For anyone who knows about economics maybe you can explain something for me?
There’s a lot of criticism of billionaires not paying taxes lately for good reasons, but the typical response is often something like, well that net worth isn’t liquid, it’s tied up in assets and stocks.
But that raises the question of - how did they buy those things in the first place? And why weren’t they taxed on the income they used for the purchase when they earned it?
Not meant to be a loaded question btw, I legitimately don’t understand how various tax loopholes work.
They didn’t necessarily buy the assets the way you would buy an investment. The more common scenario is that the person (not yet a billionaire) founds a company, owns shares in that company, the company is successful, and the shares rise in value. Or the person is the heir to the founder. The point is: The shares weren’t bought for billions, they were already owned by the billionaire (or the family) before they became billionaires.
They then use the assets as collateral for lines of credit instead of selling the shares and paying capital gains tax. So it isn’t income that they are using to live on or further invest.
Also, a strategy employed by many extremely wealthy people is that instead of owning property or expensive assets directly, they establish a ‘foundation’ (typically incorporated as not-for-profit entity) which ‘owns’ everything and either rents or ‘provides’ the assets under charter, thereby providing a legal tax shelter for all gains and liabilities. Wealthy people who have significant income from foreign ventures will use this to avoid paying income taxes by chartering the foundation in a tax haven country with little or no income tax or import fees. As a result, many very wealthy people are actually ‘cash poor’ and own virtually nothing except for personal effects, and only pay income tax on the salary or allowance the receive from their foundation. This is how billionaires can live extremely lavish lifestyles and just pay a fraction of the tax rate of a ‘normal’ person even though they disproportionately benefit from infrastructure, education, et cetera that the government provides via taxes.
Also, most of the income the super-rich get is in forms that aren’t legally classified as “income”, for purposes of tax. They’re still taxed, but at a lower rate, because they’re not “earned”.
I’m sure we can come up with many complex answers but, simply stated, the rule of law has always favored the rich and powerful because they are the people who run things.
As with most questions regarding income taxes for the ultra-wealthy, you appear to be falling into a common misconception, and are confusing “wealth” and “income”. Income taxes are paid on income, not wealth.
Putting aside the typical financial shenanigans of hiding assets offshore, creating tax shelters, borrowing against assets instead of outright selling them, etc., income tax is assessed at the time income is generated.
When Bill Gates’ Microsoft stock increases in value from $1 billion to $3 billion, there is no income generated. But when he sells $5 million in Microsoft stock so he can buy some ice cream, income IS generated. That income is then taxed at capital gains rates (15% for those earning under $492k/yr, 20% for those earning more).
Imagine that, as a kid, you buy a comic book for $1.00 from some unknown label and unknown author. Over the course of the next few decades, that label becomes a major mover in the comic book industry and that author’s works become mega-billion dollar franchises. They’re making movies based on the series, building theme parks around it, etc.
The comic book that you bought is one of only 100 copies that were ever printed, most of those have been lost or fallen apart. Yours is one of the few pristine copies and people would pay you tens of thousands of dollars to buy it off of you.
You spent $1. You now own something worth $10k+. Until the time that you sell it, though, you don’t have any real cash. And, likewise, there’s always the chance that the author of that comic book series ends up having been a child molester and reprehensible human being, all love for the series dries up, and your comic goes back to being worth only a few dollars.
The valuation of $10k isn’t even absolute. People are saying that you could sell it for that much money but…maybe not. Until you actually take it to market, who can really say what someone else would pay for it?
Should the government be able to declare that your comic book, that you bought as a kid for $1, is now worth $10k, and you owe them some cash just for the privilege of being allowed to hold the valuable item?
So now, let’s say that you continue to hold the comic book until your death. At that point, it’s worth $100k. In order for your estate to be passed to your children, it has to be valued and taxed. They might owe $15k if they want to accept your comic book. Alternately, they’ll have to sell it and pay the $15k from the proceeds. In either case, your holdings are eventually taxed. But, during your whole life you ended up “tax free” because your legacy is only taxed on death.
The real question isn’t how much taxes the wealthy pay when they’re alive, it’s how much we’re getting off those who died this year.
Un/Fortunately we have a very complex tax code with lots of loopholes; the ultra-rich employ people who can minimize what they pay by taking advantage of the code.
Estates are taxed at the Federal level only if they exceed $12.92 million (13.61 million in 2024). Otherwise there is no federal tax on it. And whether or not it’s taxed, the cost basis for further capital gains is increased to the value at the time of death so the capital gain might never be taxed.
Similarly if you donate the appreciated item, you may deduct the full value of it, but you don’t have to pay the capital gains tax.
And that’s the larger issue, not the “Jeff Bezos isn’t paying taxes” thing. He may also be avoiding some taxation on his periodic stock sales but, I’d guess, that’s a small percentage compared to his total valuation.
On the other hand - and the way that Bezos would look at - private employment is the most cost effective and socially beneficial welfare program ever discovered by humanity. Not only is it funding nearly all our citizens, it’s also funding all of our public systems, generating all of the food, and running the majority of R&D to improve all of that as well. A tax write-off for creating and leading on of those might be fair.
I’m sure this is how Bezos and other billionaires look at it, because it frames them as generous benefactors rather than opportunistic parasites who greatly benefit from interstate and state-maintained highways, subsidized energy, universal literacy, et cetera which gives them access to both a well-educated labor pool and a relatively wealthy customer base, which is why Amazon does so well in the United States and Europe, and not much business in India or anywhere in Africa or South America. That they can treat all of these public benefits as ‘externalities’ that are funded by taxes they don’t have to pay; not only income and asset taxes but also sales taxes which, until a few years ago, Amazon.com thrived in allowing customers to avoid paying the state taxes they would have to pay for normal purchases, and still undercuts brick & mortar businesses in municipalities which impose sales taxes.
The notion that Amazon et al is “funding all of our public systems, generating all of the food, and running the majority of R&D” is absurd to an extreme. Virtually all fundamental innovations in the last twelve decades have come out of government labs or government-funded academic research, and for-profit corporations stitch it together into applications, package, promote, and distribute it at substantial profit having paid little or nothing to support or recompense that research. Amazon isn’t “generating all of the food”; they are a middleman for agriculture and food production that itself is frequently subsidized. And all of that is fine, at least from a capitalist point of view—it is a system that, for better or worse, has made the United States the zenith of consumer culture—except that the people who have most profited on it also want to claim, hypocritically, that they don’t even owe a proportional share of the massive wealth they have accumulated by it that nearly one else pays by default.
Bezos, Cuban, et cetera are not public benefactors and it is long past time anybody should be promulgating that distorted, factually-deficient view.
I believe that the Post Office is self-funding. Other than that - and including programs that invest in exploratory research - everything is paid for by taxes or loans. The loans are paid for by taxes.
Taxes largely come from income.
That income comes from the wages of workers at businesses. They make products or perform services for their employer, the employer sells those products, and the profit margin is trimmed to finance science. But yes, those workers are likely to be using some component or part that had some element (fundamental or tangential) that came out of government funding. They’d be working a worse job or making a worse product, minus that.
Fundamentally, it’s all circular and implying any one true top or bottom is false. The system of taxation that optimizes the returns on that loop is more important than people feeling like it’s fair. Fair is largely defined around me paying less, not around an analysis of how we make the world a better place.
And the owners of the businesses, and the corporations themselves…except they have lobbied for and received many loopholes which allow them to avoid paying more than a token amount of taxes. Because:
I guess such ‘fairness’ is defined by how much of it you can afford to buy.
You own $1B of shares in XMicroZon. You can either:
sell a few each year, slowly losing your control of the company, and pay capital gains on the sale (assuming original base price was close to zero)
-or-
take out a loan, use the shares as collateral, you still own them, vote them, and perhaps they keep going up in value making you even richer. The money from the loan is tax-free pocket money.
The risk with the second option is if your stock tanks, at a certain point the bank will call the loan and take and sell your stock. OTOH, if you don’t lose it all first, you die, nobody pays any capital gains, and your dog FooFoo that you left all your worldly goods to now owns stock with a base price at current market value.
If I have an Canadian RRSP (tax free savings like 401K) I cannot use it as collateral for a loan - if I do, it is considered redeemd - converted to taxable income - at that time. However the rich can take their unrealized untaxed capital gains and use it as collateral and escape tax. While Canadian taxes - with exceptions - tax capital gains when the owner dies and the estate is settled (or transferred to a trust), Americans simply forgive that taxable income owing from those most able to pay.
(Of course average Americans use this same trick to get money from the amount their house went up in value by remortgaging without selling.)
i should add too that Musk received a load of Tesla stock options a few years ago - no way around this, it’s income from his job - so he became the biggest ever tax payer in the USA, paying somewhere over $10B in taxes in one year.
[Moderating]
A stern reminder to all (specifically @Sage_Rat and @Stranger_On_A_Train , but this applies to everyone) that this is Factual Questions. How billionaires do interact with the tax system is factual. How they should interact with it is a matter for P&E or GD.
This is a biggie. Just borrow money using your assets as collateral. Furthermore, in the US, the interest you pay on the loan becomes a deduction against any actual income you may have. And when you die, the capital gains go completely untaxed.
Generally speaking receiving stock options is not a taxable event unless they are granted in the money. Even exercising them to get the stock isn’t a taxable event. What he must have done was exercise them and then sold the stock. That would earn him capital gains.