The great wealth divide between the rich and the poor in the United States continues to grow and it shows no signs of slowing down. But while most Americans don’t begrudge others from earning their way to their wealth, it’s in the area of income taxation that the divide becomes resentful.
While many Americans slave away at their jobs and fork over a sizable share of their income to Uncle Sam, there are endless reports of millionaires and billionaires who pay $0 in income tax every year.
On the face of it, that sure sounds like an uneven playing field and it contributes to the narrative that “the rich get richer.” But is it really true that some billionaires really pay no income tax?
Do Billionaires Really Pay $0 in Income Tax?
Most Americans want to avoid paying taxes as much as legally possible. This applies as much to billionaires as to gig workers hustling just to get by. And many lower-income earners do avoid paying income taxes, due to their low wages and available tax deductions and credits. But it is true that some billionaires end up paying $0 in income tax.
In fact, the list of billionaires paying $0 in income tax reads like a who’s-who of the world’s most famous executives. Amazon CEO Jeff Bezos and Tesla CEO Elon Musk, for example, are the two wealthiest people in the world, according to the Forbes Billionaires’ List . But in 2007 and 2018, Bezos didn’t pay a dime in federal income tax, even though he was already a multi-billionaire. The same was true in 2018 with Musk.
According to ProPublica, however, these two are far from alone. Michael Bloomberg, Carl Icahn and George Soros all managed to avoid paying any federal income taxes at some point in recent years, in some cases multiple times.
Overall, according to ProPublica data, the 25 wealthiest Americans paid taxes equal to 3.4% of their wealth gain from 2014 to 2018. Bloomberg paid just 1.3%, while Bezos’ “true tax rate” in those years was less than 1%.
How Is That Possible?
The reason the IRS can’t stop certain billionaires from avoiding income tax is that they are abiding by federal law. The rich aren’t just making up their own rules and getting away scot-free — they are actually playing by the rules enshrined in the U.S. Tax Code. In fact, at least in principle, the rich avoid taxes the same way those in the lower income brackets do, through the use of deductions and tax credits. But while it’s a fair argument to say that only the rich can avail of some of these more advanced tactics, it doesn’t mean that they’re illegal.
By and large, the seeming discrepancy in taxes between rich and poor comes down to how the wealthy earn their riches. Middle- and lower-class workers get most of the income from wages and salaries, which are fully taxable as ordinary income. The rich, on the other hand, generate most of their earnings through capital growth. Many famous CEOs, from Mark Zuckerberg (Meta Platforms) and Steve Jobs (Apple) to Larry Page (Google) and Meg Whitman (Hewlett-Packard) all accepted a token salary of $1, in part to avoid drawing a huge tax liability. This is obviously an option that most rank-and-file workers can’t accept.
Rather than drawing huge salaries, the uber-rich tend to keep their money invested in real estate, the stock market and businesses. When the value of these assets grow, the money isn’t actually taxed unless a sale is made. Thus, the rich can keep getting richer without paying taxes because their assets rise in value. Meanwhile, if they need cash flow to fund their day-to-day living, they can borrow against these assets.
While they have to pay interest on these loans, it’s at a much lower rate than the credit card interest rates that the lower classes tend to face. As an added bonus, the money the wealthy take out in the form of loans is not considered income and so it is not taxable.
Another advantage billionaires have is that with so many investments, they can use any losses they generate to offset any potential gains. For example, if a billionaire earns a $1 million bonus but invests in a football team that generates operational losses, those losses can offset that income and result in a net-zero tax liability. The same applies to applying capital losses on stocks or other investments to any realized gains.
The combination of these factors helps explain why many wealthy people pay very low tax rates and why the IRS can’t stop them.
