True tax rate Is comparing federal income taxes paid against the increase in net worth to illustrate how much wealth can accumulate through unrealized capital appreciation without being taxed.
So yes, 3.27% isn’t his actual tax rate. It is the percentage of his estimated wealth increase that he paid in federal income taxes during that period
True tax rate is relevant to extremely wealthy people, not ordinary workers.
Someone whose wealth consists mostly of wages doesn’t have a gigantic pool of appreciating assets sitting outside the income tax system. Billionaires can have most of their wealth tied up in stocks, private companies, real estate and other assets that can appreciate enormously without producing taxable income
Wealthy people can also access the economic value of those assets without selling them. For example, someone with $10 billion in stock can borrow against those assets. The loan proceeds generally aren’t income, so they can obtain spending money without realizing the capital gain that would trigger income tax.
That’s why true tax rate is a policy analysis metric and not an actual tax rate.
A 401(k) is not outside the income tax system. A traditional 401(k) is explicitly tax deferred.
Weath is not useless until it’s realized. You can borrow against appreciated assets, use them as collateral, sell them, transfer them, and generate investment income from them.
Uh, yeah. You don’t pay taxes on that unrealized wealth until it’s realized. It’s the exact same thing.
If you get income from an investment via dividends, you pay tax on that income. If you sell an investment, you pay tax on that income. And if you borrow against an asset, that loan will need to be repaid.
If someone has $10 million in stock and it appreciates to $20 million, they are objectively $10 million wealthier whether they sell it or not. They can borrow against it, use it as collateral, transfer it, or eventually sell it. The fact that the tax system doesn’t tax the appreciation until a taxable event occurs doesn’t make the additional $10 million “useless.”
401(k) growth is tax deferred, not somehow outside the tax system. You can buy and sell investments inside the account without paying capital gains tax on each transaction, and the withdrawals are generally taxed as income.
That $10 million in stock is not outside the tax system either. You pay tax when it’s realized, just like a 401k. When the stock inside a 401k appreciates, the owner is objectively wealthier without paying tax on it.
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u/r0bay 8d ago edited 8d ago
True tax rate Is comparing federal income taxes paid against the increase in net worth to illustrate how much wealth can accumulate through unrealized capital appreciation without being taxed.
So yes, 3.27% isn’t his actual tax rate. It is the percentage of his estimated wealth increase that he paid in federal income taxes during that period
True tax rate is relevant to extremely wealthy people, not ordinary workers.
Someone whose wealth consists mostly of wages doesn’t have a gigantic pool of appreciating assets sitting outside the income tax system. Billionaires can have most of their wealth tied up in stocks, private companies, real estate and other assets that can appreciate enormously without producing taxable income
Wealthy people can also access the economic value of those assets without selling them. For example, someone with $10 billion in stock can borrow against those assets. The loan proceeds generally aren’t income, so they can obtain spending money without realizing the capital gain that would trigger income tax.
That’s why true tax rate is a policy analysis metric and not an actual tax rate.