How the Wealthy Avoid Paying Taxes

by on June 8, 2021 · 4 comments

in American Empire, Economy

ProPublica has obtained a vast cache of IRS information showing how billionaires like Jeff Bezos, Elon Musk and Warren Buffett pay little in income tax compared to their massive wealth — sometimes, even nothing.

by Jesse Eisinger, Jeff Ernsthausen and Paul Kiel / ProPublica / June 8

In 2007, Jeff Bezos, then a multibillionaire and now the world’s richest man, did not pay a penny in federal income taxes. He achieved the feat again in 2011. In 2018, Tesla founder Elon Musk, the second-richest person in the world, also paid no federal income taxes.

Michael Bloomberg managed to do the same in recent years. Billionaire investor Carl Icahn did it twice. George Soros paid no federal income tax three years in a row.

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.

Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.

Many Americans live paycheck to paycheck, amassing little wealth and paying the federal government a percentage of their income that rises if they earn more. In recent years, the median American household earned about $70,000 annually and paid 14% in federal taxes. The highest income tax rate, 37%, kicked in this year, for couples, on earnings above $628,300.

The confidential tax records obtained by ProPublica show that the ultrarich effectively sidestep this system.

You May Be Paying a Higher Tax Rate Than a Billionaire
America’s billionaires avail themselves of tax-avoidance strategies beyond the reach of ordinary people. Their wealth derives from the skyrocketing value of their assets, like stock and property. Those gains are not defined by U.S. laws as taxable income unless and until the billionaires sell.

To capture the financial reality of the richest Americans, ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period.

We’re going to call this their true tax rate.

The results are stark. According to Forbes, those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.

It’s a completely different picture for middle-class Americans, for example, wage earners in their early 40s who have amassed a typical amount of wealth for people their age. From 2014 to 2018, such households saw their net worth expand by about $65,000 after taxes on average, mostly due to the rise in value of their homes. But because the vast bulk of their earnings were salaries, their tax bills were almost as much, nearly $62,000, over that five-year period.

No one among the 25 wealthiest avoided as much tax as Buffett, the grandfatherly centibillionaire. That’s perhaps surprising, given his public stance as an advocate of higher taxes for the rich. According to Forbes, his riches rose $24.3 billion between 2014 and 2018. Over those years, the data shows, Buffett reported paying $23.7 million in taxes.

Warren Buffett
Berkshire Hathaway Inc.
2014-2018 Wealth Growth:
$24.3B
Total Income Reported:
$125M (0.51% of wealth)
Total Taxes Paid:
$23.7M (0.10% of wealth)

That works out to a true tax rate of 0.1%, or less than 10 cents for every $100 he added to his wealth.

In the coming months, ProPublica will use the IRS data we have obtained to explore in detail how the ultrawealthy avoid taxes, exploit loopholes and escape scrutiny from federal auditors.

Experts have long understood the broad outlines of how little the wealthy are taxed in the United States, and many lay people have long suspected the same thing.

But few specifics about individuals ever emerge in public. Tax information is among the most zealously guarded secrets in the federal government. ProPublica has decided to reveal individual tax information of some of the wealthiest Americans because it is only by seeing specifics that the public can understand the realities of the country’s tax system.

Consider Bezos’ 2007, one of the years he paid zero in federal income taxes. Amazon’s stock more than doubled. Bezos’ fortune leapt $3.8 billion, according to Forbes, whose wealth estimates are widely cited. How did a person enjoying that sort of wealth explosion end up paying no income tax?

Jeff Bezos
Amazon.com Inc.
2014-2018 Wealth Growth:
$99.0B
Total Income Reported:
$4.22B (4.26% of wealth)
Total Taxes Paid:
$973M (0.98% of wealth)

In that year, Bezos, who filed his taxes jointly with his then-wife, MacKenzie Scott, reported a paltry (for him) $46 million in income, largely from interest and dividend payments on outside investments. He was able to offset every penny he earned with losses from side investments and various deductions, like interest expenses on debts and the vague catchall category of “other expenses.”

In 2011, a year in which his wealth held roughly steady at $18 billion, Bezos filed a tax return reporting he lost money — his income that year was more than offset by investment losses. What’s more, because, according to the tax law, he made so little, he even claimed and received a $4,000 tax credit for his children.

His tax avoidance is even more striking if you examine 2006 to 2018, a period for which ProPublica has complete data. Bezos’ wealth increased by $127 billion, according to Forbes, but he reported a total of $6.5 billion in income. The $1.4 billion he paid in personal federal taxes is a massive number — yet it amounts to a 1.1% true tax rate on the rise in his fortune.

For the balance of this article, please go here.

{ 4 comments… read them below or add one }

Avatar Bearded OBcean June 8, 2021 at 12:45 pm

How would you tax someone’s wealth and who would go about quantifying it annually?

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Frank Gormlie Frank Gormlie June 8, 2021 at 2:10 pm

I’m sorry – I don’t know what you mean. The IRS taxes millions every year, but these filthy rich can walk away without paying their share.

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Avatar Bearded OBcean June 8, 2021 at 3:05 pm

The article refers to wealth, not income, which are two different things.

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Avatar GR June 8, 2021 at 3:23 pm

Exactly.
My income was $110 k last year on which I paid taxes.
However my wealth (Savings, 401k, IRA, Brokerage accts, real estate, etc) increased by another $100k last year.

Am I supposed to pay taxes on $210 K ???
This makes no sense. There’s a reason why those are called “unrealized” gains. They are only on paper until you sell that asset.

Now the only valid point I see (and even that is indirectly) is that common people are not able to do what these big business owners can i.e. take $1 in salary and the rest in non-taxable shares.

Congress should allow employees of any company to be compensated as per their wishes. If I want only $40k in salary and the remaining $70 as S&P ETF, there should be a law passed which would require my employer to give me this option.

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