How Do Rich People Avoid Paying Taxes? It’s Easy, Actually

Water and oil, night and day, billionaires and paying their fair share in taxes — this is just a short list of iconic opposites. It's probably not surprising that rich people go to great lengths to avoid paying any more taxes than they absolutely have to, but a new ProPublica investigation, published today, reveals in brutal detail how they get away with paying virtually nothing. Using over 15 years of tax returns from the ultra-rich, the investigation calculates the amount of taxes the 25 richest Americans paid contrasted with how much their net worth grew each year, to get what it calls their "true tax rate."

Let’s get specific, here, because ProPublica names names. Berkshire Hathaway billionaire Warren Buffet's true tax rate is 0.10%. Amazon’s Jeff Bezos' is 0.98%. Failed presidential candidate Michael Bloomberg's? 1.30%. Meanwhile, father of Grimes’ child, Elon Musk paid a comparatively high rate of 3.27%. No wonder he's such a fan of meme stocks — truly a man of the people.

A huge part of these tiny tax rates is the fact that extremely wealthy people maintain their wealth differently than ordinary people. It's not sitting in a bank, and it's definitely not stuffed under the mattress. They hold it in assets like stocks and real estate, which are only taxed when sold. Until then, it's "unrealized," not counting as income. Buffet, for example, reported an income of $125 million between 2014 to 2018, despite the fact that his net worth grew by $24.3 billion. Maybe you've heard before that Jeff Bezos made a salary around $80,000 as Amazon's CEO. That's obviously not the same thing as saying that his wealth only grew by $80K per year. Keeping your salary low is one way the ultra-rich get to keep more of their wealth. Bezos reported $6.5 billion to the IRS between 2006 to 2018, yet his net worth grew by $127 billion. In 2011, he reported a net loss and claimed a child tax credit. He's currently worth around $187 billion.

From 2014 to 2018, according to ProPublica, the 25 richest Americans increased their wealth to the tune of $401 billion. They paid 3.4% of that back in taxes. It compares this rate to a middle class American in their early 40s, whose wealth increased by an average of $65,000 between the same period. They would have paid about 95% of that back in taxes. Overall, the average American household from 2006 to 2018 paid more in taxes than they accumulated wealth. The report also notes that most of the wealth growth that middle-class Americans experience is thanks to a rise in home value, painting an even starker picture for how Americans who don't own such assets are supposed to see an upward trend in their net worth.

Even besides this, any income reported on their tax return can be offset by expenses and deductions. The 25 richest Americans can of course enlist the help of tax virtuosos who can perform dazzling acrobatics in tax avoidance. The kicker is that this type of tax avoidance is all basically legal — tax avoidance is using legal means afforded by the U.S. tax code to reduce how much you pay in taxes. Meanwhile, tax dodging is the illegal way that ordinary Americans might misreport their income or make some other mistake on their tax returns. The wealthiest people don't make such rookie moves. ProPublica notes that owning a sports team, for example, is a possible tax write-off. Another popular way to reduce tax liability is philanthropy, which not only saves billionaires money but also gives them good PR. Even in death, they can cling to much of their wealth. The highest U.S. estate tax rate is currently 40%, but the report says, "many of the richest create foundations for philanthropic giving, which provide large charitable tax deductions during their lifetimes and bypass the estate tax when they die."

Some billionaire-apologists argue that net worth somehow isn't really wealth, because much of it isn't liquid — they couldn't withdraw billions out of the bank right this second. But that's a disingenuous twisting of how wealth works. Jeff Bezos might not be able to bathe in a billion-dollar cash pile (not on the spur-of-the-moment, anyway), but everyone understands and respects the power that being "worth" $200 billion confers. There's an old story about Rockefeller once being denied a loan because he didn't have verifiable credit at the time, intended to show how the credit system is supposed to treat everyone equally. But does anyone actually believe Rockefeller would have had trouble borrowing any amount of money he wanted? In fact, credit is pretty much exactly how extremely wealthy people thrive. While for many Americans debt has become an unbearable burden, for billionaires it's the perfect way to avoid giving away more of their wealth, since loans aren't considered income. Earning an income is petty; the truly rich leverage debt to fund their lavish lifestyles, with a credit line in the billions of dollars. Their material wealth is not so material, but an invisible hand that opens every door.

That billionaires have to pay far less taxes than an ordinary wage-earner does also shows how money is either a vacuum or a magnet. If you don't have enough of it, its absence becomes a kind of black hole that sucks up even more money. Being poor is more expensive than being rich — you often end up paying more in banking fees, for example, paying more in interest, even paying more for everyday goods. Meanwhile, when you already have money, it allows you to start businesses that balloon into global megacorporations that attract deep-pocketed investors even when they're not turning a profit.

"The personal federal tax bill for the top 25 in 2018: $1.9 billion," ProPublica's report says. "The bill for the wage earners: $143 billion." Working a job? In this economy? It's obviously not an efficient way to accumulate wealth. Why should anyone dream of a job or want to return to their difficult, low-wage "essential" job — with CEOs complaining about the indolence of people supposedly preferring to stay on unemployment benefits — while billionaires give back so little of their staggering wealth to the society that helped create them?

Warren Buffet may have been proclaiming for years that billionaires should be taxed more, but he does so in a political landscape where the odds of reversing so much entrenched wealth inequality remains pretty low — or at the least, where progress towards that inches along at a snail's pace. President Biden has proposed higher tax rates for the rich, with a top marginal tax rate of 39.6%, and there's been vocal pushback from conservatives. Opponents of the plan have argued this is the biggest tax hike in history, but that's not true. Top tax rates have been higher than 39.6% before, and our overall tax burden as a nation is far lower than most, ranking 33rd among the 35 richest countries.

And unless the way that the ultra-rich hold their wealth changes — in assets rather than income — as well as whether we tax it or not, how much will a higher marginal tax rate really tip the scales? How do we ensure billionaires contribute an equal share to our society when they can still use foreign tax havens? Is this a flaw to fix like a leaky faucet, or is it a feature of the tax code, which contains so many specific clauses to help the rich? In A Fine Mess, a book about the convoluted U.S. tax system, author T.R. Reid lists several historical examples of this, including a special tax loophole that applied to “an automobile manufacturer incorporated in Delaware on October 13, 1916.” It was a loophole written exclusively for General Motors, without actually naming General Motors. Such examples make it seem like writing the nation's tax code is like signing someone's yearbook with an inside joke.

"To the moon" is a phrase often used by r/WallStreetBets traders when they want a stock, such as GameStop, to soar. While an individual trader might gamble on the financial windfall of skyrocketing meme stocks, billionaires seem to know that their wealth is not only safe, but that it will continue to generate more wealth. Instead, they aspire to literally go to the moon; ProPublica's investigation comes the day after Bezos announced he was going to space with his brother next month. Who knows? Maybe the last frontier will serve as the ultimate tax haven for billionaires. We just hope they’ll stay up there.