that amount in taxes. Instead, even a high interest rate on a loan, like 13%, is way less than they would pay in tax, so they typically opt for the interest payment instead.
How can the ultra rich justify paying so little?
- Well, it varies a bit from person to person, but there are a couple of main answers this group of people gives for why their taxes should stay low.
- One argument is that their money can be put toward philanthropic efforts where it might make a bigger difference than if it was given to the government in the form of taxes. Bill Gates and Warren Buffett are both proponents of this and have pledged to give almost all of their money away to charitable foundations.
- Another argument is that, because so much of their wealth is wrapped up in the success of their companies, especially in the case of chief executives like Elon Musk and Mark Zuckerberg, corporate taxes affect them greatly and should be seen as sort of a tax on them.
- But the ultra rich aren’t necessarily doing anything illegal. For them to pay what many consider their fair share, the focus would need to shift to radically changing the tax code.
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