It is no secret that the ultra-wealthy generally make use of tax-avoidance strategies. Paying less tax means more wealth accumulated. Recent information leaked from offshore tax havens reveals some of the ways the wealthy keep their money in the family and away from the U.S. Treasury.
Despite recent interest rate hikes and lost stock value, the ultra-wealthy remain in good condition in the U.S. A report from Inequality.org, an initiative of the Institute for Policy Study, suggests billionaires in the U.S. have seen a 50 percent increase in asset value since March 2020, the outset of the pandemic. While some of the very wealthy are investigated for tax fraud, many are using perfectly legal methods to protect their wealth.
The media famously reported that two of the wealthiest people in the world occasionally pay no federal income taxes in the U.S. Jeff Bezos paid no federal income tax in 2007 and 2011. Elon Musk paid no federal income taxes in 2018. Key methods by which the wealthy maintain their wealth include:
- Income differences: The income tax returns of the wealthy are considerably different from those of middle-class America. Capital gains, interest, and investment income can be creatively manipulated to reduce tax liability. Whereas most Americans pay taxes on their wages, money earned from investments can be routed in a way to mitigate or eliminate taxes on that money.
- Holding assets: The wealth of many individuals is tied to stock or real property. Instead of selling assets for income, high-asset individuals may take out low-interest loans using their investment portfolio as collateral. As loans do not trigger a tax liability, the wealthy can continue to accrue without paying significant taxes.
- Estate planning: Portfolio management and estate planning are critical to reducing or eliminating taxes, often through trusts and gifting strategies. These trusts allow the wealthy to maintain and build multi-generational wealth to avoid estate taxes.
A bill known as the “Billionaire Minimum Income Tax Act” was introduced in Congress in the summer of 2022. The bill would require households with over $100 million in worth to pay a minimum 20 percent tax on their full income. Upon introduction, Congressman Steve Cohen remarked, “It is time that billionaires chip in like everyone else to pay at least a base level of taxes. There is tremendous public support for this proposal, which will close loopholes in our tax code and ensure billionaires pay a fairer share. It's time to make the tax system fair."
While unlikely to be signed into law, the bill does highlight growing restlessness in the U.S. as the rich get richer—and the less rich pay tax.
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