America’s billionaires have often financed their lavish lifestyles by using their vast fortunes as collateral for loans, which can come with single-digit interest rates.
Borrowing money allows the ultrawealthy to earn minuscule salaries, avoiding the 37% federal tax on top incomes, as well as avoid selling stock to free up cash, bypassing the 20% top capital gains tax rate. Since loans aren’t considered taxable income, the wealthy need only pay back the principal and interest, rather than the higher taxes that would accompany multimillion-dollar incomes and investments.
America’s 25 wealthiest individuals saw their net worth grow by $401 billion from 2014 to 2018, according to Forbes. But they paid a total of $13.6 billion in federal income taxes in that same period, amounting to 3.4% of that newly acquired wealth, ProPublica found.
By contrast, a middle-class American in their 40s who had amassed a “typical amount of wealth for people their age,” saw their net worth grow by $65,000 from 2014 to 2018, but paid $62,000 in income taxes, or 95% of that new wealth, according to ProPublica.
The US does not directly tax individuals’ total wealth, unlike some European countries. Nor does it tax stock holdings until they are sold. And billionaires tend to have a lot of their net worth wrapped up in stocks.
However, ProPublica’s analysis revealed in new detail how America’s tax code allows the ultrawealthy to take advantage of a litany of tax loopholes and wealth-management strategies to increase their wealth without also increasing their tax bills substantially.
To illustrate the gap between wealth and taxes paid by the ultrawealthy, ProPublica created what it called a “true tax rate.” ProPublica defined this as the total federal income tax a person paid, in this case from 2014 to 2018, compared to how much new wealth they acquired in that same time period.
ProPublica did not publish its source data or disclose how it obtained IRS data.
According to ProPublica, the top 25 wealthiest Americans paid a “true tax rate” of 3.4% — a result of tax avoidance strategies that are out of reach for most Americans.
Borrowing, it turns out, is one of those strategies.
There are also more loop holes such as if you own a Yacht or private jets you can use it as a tax write off, if you own horses for horse racing you can also deduct it off taxes along with owning your own sports team. ProPublica has done an amazing job with investigating tax loopholes
Without diminishing the thesis that tax law contains loopholes (obviously), I’m trying to understand how this particular tax strategy works. Let’s say I own an asset that appreciates. I sell it. Therefore, I pay capital gains taxes. Alternatively, I borrow against the asset. No capital gains taxes yet. Instead, I pay interest on the loan (and interest rates are currently up).
But don’t I need to pay back the loan eventually? Eventually, the interest could add up to more than the taxes deferred. And I’ll need to pay taxes on whatever income I use to eventually pay back the loan. So why not just pay taxes now? Am I waiting for lower taxes rates? (Either for me individually or for the whole country.) Or maybe I am waiting for inflation? (So that the purchasing power of repaying the loan is less than the principal.)
Article continues beyond OP’s quote.
Thought this one was worth posting.
“I didn’t make money because, unfortunately for me, my interest was higher than my whole adjusted income,” Icahn told ProPublica, adding that while he does borrow a lot of money, it’s “not at all” meant to lower his tax bill, but rather that he borrows “to win. I enjoy the competition. I enjoy winning.”
It’s the Buy, Borrow, Die strategy.
This is the best summary I could come up with:
ProPublica reported Tuesday it had obtained a massive trove of IRS documents, revealing that America’s wealthiest individuals have avoided paying billions of dollars in taxes for years, resulting in income tax bills that amount to a fraction of their net worth.
Many Americans borrow money only when they have to for large purchases like college tuition or a house, as interest can quickly add up, especially if they’re not able to pay back the loan right away.
But according to ProPublica and independent experts, America’s billionaires have often financed their lavish lifestyles by using their vast fortunes as collateral for loans, which can come with single-digit interest rates.
But they paid a total of $13.6 billion in federal income taxes in that same period, amounting to 3.4% of that newly acquired wealth, ProPublica found.
ProPublica defined this as the total federal income tax a person paid, in this case from 2014 to 2018, compared to how much new wealth they acquired in that same time period.
Elon Musk has similarly put up a massive amount of his equity in Tesla and SpaceX as collateral for loans, rather than sell those shares and pay 20% in capital gains tax to free up the money.
The original article contains 711 words, the summary contains 203 words. Saved 71%. I’m a bot and I’m open source!
I’ve never lost more money than I have owning GME shares. I feel like I fell for the biggest social experiment and it’s still trying to grab people. I’m an idiot, so I still have my shares, but compared to YEARS AGO when I bought them, they’re fucking worthless. GME is the biggest joke ever and I fell for it. Hell they even completely gave up on their crypto venture.
Considering that your shares are “worthless,” you’re not going to make money from selling, so just hang onto them for a few more years. Ryan Cohen might turn the company around. He sure seems like he’s trying… and making some progress on cash flow. And what if it leads to reform of the whole financial system? We’ve already gotten the SEC to pass a couple of stricter rules. And you’ve already paid for the stock, so it costs you nothing to take the chance.
P.S. Are you DRSed?
I am DRS’d with all but like 3 shares (one in 3 different brokers). I’ve only got them still because of what you’ve stated, feels pointless to sell, buuuuuut it feels equally pointless to watch the number go down for years. I just wished I’d never heard of it.
I feel for you. We get some commenters trying to encourage people to sell. But I think that you’re just a regular guy feeling discouraged. None of this is fair. Hang in there!
At the end of the day, we risked some of our regular life money for life changing money and the tickets don’t expire. Hodl.
