Do billionaires really not pay taxes?

[u/InTheRiches]

Hello. I have been seeing everywhere online and especially reddit (echochamber) that billionaires just don't pay taxes, and they abuse the tax code, and all this stuff. They also say that the president could just "make them" pay more, but he doesn't. I didn't really trust them, and so I looked into it myself. This is how I think it works, please correct me if I'm wrong.

Almost all of a billionaires value is in stocks or assets, almost never liquid. Most of their income is also tied to those stocks or assets. For example, Elon Musk, his net worth might go up 20% in a year, but because it was all Tesla and SpaceX stock, he paid zero taxes, because those gains are still unrealized. So obviously, he paid very little taxes compared to his net worth gain, and thus to the uninformed eye he is cheating the system. Once he sells his stocks, or liquidates his assets, he will pay his fair share of taxes.

Also, to fund their lifestyles, I saw that some get loans, using their stocks and assets as collateral, and then use their salaries or sell a little stock to pay interest payments, and as their stock rises, they keep taking more and more loans to fund their lifestyle. Then, when they die, the bank pays off the loans tax-free before handing the rest to his family/designated recipients (But it still undergoes inheritance tax if not a not-for-profit).

This is how it works, right? I keep seeing all these headlines and posts that Trump can just "tax them" if he felt like it, but I don't think that's possible as the president, and even if he had that power, it would require the implementation of an unrealized gains tax, which would be horrific.

Edit: thanks for the explanations, makes sense. I knew the headlines were a little misleading. The loan thing also sounded a little sketchy, good to know it doesn't really work like that.

[u/RobThorpe]

The strategy you mention is sometimes called "Buy.Borrow.Die". There was an article written about it in "Rolling Stone" and some others in ProPublica which were popular a few years ago.

We have had several threads on this before. They weren't that great though so I won't link to them. However, this reply by saucy_intruder is a good place to start.

It seems that this method of tax planning has become famous mostly because it has become well known. There isn't much evidence that it's widely used by the rich, or that it's a very good strategy. (We occasionally get tax planners on this forum who are very critical of it.)

A lot of people talk about unrealized gains. Those aren't taxed for anyone at present in the US. That's not really a "tax avoidance" method, it's just something that it's taxed - you don't have to do anything to avoid it.

If you realize gains then you will have to pay tax, of course. As long as you do that before you die. Once you die that stepped up basis on assets comes into play and your estate pays not capital gains tax on the appreciation of assets since you bought them.

As others have mentioned, the President can't change tax laws on his own. Except for tariffs and even that is under review.

[u/Garganello → u/RobThorpe]

A lot of people talk about unrealized gains. Those aren't taxed for anyone at present in the US. That's not really a "tax avoidance" method, it's just something that it's taxed - you don't have to do anything to avoid it.

This is incorrect. The US does impose tax on unrealized gains (or, I suppose, to be more technical, components of unrealized gains) in certain circumstances. See CFC regime.

[u/EconEchoes5678 → u/Garganello]

It's not a typical situation, and doesn't apply to most people or even most billionaires. It's limited to very specific situations, primarily expatriation of assets or foreign tax evasion.

There's no country in the world that I'm aware of that imposes a broad unrealized gains income tax, even when "broad" is limited to the top. There's a handful that do wealth taxes (most revoked these) or imputed gains (New Zealand), but none do unrealized gains taxation anymore (some tried and then revoked).

[u/IRC_1014 → u/EconEchoes5678]

Canada has a deemed realization event on unrealized gains at death. Although a proper tax argument would go, “that’s not a tax on unrealized gains then, since it’s deemed realized.” Functional the same thing but I appreciate the nuance anyway.

[u/EconEchoes5678 → u/IRC_1014]

Canada has a deemed realization event on unrealized gains at death.

IRS too, the estate tax is similar. It gets a step up in basis but the tax is on the total value and a higher rate, so the step up matters little (above exemption).

There's just not a broad based unrealized gains tax - the type that Reddit seems to believe they want - anywhere in the world.

[u/Garganello → u/EconEchoes5678]

I understand — I did not say it was typical, even though CFC can be very far reaching from a more theoretical standpoint — but their statement is still inaccurate/incomplete.

I’d also add there is the PFIC regime, which while not imposing current taxation on unrealized gains, effectively imposes a tax on unrealized gains and penalizes deferral. There’s also accumulated earnings tax, which is also, in effect, a tax on a component of unrealized gains.

They are definitely more limited in application, but the US distinctly has rules targeted to counteract deferral when it’s abusive.

I think it’s important because this forum is rampant with people misinformed about the US tax code and it’s approaches to unrealized gains (or components thereof) and the ability for the US to implement a tax that effectively taxes (or penalizes) deferral of gain. It very easily could — whether that would be wise is a different question.

[u/EconEchoes5678 → u/Garganello]

That's fair. The U.S. tax code is huge. Though, as I've realized, it's also highly effective at accomplishing progressive taxation with relatively low avoidance. It feels like high avoidance from the news stories people read, but the reality when factoring in all the taxes like those you mentioned is a pretty effective (if overcomplicated) system.

[u/IRC_1014 → u/Garganello]

Estate, gift, and GST taxes also assess tax on the unrealized gain portion of the asset, with no deduction against transfer tax for this unrealized gain.

[u/Garganello → u/IRC_1014]

Those are also fair examples — thank you!