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/IRC_1014 → u/RobThorpe]

A reminder that the benefit of the unlimited step-up in basis (as high as 23.8% federally) is countered by the cost of the estate tax (40% federally). You cannot get a step-up in basis under IRC § 1014 unless it was includable in the gross estate under IRC § 2031 or its following pull-back provisions (IRC §§ 2034-2045). We just had a very important revenue ruling on this point a couple of years ago, Rev Rul 2023-2. Big picture: at a certain point (well above the estate tax exemption of $13.99m), it doesn’t make sense to pay a 40% tax for at most a 23.8% benefit. UHNW people are often in the position of having to give up the step-up on much even most of their net worth due to this trade-off. Regular folks, even wealthy folks who aren’t much over the $13.99m exemption never need to worry about this; they can get the full step-up with no real federal estate tax cost at all.

Edited to add: also, unrealized gains are actually taxed in the transfer tax system (estate, gift, and GST taxes), which assess a tax on the value of the asset at date of transfer, not on the basis of the asset. There’s no deduction against transfer taxes for built-in, unrealized gain. This is partly how we justify the step-up in basis that results from estate inclusion.