Editor’s Note: there are multiple reputable sources that are cited such as the IRS, however the views expressed in this article are the opinions of the author.
Taxes, although crucial for providing essential services to the nation, can become a financial burden for many Americans as they grudgingly file tax returns, or receive paychecks with a large portion already taken out and sent to the government. It’d be so much easier to dismiss paying taxes and avoid them altogether, but it’s the responsibility of an American citizen, and the law of the land to pay taxes. Yet tax avoidance/evasion is still vastly prevalent nationwide and has been a point of national contention, as the tax gap reached $688 billion in 2021. Tax evasion is illegal and can be audited. However, tax avoidance is legal, and the repercussions of tax avoidance loopholes can be detrimental to the economy.
Anyone can commit tax avoidance, but it’s the ultrarich that get away with it, and to a significantly unjust degree. Every year, they underpay their taxes by $163 billion annually.
The ultrarich are defined as billionaires or those who are in the top 1% of the financial class. Since their income is so large, it’s simple to assume that they would pay the largest percentage of all their collective wealth. However, lower-class Americans who are primarily paid through wages have the highest marginal tax rate capped at 40% of their income, while the ultrarich who are not paid by wages have a cap at 30% for business taxes and below 25% for realized capital gains. An average person earning $45,000 pays 21% of their income in taxes, and the average couple that earns $200,000 with one child pays 26%. The ultrarich pay an average of 17%. Ultrarich people like Elon Musk and Jeff Bezos did not pay any federal income tax at all for several years. Thus, that only leaves the middle class that pays the highest percentage of their income as the lower class cannot afford to pay as much, and the ultrarich find ways to avoid paying taxes.
So how do the ultrarich avoid taxes? Here are some of the loopholes they use.
Holding their wealth in assets/stocks
Income tax is the largest portion of tax that the government receives. Lower and middle-class Americans pay a portion of their income to the government, with the lower class paying a smaller percentage and the middle class paying a larger percentage. The richest 1% can afford to hold their wealth through assets. They also invest tremendously and buy valuable stocks. When these assets or stocks are not sold, it’s referred to as unrealized capital gain. Unrealized capital gain is not taxed. To gain cash from stocks, the ultrarich can employ the ‘buy, borrow, die’ strategy and borrow against the stocks. This is not taxable, and allows for the ultrarich to create a sort of ‘income’ for themselves. The ultrarich can also borrow loans in exchange for their assets being collateral, without being taxed.
Property is also an asset that is used by ultrarich people to avoid taxes. Specifically, Donald Trump owned lots of property that would decrepiate throughout the years. Depreciating property allows for deductions on income tax. Thus, this strategy was heavily employed by the former president to avoid paying taxes.
With these strategies, the ultrarich can continue to possess a huge net worth while not being taxed.
‘Charity and Philanthropy’
The ultrarich do not have to donate to charity; they can afford to create their own foundations. Charity for some of the ultrarich is more of an investment, or another loophole to avoid paying taxes. Donations in a charity created by the ultrarich are very loosely regulated, with the charity being non-taxable. The owners of these charities may use the money collected for selfish gains, so these institutions may not even provide public service or public good in any matter. This defeats the purpose of philanthropy. Thus, the ultrarich can make a huge profit from the charity and hold assets, while maintaining a ‘good reputation’ for themselves.
Hobbies for ‘Business purposes’
A private jet is just one example of a ‘must have’ for the ultrarich. These expenses would come with very high taxes. However, if a luxury good is used for business purposes, then the product becomes almost, if not completely, tax deductible. There is some wiggle room for defining if a luxury good can be used for ‘business purposes’, but many people almost cross the line. For example, one can fly a private jet for a business trip, but take a vacation there as well. This somewhat enters the territory of tax evasion, but if the person is convincing enough, they can get away with these hobbies without paying taxes for them.
Invest in tax wrappers
Tax wrappers serve to provide financial assistance to the very wealthy while also being tax deductible. Essentially, they serve to make the rich richer.
A family office is a service that helps an ultrarich family with investment strategies, financial planning, estate and tax planning, and other financial needs with the tax deductions of a business. It helps to distribute and grow wealth for the generations to come in a family. Additionally, there is a private service called private placement life insurance policy. This product is an ‘insurance’ for the very wealthy that costs millions of dollars to set up. When set up, the insurance provides investments tips and hedge funds, resulting in tax-deductible profits. When the original holder dies, all the money will go to beneficiaries tax-free. These are just a couple examples of the many tax wrapper products available to invest in.
Buying businesses and investing in industries
The ultrarich can invest in business and industries that offer tax-deductible profits. For example, real estate developer Stephen Ross did not pay taxes for ten years, as real estate was an industry that offered tremendous tax write-offs. Also, buying a sports team includes tax deductions. Microsoft CEO Steve Ballmer bought the Los Angeles Clippers and received numerous tax write-offs in doing so.
Solutions to tax avoidance in the ultrarich
The loopholes in tax avoidance for the ultrarich are problematic, with some of these loopholes nearing the concept of tax evasion. The economic inequality of the lower and middle class paying a huge portion of their income while the rich get richer needs to be resolved. Biden has proposed a plan to impose stricter tax regulations for the ultrarich while in office, although this has not had much effect.
Some solutions include taxing step-ups when assets are transferred from heirs to original holders. The heir would pay a capital gain tax for this asset. Collectively, this could generate $104.9 billion in the next 10 years. Additionally, taxing transfer of money as a whole to heirs would also generate lots of revenue. Increasing tax rates on the rich as a whole would also help. Finally, introducing a value added tax (VAT) would make the ultrarich pay for other taxes besides income taxes, since the ultrarich gain wealth in unconventional ways. This implements stricter tax codes to the ultrarich while leaving the tax rates the same for the lower and middle class.
Everyone in America has to do their share, no matter what class they are in. Paying taxes is an essential part of maintaining our nation and no person, no matter their financial class, should violate the duties of being an American citizen.
Works Cited
Gale, William G., and Semra Vignaux. “The Difference in How the Wealthy Make Money—and Pay Taxes.” Brookings, The Brookings Institution, 7 Sept. 2023, http://www.brookings.edu/articles/the-difference-in-how-the-wealthy-make-money-and-pay-taxes/. Accessed 30 Sept. 2024.
IR-2023-187. “IRS Updates Tax Gap Projections for 2020, 2021; Projected Annual Gap Rises to $688 Billion | Internal Revenue Service.” Www.irs.gov, 12 Oct. 2023, http://www.irs.gov/newsroom/irs-updates-tax-gap-projections-for-2020-2021-projected-annual-gap-rises-to-688-billion.
Kiel, Paul. “Ten Ways Billionaires Avoid Taxes on an Epic Scale.” ProPublica, 24 June 2022, http://www.propublica.org/article/billionaires-tax-avoidance-techniques-irs-files.
Kim, Whizy. “The Billionaire’s Guide to Doing Taxes.” Vox, Vox Media, 13 Mar. 2024, http://www.vox.com/money/2024/3/13/24086102/billionaires-wealthy-tax-avoidance-loopholes. Accessed 30 Sept. 2024.
Lee, Medora. “How Do Rich People Avoid Taxes? Wealthy Americans Skirt $160 Billion a Year in Tax Payment.” USA TODAY, 21 Feb. 2023, http://www.usatoday.com/story/money/taxes/2023/02/21/how-do-rich-people-avoid-taxes/11308215002/. Accessed 29 Sept. 2024.
Morris Pearl, opinion contributor. “Working Americans Pay Income Taxes — Why Don’t Billionaires?” The Hill, 1 Aug. 2022, thehill.com/opinion/finance/3580013-working-americans-pay-income-taxes-why-dont-billionaires/. Accessed 29 Sept. 2024.
“The Three Basic Tax Types.” Tax Foundation, 6 Dec. 2023, taxfoundation.org/taxedu/educational-resources/primer-the-three-basic-tax-types/#:~:text=Though%20barely%20100%20years%20old.