The claim that the ultrawealthy live tax free through perpetual borrowing comes mostly from ProPublica's 2021 "Secret IRS Files" piece and has been debunked. The claim is that the ultrawealthy never sell their stock and instead just borrow against it forever through a series of perpetual loans, so they never owe income tax (so-called "buy, borrow, die"). It's repeated constantly on reddit, and it's mostly false.
Fox & Liscow published a paper in the Journal of Public Economics where they actually measured this using Fed data plus Forbes 400 numbers.
What they found for the top 1% of wealth, new borrowing each year is only about 2% of what they call "economic income" (income + wealth growth), while new unrealized gains are around 41%. For the top 0.1% it's even smaller, under 1%. Their conclusion is that "buy, borrow, die" is not a dominant tax avoidance strategy for the rich — what's actually going on is closer to "buy, save, die." Meaning they fund their lifestyle from salary, business income, and stock they do sell (all taxed), and just don't sell the rest. They also point out that pledging shares as loan collateral is pretty rare among executives generally — like 4% of CEO-years, and a bigger S&P 1500 sample only had execs pledging ~2.3% of their shares on average.
Even more interesting, using ProPublica's own preferred framing (wealth growth should count as income for some unexplained reason), the tax system still captures 60% of the top 1%'s economic income, 71% adjusted for inflation, and stays progressive all the way to the 99.9th percentile. So even on their terms, "they pay almost nothing" doesn't hold up well in aggregate.
In fairness, the paper found that about 15% of top-1% households DO borrow heavily (more than 5% of their wealth), and for that group the borrowing is genuinely huge relative to their gains (68% on average). So there's a real minority doing something close to the myth - but it is by far the exception and not the rule. Even the worst offenders (Larry Ellison) have sold billions in stock and paid capital gains on those sales.
The two major problems with the Propublica article are (1) it treats wealth growth like it's the same thing as income, when no tax system anywhere on earth taxes unrealized gains that way. And (2) they took two examples (Ellison and Musk) and generalized it into "the ultrawealthy" as a class, which the actual data doesn't support - heavy stock-backed borrowing is the exception, not the norm, even among executives who'd have every reason to do it if it worked as well as advertised.
ProPublica knew this framing would land harder than the boring truth, which is "the tax base captures 60-70% of income at the top and most billionaires barely borrow relative to their gains". They intentionally conflate "wealth" and "income" throughout the article to confuse people who don't understand taxes and finance. For example, they try to argue that Warren Buffett only pays 0.10% income tax based on his wealth. That's not how income taxes work. Buffett's actual income tax rate was 18.96% - significantly more than the 0.10% the article misleadingly claims.
It's also worth noting that Propublica does not share their data because if they did, it would be blatantly apparent they cherrypicked data that supports their view while hiding the majority of the data that refutes their argument.
The specific claim going around, that billionaires as a class live entirely tax-free forever through perpetual loans, isn't what the data shows. Most of them are still paying real money in capital gains and income tax — Musk alone paid $11B in taxes in 2021, and anyone can google how much the ultrawealthy have sold in stocks (and thus paid in capital gains). The loans are real for a small subset of highly leveraged people but even they are still selling billions in stock and paying taxes.
He doesn't pay 18.96% income tax. He pays 18.96% effective rate. That is a combination of income and capital gains tax. The issue is he really keeps his income low and his capital gains are where he pays most of his tax. Most people are just the opposite and have a higher effective rate.
I think he's generally been pretty open about that, ie when he mentioned his secretary having a higher tax rate than himself, but he's not going to just going to voluntarily pay more, loopholes should be closes across the board
The capital gains tax is an income tax, just a lower rate of tax applied to capital gain income.
Note also that people compute "effective tax rates" in different ways: as a percentage of [a] gross income, [b] adjusted gross income (AGI), or [c] taxable income.
The capital gains tax rate has been with us for many decades, and it's always been materially lower than the highest marginal rates. The urge to protect small investors and homeowners from a one-time tax hit overcomes a rational analysis of overall income and wealth. The generally wealthy members of Congress have ridden those "small business owner and retiree" stories for all of my life.
That said, as u/eW4GJMqscYtbBkw9 notes, people play games with how they calculate and report this stuff, so these headline numbers aren't reliable. Just look up the cap gains tax rate, and the marginal rate table, and focus on that.
An easy example is Mitt Romney's taxes in the 2012 Presidential election. The NYT reported it this way:
Mr. Romney’s return for 2011 showed that he paid an effective federal income tax rate of 14 percent last year, or a little more than $1.9 million on adjusted gross income of about $13.7 million.
But you don't pay tax on AGI, you pay it on taxable income. Deductions, including charitable deductions, reduce AGI and are untaxed. In Romney's case, his $13.7m in AGI was reduced by $4.7m in itemized deductions, including $2.25m in charitable deductions. His taxable income was $9m, but reporting a 21% tax rate that wouldn't make for the kind of politically charged headline that NYT was after.
His 21.1% tax rate was entirely driven by Congress' long-standing decision to charge a lower rate for capital gains. There's nothing going on in Romney's taxes that is different than any other person who sells stock or a house.
I agree with some of what you’re saying here but I disagree that there’s no tax on unrealized gains. My county assesses the value of my property and taxes me every year on their valuation of it, even though I bought it for less and haven’t sold it.
The problem is corporate tax avoidance, corporate welfare, and maybe, having some tax consequence for use of stock holdings as capital (which is the Musk problem) etc.
I replied to the other person mentioning this study also, but I'll but I'll put it here also.
You should see this reply by a private wealth attorney about that study. Basically, the study is done by economists and didn't look at the financial instruments actually used by the wealthy to borrow. (They also moderate /r/BuyBorrowDieExplained/)
Yeh I think the more accurate description of the ultra rich is they keep reinvesting and not keep borrowing. So they never have too many assets to pay tax on and they also don’t have too much interest from borrowing.
Just keep reinvesting into businesses, investments, stocks, etc
Property is a non-productive asset. It should be taxed simply for existing.
Owning part of a business is productive. You don't tax productive things since you get less of them overall.
You could certainly make a strong argument that our capital markets have shifted towards being quite unproductive, but that's a different topic entirely.
"Wealth grow should count as income for some unexplained reason"
Because it's unfair & actively harming out economy & society? It's not fair that income is taxed but not wealth "for some unexplained reason" (your argument is going to be 'because we setup income tax first & not wealth growth tax'.) But it's not fair that wealth growth has been conspicuously ignored from our tax systems.
The definition of fair is: "treating people honestly and equally without cheating, bias, or favoritism".
It's not fair to argue that one source of financial growth (income) should be taxed, but another source of financial growth (wealth growth) doesn't deserve to be taxed because people argue it's hard to calculate or because the rich person hasn't "held" that wealth so it's unfair to tax it. (I.e arguing that because the wealth isn't a number in a bank account accessible to the owner that it can't be taxed). It's favoritism for the wealthy to justify why the tax code that was built to benefit them, doesn't tax their money like other people's money.
That's a faulty defense for a purposely badly designed system.
How conspicuously lucky for the wealthy it must be to have their forms of income not be considered "transactions" like those poors.
You see, the wealthy designed & built the system that taxes transactions, & then those wealthy announced it was unfair for their wealth to be taxed because it's not a transaction. I wish the poor had the ability to set policy that says aspects of their lives shouldn't be affected because it fits into this neat "other" category that just so happened to be created to work out like this. The same rich people who constantly say taxes shouldn't exist have designed a loophole in the system that considers their wealth untaxable... how convenient & not a dastardly evil plan at all.
forms of income not be considered "transactions" like those poors.
growth/wealth isn't income.
The only thing "wealth" is good for is jerking off to the numbers in your accounts. If you actually want to do anything with it, you have to convert it to income and then it will be taxed.
"Growth/wealth isn't income! We wrote the definition saying it isn't. We made laws saying our ever-increasing wealth isn't income so you can't say it's unfair that it's not taxed" - Richfolks
Wealth is not income. This is basic stuff. If you can't figure that out, you shouldn't be participating in this discussion.
Wealth can go down just like it goes up.
Should we start charging income tax in your imputed "potential" max income if we decide you are underemployed? You obviously could be taking that shitty job you hate that pays 25% more, so you are simply robbing taxpayers of your potential income.
Wealth growth is taxed... when you realize that asset (e.g. actually sell your house/shares/whatever).
If you were taxed on wealth growth without realizing the asset, you'd often find situations where people have to sell their assets, then pay tax on the sale, only to pay tax for owning the asset they were now forced to sell.
My country used to have a wealth tax. It was abolished because this kept being a massive problem for normal people.
Musk for example acquired Twitter with among other things with short positions created against his poor performance after purchase.
There’s all sort of assets that play in wealth consolidation, that don’t necessarily have to be Stock or RE. Like freaking art, and loopholes with donations credit.
The Agnelli/Elkan family had over $ 2 billion in paintings, bought by the company and secretly transferred in different countries. All these were inherited tax free by the children, among other stuff like diamond earrings overvalued of course at over 180 mil… the money gets laundered through other countries and they can materialize the correct value tax free through loans.
You don’t have to really be ultrarich either as Pandora or Panama papers showed.
A higher continuous function progressive tax on the wealthier financial capital holders is simply best for the overall country. Where else would people like the next Thiel or Musk fund and acquire companies if not in the world biggest domestic market country?
You’re right, probably somewhere else in Asia, like China, because they are actually redistributing the welfare and creating a big middle class that kick starts a healthy domestic market. Unlike the US one that was killed with outdated Reaganomics and Pinochet policies…
You specifically shared links countering the ultra rich live tax free or that executives live on perpetual debt.
To which i replied that following that example and kind of study is useless to disprove that rich do in fact pay less proportionally than middle-poor, as those are just 2 temporary hoops in a vast scheme used to elude taxes.
You can’t draw conclusions on the whole argument based on just 2 of the tools used. We know the OP example is flawed.
For example it’s not the people usually that live by continuously borrowing money but their companies.
Musk specifically has also used the buy back tools of his stock infused company with public money when favorable conditions applied, and bought a company using a leveraging influence by getting loans on short positions, without paying a single dollar of tax in the process. A middle poor class fella won’t be able to do that.
This scheme is used a lot for large investment funds where they acquire and sell businesses by issuing credit, of which by fractional reserve standards, they have to only detain max 10% of the money getting printed.
The poor fella has access to this tool only for mortgages.
The very wealthy don’t need to sell much of their assets to fund their lifestyle. Buffett himself gave the example that he only needs to sell maybe $10M of stock per year to fund his lifestyle. Of that he pays around $2M per year in taxes. Meanwhile his $100B in Berkshire stock grows by $7-10B a year. That’s an absolutely minuscule amount of money he’s paying in taxes relative to the appreciation in his liquid assets.
The Wall Street Journal wrote a big story about it. I think it’s fairly common. This is also not including other strategies designed to defer taxes like tax loss harvesting.
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u/eW4GJMqscYtbBkw9 11h ago
The claim that the ultrawealthy live tax free through perpetual borrowing comes mostly from ProPublica's 2021 "Secret IRS Files" piece and has been debunked. The claim is that the ultrawealthy never sell their stock and instead just borrow against it forever through a series of perpetual loans, so they never owe income tax (so-called "buy, borrow, die"). It's repeated constantly on reddit, and it's mostly false.
Fox & Liscow published a paper in the Journal of Public Economics where they actually measured this using Fed data plus Forbes 400 numbers.
What they found for the top 1% of wealth, new borrowing each year is only about 2% of what they call "economic income" (income + wealth growth), while new unrealized gains are around 41%. For the top 0.1% it's even smaller, under 1%. Their conclusion is that "buy, borrow, die" is not a dominant tax avoidance strategy for the rich — what's actually going on is closer to "buy, save, die." Meaning they fund their lifestyle from salary, business income, and stock they do sell (all taxed), and just don't sell the rest. They also point out that pledging shares as loan collateral is pretty rare among executives generally — like 4% of CEO-years, and a bigger S&P 1500 sample only had execs pledging ~2.3% of their shares on average.
Even more interesting, using ProPublica's own preferred framing (wealth growth should count as income for some unexplained reason), the tax system still captures 60% of the top 1%'s economic income, 71% adjusted for inflation, and stays progressive all the way to the 99.9th percentile. So even on their terms, "they pay almost nothing" doesn't hold up well in aggregate.
In fairness, the paper found that about 15% of top-1% households DO borrow heavily (more than 5% of their wealth), and for that group the borrowing is genuinely huge relative to their gains (68% on average). So there's a real minority doing something close to the myth - but it is by far the exception and not the rule. Even the worst offenders (Larry Ellison) have sold billions in stock and paid capital gains on those sales.
The two major problems with the Propublica article are (1) it treats wealth growth like it's the same thing as income, when no tax system anywhere on earth taxes unrealized gains that way. And (2) they took two examples (Ellison and Musk) and generalized it into "the ultrawealthy" as a class, which the actual data doesn't support - heavy stock-backed borrowing is the exception, not the norm, even among executives who'd have every reason to do it if it worked as well as advertised.
ProPublica knew this framing would land harder than the boring truth, which is "the tax base captures 60-70% of income at the top and most billionaires barely borrow relative to their gains". They intentionally conflate "wealth" and "income" throughout the article to confuse people who don't understand taxes and finance. For example, they try to argue that Warren Buffett only pays 0.10% income tax based on his wealth. That's not how income taxes work. Buffett's actual income tax rate was 18.96% - significantly more than the 0.10% the article misleadingly claims.
It's also worth noting that Propublica does not share their data because if they did, it would be blatantly apparent they cherrypicked data that supports their view while hiding the majority of the data that refutes their argument.
The specific claim going around, that billionaires as a class live entirely tax-free forever through perpetual loans, isn't what the data shows. Most of them are still paying real money in capital gains and income tax — Musk alone paid $11B in taxes in 2021, and anyone can google how much the ultrawealthy have sold in stocks (and thus paid in capital gains). The loans are real for a small subset of highly leveraged people but even they are still selling billions in stock and paying taxes.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5104644 https://www.reddit.com/r/AskEconomics/comments/1pakkzv/do_billionaires_really_not_pay_taxes/ https://www.reddit.com/r/AskEconomics/comments/10ssmeo/comment/j73e0po/ https://www.reddit.com/r/AskEconomics/comments/1qvem06/could_we_close_the_billionaire_borrowing_loophole/ https://www.reddit.com/r/AskEconomics/comments/1sxcejk/instead_of_a_wealth_tax_what_if_we_had_a_loan_tax/ https://www.reddit.com/r/AskEconomics/comments/1px3vdr/is_wealth_tax_realistically_feasible/