How billionaires like Elon Musk pay less tax than you

By | December 21, 2021
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How do billionaires pay less tax than you? Elon Musk, Jeff Bezos, and Warren Buffett are three of the richest men in the world. You likely pay more tax as a proportion of your earnings than they do. Warren Buffett once said this but I’m paying about the same percentage of my income to the federal government as my secretary does leak tax returns. Analyzed by ProPublica found that Jeff Bezos paid no federal income tax in 2007 and 2011. While Elon Musk didn’t pay any income tax in 2018. The rich have it different than the rest of us. They make their money holding assets capital. We tax capital very lightly. So why do the ultra-wealthy pay so little tax.  As a proportion of their wealth and why can’t politicians seem to do anything about it.

Read more articles: How to Maximize Your Tax Refund This Tax Season

How do billionaires pay less tax than you?

 

People like Elon Musk and Jeff Bezos didn’t become the two richest people on the planet by being paid a salary instead. They like to be compensated in the form of shares in the companies that they run shares though are very different from a salary. You only pay tax capital gains tax. When you sell shares the top tax rate on capital gains is 20 by contrast wages salaries bonuses are taxed at 37. That’s just the start of the benefits of many billionaires.

 

Following a mantra called buy borrow die when it comes to tax. The simple idea is that capital gains tax only applies when you sell shares. So simply don’t sell them ever a key part of the by borrow dies strategy is trying to consume potentially without uh having to unlock a lot of cash or liquidity. That is mostly reinvested into you know a business but there is an intrinsic problem with this strategy. Because if you’re not being paid a salary and you’re not selling the shares that you own.

 

How do you find the money to buy yachts and private islands?

 

Well, that’s where the borrow part of the strategy comes in you simply borrow money using your shares as collateral. Elon musk can borrow money from a bank say and use that borrowed money to buy.  Whatever billionaires buy and borrow in our system is not a taxable event and it gets even better than that. Because if you borrow money from the bank you may even be eligible for tax breaks. And then there’s the final part of the strategy the kicker when they pass away.

 

They can then go ahead and bequeath it to an heir who does not pay tax when that asset is given to them. In the u.s we call that uh the step-up in basis. Almost everywhere schemes like this are being used by the uber-wealthy to avoid paying tax. All perfectly legal in the u.s Joe Biden tried to torpedo the die part of the buy borrow dies strategy but the president’s push simply didn’t get the support it needed in congress.

 

Another idea to tax a person’s net wealth annually didn’t make it either most scholars. Believe a wealth tax is questionable under our constitution which limits the ability to tax property directly. And that’s why many tech billionaires who have made a fortune during the pandemic may well pay a lower tax rate than you do. And the chances of that changing anytime soon are pretty minimal. Now at the end of the day, the billionaires I think will win the framework of our income tax rules will not be changed in any fundamental fashion.

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