The Secret IRS Files Trove of NeverBeforeSeen Records Reveal How the Wealthiest Avoid Income Tax ProPublica
pA massive trove of tax information obtained by ProPublica covering thousands of Americas wealthiest individuals reveals whats inside the billionaires bag of tricks for minimizing their personal tax bills sometimes to nothingppProPublica is a nonprofit newsroom that investigates abuses of power The Secret IRS Files is an ongoing reporting project Sign up to be notified when the next installment publishesppIn 2007 Jeff Bezos then a multibillionaire and now the worlds richest man did not pay a penny in federal income taxes He achieved the feat again in 2011 In 2018 Tesla founder Elon Musk the secondrichest person in the world also paid no federal income taxesppMichael Bloomberg managed to do the same in recent years Billionaire investor Carl Icahn did it twice George Soros paid no federal income tax three years in a rowppProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nations wealthiest people covering more than 15 years The data provides an unprecedented look inside the financial lives of Americas titans including Warren Buffett Bill Gates Rupert Murdoch and Mark Zuckerberg It shows not just their income and taxes but also their investments stock trades gambling winnings and even the results of auditsppTaken together it demolishes the cornerstone myth of the American tax system that everyone pays their fair share and the richest Americans pay the most The IRS records show that the wealthiest can perfectly legally pay income taxes that are only a tiny fraction of the hundreds of millions if not billions their fortunes grow each yearppMany Americans live paycheck to paycheck amassing little wealth and paying the federal government a percentage of their income that rises if they earn more In recent years the median American household earned about 70000 annually and paid 14 in federal taxes The highest income tax rate 37 kicked in this year for couples on earnings above 628300ppThe confidential tax records obtained by ProPublica show that the ultrarich effectively sidestep this systemppRead MoreppAmericas billionaires avail themselves of taxavoidance strategies beyond the reach of ordinary people Their wealth derives from the skyrocketing value of their assets like stock and property Those gains are not defined by US laws as taxable income unless and until the billionaires sellppTo capture the financial reality of the richest Americans ProPublica undertook an analysis that has never been done before We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time periodppWere going to call this their true tax rateppThis is an ongoing investigation Sign up to be notified when the next story publishesppppThanks for signing up If you like our stories mind sharing this with a friendppFor more ways to keep up be sure to check out the rest of our newslettersppDefend the facts Support independent journalism by donating to ProPublica ppThe results are stark According to Forbes those 25 people saw their worth rise a collective 401 billion from 2014 to 2018 They paid a total of 136 billion in federal income taxes in those five years the IRS data shows Thats a staggering sum but it amounts to a true tax rate of only 34ppIts a completely different picture for middleclass Americans for example wage earners in their early 40s who have amassed a typical amount of wealth for people their age From 2014 to 2018 such households saw their net worth expand by about 65000 after taxes on average mostly due to the rise in value of their homes But because the vast bulk of their earnings were salaries their tax bills were almost as much nearly 62000 over that fiveyear periodppThe Ultrawealthy by the NumbersppWealth income and taxes for four of the richest people in the country from 2014 to 2018ppNo one among the 25 wealthiest avoided as much tax as Buffett the grandfatherly centibillionaire Thats perhaps surprising given his public stance as an advocate of higher taxes for the rich According to Forbes his riches rose 243 billion between 2014 and 2018 Over those years the data shows Buffett reported paying 237 million in taxesppThat works out to a true tax rate of 01 or less than 10 cents for every 100 he added to his wealth ppIn the coming months ProPublica will use the IRS data we have obtained to explore in detail how the ultrawealthy avoid taxes exploit loopholes and escape scrutiny from federal auditorsppExperts have long understood the broad outlines of how little the wealthy are taxed in the United States and many lay people have long suspected the same thingppBut few specifics about individuals ever emerge in public Tax information is among the most zealously guarded secrets in the federal government ProPublica has decided to reveal individual tax information of some of the wealthiest Americans because it is only by seeing specifics that the public can understand the realities of the countrys tax systemppConsider Bezos 2007 one of the years he paid zero in federal income taxes Amazons stock more than doubled Bezos fortune leapt 38 billion according to Forbes whose wealth estimates are widely cited How did a person enjoying that sort of wealth explosion end up paying no income taxppIn that year Bezos who filed his taxes jointly with his thenwife MacKenzie Scott reported a paltry for him 46 million in income largely from interest and dividend payments on outside investments He was able to offset every penny he earned with losses from side investments and various deductions like interest expenses on debts and the vague catchall category of other expensesppIn 2011 a year in which his wealth held roughly steady at 18 billion Bezos filed a tax return reporting he lost money his income that year was more than offset by investment losses Whats more because according to the tax law he made so little he even claimed and received a 4000 tax credit for his childrenppHis tax avoidance is even more striking if you examine 2006 to 2018 a period for which ProPublica has complete data Bezos wealth increased by 127 billion according to Forbes but he reported a total of 65 billion in income The 14 billion he paid in personal federal taxes is a massive number yet it amounts to a 11 true tax rate on the rise in his fortuneppCompare Bezos Financial Picture to a Typical American HouseholdppWhile Bezos wealth has grown astronomically over the last decade and hes paid a minuscule fraction of it in taxes a typical American household paid more in taxes than it accumulated in wealthppJeff BezosppTypical American Household ppThe revelations provided by the IRS data come at a crucial moment Wealth inequality has become one of the defining issues of our age The president and Congress are considering the most ambitious tax increases in decades on those with high incomes But the American tax conversation has been dominated by debate over incremental changes such as whether the top tax rate should be 396 rather than 37ppProPublicas data shows that while some wealthy Americans such as hedge fund managers would pay more taxes under the current Biden administration proposals the vast majority of the top 25 would see little changeppThe tax data was provided to ProPublica after we published a series of articles scrutinizing the IRS The articles exposed how years of budget cuts have hobbled the agencys ability to enforce the law and how the largest corporations and the rich have benefited from the IRS weakness They also showed how people in poor regions are now more likely to be audited than those in affluent areasppRead MoreppProPublica is not disclosing how it obtained the data which was given to us in raw form with no conditions or conclusions ProPublica reporters spent months processing and analyzing the material to transform it into a usable databaseppWe then verified the information by comparing elements of it with dozens of already public tax details in court documents politicians financial disclosures and news stories as well as by vetting it with individuals whose tax information is contained in the trove Every person whose tax information is described in this story was asked to comment Those who responded including Buffett Bloomberg and Icahn all said they had paid the taxes they owedppA spokesman for Soros said in a statement Between 2016 and 2018 George Soros lost money on his investments therefore he did not owe federal income taxes in those years Mr Soros has long supported higher taxes for wealthy Americans Personal and corporate representatives of Bezos declined to receive detailed questions about the matter ProPublica attempted to reach Scott through her divorce attorney a personal representative and family members she did not respond Musk responded to an initial query with a lone punctuation mark After we sent detailed questions to him he did not replyppOne of the billionaires mentioned in this article objected arguing that publishing personal tax information is a violation of privacy We have concluded that the public interest in knowing this information at this pivotal moment outweighs that legitimate concernppThe consequences of allowing the most prosperous to game the tax system have been profound Federal budgets apart from military spending have been constrained for decades Roads and bridges have crumbled social services have withered and the solvency of Social Security and Medicare is perpetually in questionppThere is an even more fundamental issue than which programs get funded or not Taxes are a kind of collective sacrifice No one loves giving their hardearned money to the government But the system works only as long as its perceived to be fairppOur analysis of tax data for the 25 richest Americans quantifies just how unfair the system has becomeppBy the end of 2018 the 25 were worth 11 trillionppFor comparison it would take 143 million ordinary American wage earners put together to equal that same amount of wealthppThe personal federal tax bill for the top 25 in 2018 19 billionppThe bill for the wage earners 143 billionppThe idea of a regular tax on income much less on wealth does not appear in the countrys founding documents In fact Article 1 of the US Constitution explicitly prohibits direct taxes on citizens under most circumstances This meant that for decades the US government mainly funded itself through indirect taxes tariffs and levies on consumer goods like tobacco and alcoholppWith the costs of the Civil War looming Congress imposed a national income tax in 1861 The wealthy helped force its repeal soon after the war ended Their pique could only have been exacerbated by the fact that the law required public disclosure The annual income of the moguls of the day 13 million for William Astor 576000 for Cornelius Vanderbilt was listed in the pages of The New York Times in 1865ppBy the late 19th and early 20th century wealth inequality was acute and the political climate was changing The federal government began expanding creating agencies to protect food workers and more It needed funding but tariffs were pinching regular Americans more than the rich The Supreme Court had rejected an 1894 law that would have created an income tax So Congress moved to amend the Constitution The 16th Amendment was ratified in 1913 and gave the government power to lay and collect taxes on incomes from whatever source derivedppIn the early years the personal income tax worked as Congress intended falling squarely on the richest In 1918 only 15 of American families owed any tax The top 1 paid 80 of the revenue raised according to historian W Elliot BrownleeppBut a question remained What would count as income and what wouldnt In 1916 a woman named Myrtle Macomber received a dividend for her Standard Oil of California shares She owed taxes thanks to the new law The dividend had not come in cash however It came in the form of an additional share for every two shares she already held She paid the taxes and then brought a court challenge Yes shed gotten a bit richer but she hadnt received any money Therefore she argued shed received no incomeppFour years later the Supreme Court agreed In Eisner v Macomber the high court ruled that income derived only from proceeds A person needed to sell an asset stock bond or building and reap some money before it could be taxedppSince then the concept that income comes only from proceeds when gains are realized has been the bedrock of the US tax system Wages are taxed Cash dividends are taxed Gains from selling assets are taxed But if a taxpayer hasnt sold anything there is no income and therefore no taxppContemporary critics of Macomber were plentiful and prescient Cordell Hull the congressman known as the father of the income tax assailed the decision according to scholar Marjorie Kornhauser Hull predicted that tax avoidance would become common The ruling opened a gaping loophole Hull warned allowing industrialists to build a company and borrow against the stock to pay living expenses Anyone could live upon the value of their company stock without selling it and of course without ever paying tax he saidppHulls prediction would reach full flower only decades later spurred by a series of epochal economic legal and cultural changes that began to gather momentum in the 1970s Antitrust enforcers increasingly accepted mergers and stopped trying to break up huge corporations For their part companies came to obsess over the value of their stock to the exclusion of nearly everything else That helped give rise in the last 40 years to a series of corporate monoliths beginning with Microsoft and Oracle in the 1980s and 1990s and continuing to Amazon Google Facebook and Apple today that often have concentrated ownership high profit margins and rich share prices The winnertakeall economy has created modern fortunes that by some measures eclipse those of John D Rockefeller JP Morgan and Andrew CarnegieppIn the here and now the ultrawealthy use an array of techniques that arent available to those of lesser means to get around the tax systemppCertainly there are illegal tax evaders among them but it turns out billionaires dont have to evade taxes exotically and illicitly they can avoid them routinely and legallyppMost Americans have to work to live When they do they get paid and they get taxed The federal government considers almost every dollar workers earn to be income and employers take taxes directly out of their paychecksppThe Bezoses of the world have no need to be paid a salary Bezos Amazon wages have long been set at the middleclass level of around 80000 a yearppFor years theres been something of a competition among elite founderCEOs to go even lower Steve Jobs took 1 in salary when he returned to Apple in the 1990s Facebooks Zuckerberg Oracles Larry Ellison and Googles Larry Page have all done the sameppYet this is not the selfeffacing gesture it appears to be Wages are taxed at a high rate The top 25 wealthiest Americans reported 158 million in wages in 2018 according to the IRS data Thats a mere 11 of what they listed on their tax forms as their total reported income The rest mostly came from dividends and the sale of stock bonds or other investments which are taxed at lower rates than wagesppWealth and income work very differently for the ultrawealthy than they do for most people
This represents 100 of income for a typical wageearning American householdppThe federal government taxes income A typical American household might pay something like 14ppFor many households the rest of their income goes toward expenses every year with maybe a small amount left over for savingsppA typical household might also own a home which often grows in value over time Such asset gains make up much of that households wealth growth for any given yearppThis proportion of wealth growth vs taxes has been typical for middleaged Americans since the mid2000s However its inverted for the ultrawealthyppThis represents 100 of income for Bezos From 2006 to 2018 his taxes were about 21 of his income ppBut for people in this stratosphere income doesnt really matter Bezos Amazon shares have skyrocketed in value since 2006 In most years his wealth grew far more than what he reported in income to the IRSppBetween 2006 and 2018 Bezos wealth shot up by over 120 billion while he paid a minuscule proportion in taxes
Meanwhile typical Americans his age paid more in taxes than they saw in wealth growth over that periodppThat is for every 100 of wealth growth over that period typical Americans paid 160 in taxes
Bezos paid only 109ppAs Congressman Hull envisioned long ago the ultrawealthy typically hold fast to shares in the companies theyve founded Many titans of the 21st century sit on mountains of what are known as unrealized gains the total size of which fluctuates each day as stock prices rise and fall Of the 425 trillion in wealth held by US billionaires some 27 trillion is unrealized according to Emmanuel Saez and Gabriel Zucman economists at the University of California BerkeleyppBuffett has famously held onto his stock in the company he founded Berkshire Hathaway the conglomerate that owns Geico Duracell and significant stakes in American Express and CocaCola That has allowed Buffett to largely avoid transforming his wealth into income From 2015 through 2018 he reported annual income ranging from 116 million to 25 million That may seem like a lot but Buffett ranks as roughly the worlds sixthrichest person hes worth 110 billion as of Forbes estimate in May 2021 At least 14000 US taxpayers in 2015 reported higher income than him according to IRS datappTheres also a second strategy Buffett relies on that minimizes income and therefore taxes Berkshire does not pay a dividend the sum a piece of the profits in theory that many companies pay each quarter to those who own their stock Buffett has always argued that it is better to use that money to find investments for Berkshire that will further boost the value of shares held by him and other investors If Berkshire had offered anywhere close to the average dividend in recent years Buffett would have received over 1 billion in dividend income and owed hundreds of millions in taxes each yearppMany Silicon Valley and infotech companies have emulated Buffetts model eschewing stock dividends at least for a time In the 1980s and 1990s companies like Microsoft and Oracle offered shareholders rocketing growth and profits but did not pay dividends Google Facebook Amazon and Tesla do not pay dividendsppIn a detailed written response Buffett defended his practices but did not directly address ProPublicas true tax rate calculation I continue to believe that the tax code should be changed substantially he wrote adding that he thought huge dynastic wealth is not desirable for our societyppThe decision not to have Berkshire pay dividends has been supported by the vast majority of his shareholders I cant think of any large public company with shareholders so united in their reinvestment beliefs he wrote And he pointed out that Berkshire Hathaway pays significant corporate taxes accounting for 15 of total US corporate taxes in 2019 and 2020ppBuffett reiterated that he has begun giving his enormous fortune away and ultimately plans to donate 995 of it to charity I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an everincreasing US debt he wroteppBuy Borrow Die How Americas Ultrawealthy Stay That WayppSo how do megabillionaires pay their megabills while opting for 1 salaries and hanging onto their stock According to public documents and experts the answer for some is borrowing money lots of itppFor regular people borrowing money is often something done out of necessity say for a car or a home But for the ultrawealthy it can be a way to access billions without producing income and thus income taxppThe tax math provides a clear incentive for this If you own a company and take a huge salary youll pay 37 in income tax on the bulk of it Sell stock and youll pay 20 in capital gains tax and lose some control over your company But take out a loan and these days youll pay a singledigit interest rate and no tax since loans must be paid back the IRS doesnt consider them income Banks typically require collateral but the wealthy have plenty of thatppThe vast majority of the ultrawealthys loans do not appear in the tax records obtained by ProPublica since they are generally not disclosed to the IRS But occasionally the loans are disclosed in securities filings In 2014 for example Oracle revealed that its CEO Ellison had a credit line secured by about 10 billion of his sharesppLast year Tesla reported that Musk had pledged some 92 million shares which were worth about 577 billion as of May 29 2021 as collateral for personal loansppWith the exception of one year when he exercised more than a billion dollars in stock options Musks tax bills in no way reflect the fortune he has at his disposal In 2015 he paid 68000 in federal income tax In 2017 it was 65000 and in 2018 he paid no federal income tax Between 2014 and 2018 he had a true tax rate of 327ppThe IRS records provide glimpses of other massive loans In both 2016 and 2017 investor Carl Icahn who ranks as the 40thwealthiest American on the Forbes list paid no federal income taxes despite reporting a total of 544 million in adjusted gross income which the IRS defines as earnings minus items like student loan interest payments or alimony Icahn had an outstanding loan of 12 billion with Bank of America among other loans according to the IRS data It was technically a mortgage because it was secured at least in part by Manhattan penthouse apartments and other propertiesppBorrowing offers multiple benefits to Icahn He gets huge tranches of cash to turbocharge his investment returns Then he gets to deduct the interest from his taxes In an interview Icahn explained that he reports the profits and losses of his business empire on his personal taxesppIcahn acknowledged that he is a big borrower I do borrow a lot of money Asked if he takes out loans also to lower his tax bill Icahn said No not at all My borrowing is to win I enjoy the competition I enjoy winningppHe said adjusted gross income was a misleading figure for him After taking hundreds of millions in deductions for the interest on his loans he registered tax losses for both years he said I didnt make money because unfortunately for me my interest was higher than my whole adjusted incomeppAsked whether it was appropriate that he had paid no income tax in certain years Icahn said he was perplexed by the question Theres a reason its called income tax he said The reason is if if youre a poor person a rich person if you are Apple if you have no income you dont pay taxes He added Do you think a rich person should pay taxes no matter what I dont think its germane How can you ask me that questionppSkeptics might question our analysis of how little the superrich pay in taxes For one they might argue that owners of companies get hit by corporate taxes They also might counter that some billionaires cannot avoid income and therefore taxes And after death the common understanding goes theres a final noescape clause the estate tax which imposes a steep tax rate on sums over 117 millionppProPublica found that none of these factors alter the fundamental pictureppTake corporate taxes When companies pay them economists say these costs are passed on to the companies owners workers or even consumers Models differ but they generally assume big stockholders shoulder the lions shareppCorporate taxes however have plummeted in recent decades in what has become a golden age of corporate tax avoidance By sending profits abroad companies like Google Facebook Microsoft and Apple have often paid little or no US corporate taxppFor some of the nations wealthiest people particularly Bezos and Musk adding corporate taxes to the equation would hardly change anything at all Other companies like Berkshire Hathaway and Walmart do pay more which means that for people like Buffett and the Waltons corporate tax could add significantly to their burdenppIt is also true that some billionaires dont avoid taxes by avoiding incomes In 2018 nine of the 25 wealthiest Americans reported more than 500 million in income and three more than 1 billionppIn such cases though the data obtained by ProPublica shows billionaires have a palette of taxavoidance options to offset their gains using credits deductions which can include charitable donations or losses to lower or even zero out their tax bills Some own sports teams that offer such lucrative writeoffs that owners often end up paying far lower tax rates than their millionaire players Others own commercial buildings that steadily rise in value but nevertheless can be used to throw off paper losses that offset incomeppMichael Bloomberg the 13thrichest American on the Forbes list often reports high income because the profits of the private company he controls flow mainly to himppIn 2018 he reported income of 19 billion When it came to his taxes Bloomberg managed to slash his bill by using deductions made possible by tax cuts passed during the Trump administration charitable donations of 9683 million and credits for having paid foreign taxes The end result was that he paid 707 million in income tax on that almost 2 billion in income That amounts to just a 37 conventional income tax rate Between 2014 and 2018 Bloomberg had a true tax rate of 130ppIn a statement a spokesman for Bloomberg noted that as a candidate Bloomberg had advocated for a variety of tax hikes on the wealthy Mike Bloomberg pays the maximum tax rate on all federal state local and international taxable income as prescribed by law the spokesman wrote And he cited Bloombergs philanthropic giving offering the calculation that taken together what Mike gives to charity and pays in taxes amounts to approximately 75 of his annual incomeppThe statement also noted The release of a private citizens tax returns should raise real privacy concerns regardless of political affiliation or views on tax policy In the United States no private citizen should fear the illegal release of their taxes We intend to use all legal means at our disposal to determine which individual or government entity leaked these and ensure that they are held responsibleppUltimately after decades of wealth accumulation the estate tax is supposed to serve as a backstop allowing authorities an opportunity to finally take a piece of giant fortunes before they pass to a new generation But in reality preparing for death is more like the last stage of tax avoidance for the ultrawealthyppUniversity of Southern California tax law professor Edward McCaffery has summarized the entire arc with the catchphrase buy borrow dieppThe notion of dying as a tax benefit seems paradoxical Normally when someone sells an asset even a minute before they die they owe 20 capital gains tax But at death that changes Any capital gains till that moment are not taxed This allows the ultrarich and their heirs to avoid paying billions in taxes The stepup in basis is widely recognized by experts across the political spectrum as a flaw in the codeppThen comes the estate tax which at 40 is among the highest in the federal code This tax is supposed to give the government one last chance to get a piece of all those unrealized gains and other assets the wealthiest Americans accumulate over their lifetimesppIts clear though from aggregate IRS data tax research and what little trickles into the public arena about estate planning of the wealthy that they can readily escape turning over almost half of the value of their estates Many of the richest create foundations for philanthropic giving which provide large charitable tax deductions during their lifetimes and bypass the estate tax when they dieppWealth managers offer clients a range of opaque and complicated trusts that allow the wealthiest Americans to give large sums to their heirs without paying estate taxes The IRS data obtained by ProPublica gives some insight into the ultrawealthys estate planning showing hundreds of these trustsppThe result is that large fortunes can pass largely intact from one generation to the next Of the 25 richest people in America today about a quarter are heirs three are Waltons two are scions of the Mars candy fortune and one is the son of Estée LauderppIn the past year and a half hundreds of thousands of Americans have died from COVID19 while millions were thrown out of work But one of the bleakest periods in American history turned out to be one of the most lucrative for billionaires They added 12 trillion to their fortunes from January 2020 to the end of April of this year according to ForbesppThat windfall is among the many factors that have led the country to an inflection point one that traces back to a halfcentury of growing wealth inequality and the financial crisis of 2008 which left many with lasting economic damage American history is rich with such turns There have been famous acts of tax resistance like the Boston Tea Party countered by less wellknown efforts to have the rich pay moreppOne such incident over half a century ago appeared as if it might spark great change President Lyndon Johnsons outgoing treasury secretary Joseph Barr shocked the nation when he revealed that 155 Americans making over 200000 about 16 million today had paid no taxes That group he told the Senate included 21 millionairesppWe face now the possibility of a taxpayer revolt if we do not soon make major reforms in our income taxes Barr said Members of Congress received more furious letters about the tax scofflaws that year than they did about the Vietnam WarppCongress did pass some reforms but the longterm trend was a revolt in the opposite direction which then accelerated with the election of Ronald Reagan in 1980 Since then through a combination of political donations lobbying charitable giving and even direct bids for political office the ultrawealthy have helped shape the debate about taxation in their favorppOne apparent exception Buffett who broke ranks with his billionaire cohort to call for higher taxes on the rich In a famous New York Times oped in 2011 Buffett wrote My friends and I have been coddled long enough by a billionairefriendly Congress Its time for our government to get serious about shared sacrificeppBuffett did something in that article that few Americans do He publicly revealed how much he had paid in personal federal taxes the previous year 69 million Separately Forbes estimated his fortune had risen 3 billion that year Using that information an observer could have calculated his true tax rate it was 02 But then as now the discussion that ensued on taxes was centered on the traditional income tax rateppIn 2011 President Barack Obama proposed legislation known as the Buffett Rule It would have raised income tax rates on people reporting over a million dollars a year It didnt pass Even if it had however the Buffett Rule wouldnt have raised Buffetts taxes significantly If you can avoid income you can avoid taxesppToday just a few years after Republicans passed a massive tax cut that disproportionately benefited the wealthy the country may be facing another swing of the pendulum back toward a popular demand to raise taxes on the wealthy In the face of growing inequality and with spending ambitions that rival those of Franklin D Roosevelt or Johnson the Biden administration has proposed a slate of changes These include raising the tax rates on people making over 400000 and bumping the top income tax rate from 37 to 396 with a top rate for longterm capital gains to match that The administration also wants to up the corporate tax rate and to increase the IRS budgetppSome Democrats have gone further floating ideas that challenge the tax structure as its existed for the last century Oregon Sen Ron Wyden the chairman of the Senate Finance Committee has proposed taxing unrealized capital gains a shot through the heart of Macomber Sens Elizabeth Warren and Bernie Sanders have proposed wealth taxesppAggressive new laws would likely inspire new sophisticated avoidance techniques A few countries including Switzerland and Spain have wealth taxes on a small scale Several most recently France have abandoned them as unworkable Opponents contend that they are complicated to administer as it is hard to value assets particularly of private companies and propertyppWhat it would take for a fundamental overhaul of the US tax system is not clear But the IRS data obtained by ProPublica illuminates that all of these conversations have been taking place in a vacuum Neither political leaders nor the public have ever had an accurate picture of how comprehensively the wealthiest Americans avoid paying taxesppBuffett and his fellow billionaires have known this secret for a long time As Buffett put it in 2011 Theres been class warfare going on for the last 20 years and my class has wonppHelp Us Report on Taxes and the UltrawealthyppDo you have expertise in tax law accounting or wealth management Do you have tips to share Heres how to get in touch We are looking for both specific tips and broader expertiseppDoris Burke Carson Kessler and Ellis Simani contributed reportingppAdditional image credits Elon Musk Britta Pedersen POOL AFP via Getty Images Jeff Bezos Leigh VogelGetty Images Michael Bloomberg Johannes EiseleAFP via Getty Images Warren Buffett Jamie McCarthyGetty ImagesppFiled under ppJesse Eisinger is a senior editor and reporter at ProPublicappJeff Ernsthausen is a senior data reporter at ProPublicappPaul Kiel covers business and consumer finance for ProPublicapp
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pppp Copyright 2024 Pro Publica IncppCreative Commons License CC BYNCND 30ppThank you for your interest in republishing this story You are free to republish it so long as you do the followingp
This represents 100 of income for a typical wageearning American householdppThe federal government taxes income A typical American household might pay something like 14ppFor many households the rest of their income goes toward expenses every year with maybe a small amount left over for savingsppA typical household might also own a home which often grows in value over time Such asset gains make up much of that households wealth growth for any given yearppThis proportion of wealth growth vs taxes has been typical for middleaged Americans since the mid2000s However its inverted for the ultrawealthyppThis represents 100 of income for Bezos From 2006 to 2018 his taxes were about 21 of his income ppBut for people in this stratosphere income doesnt really matter Bezos Amazon shares have skyrocketed in value since 2006 In most years his wealth grew far more than what he reported in income to the IRSppBetween 2006 and 2018 Bezos wealth shot up by over 120 billion while he paid a minuscule proportion in taxes
Meanwhile typical Americans his age paid more in taxes than they saw in wealth growth over that periodppThat is for every 100 of wealth growth over that period typical Americans paid 160 in taxes
Bezos paid only 109ppAs Congressman Hull envisioned long ago the ultrawealthy typically hold fast to shares in the companies theyve founded Many titans of the 21st century sit on mountains of what are known as unrealized gains the total size of which fluctuates each day as stock prices rise and fall Of the 425 trillion in wealth held by US billionaires some 27 trillion is unrealized according to Emmanuel Saez and Gabriel Zucman economists at the University of California BerkeleyppBuffett has famously held onto his stock in the company he founded Berkshire Hathaway the conglomerate that owns Geico Duracell and significant stakes in American Express and CocaCola That has allowed Buffett to largely avoid transforming his wealth into income From 2015 through 2018 he reported annual income ranging from 116 million to 25 million That may seem like a lot but Buffett ranks as roughly the worlds sixthrichest person hes worth 110 billion as of Forbes estimate in May 2021 At least 14000 US taxpayers in 2015 reported higher income than him according to IRS datappTheres also a second strategy Buffett relies on that minimizes income and therefore taxes Berkshire does not pay a dividend the sum a piece of the profits in theory that many companies pay each quarter to those who own their stock Buffett has always argued that it is better to use that money to find investments for Berkshire that will further boost the value of shares held by him and other investors If Berkshire had offered anywhere close to the average dividend in recent years Buffett would have received over 1 billion in dividend income and owed hundreds of millions in taxes each yearppMany Silicon Valley and infotech companies have emulated Buffetts model eschewing stock dividends at least for a time In the 1980s and 1990s companies like Microsoft and Oracle offered shareholders rocketing growth and profits but did not pay dividends Google Facebook Amazon and Tesla do not pay dividendsppIn a detailed written response Buffett defended his practices but did not directly address ProPublicas true tax rate calculation I continue to believe that the tax code should be changed substantially he wrote adding that he thought huge dynastic wealth is not desirable for our societyppThe decision not to have Berkshire pay dividends has been supported by the vast majority of his shareholders I cant think of any large public company with shareholders so united in their reinvestment beliefs he wrote And he pointed out that Berkshire Hathaway pays significant corporate taxes accounting for 15 of total US corporate taxes in 2019 and 2020ppBuffett reiterated that he has begun giving his enormous fortune away and ultimately plans to donate 995 of it to charity I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an everincreasing US debt he wroteppBuy Borrow Die How Americas Ultrawealthy Stay That WayppSo how do megabillionaires pay their megabills while opting for 1 salaries and hanging onto their stock According to public documents and experts the answer for some is borrowing money lots of itppFor regular people borrowing money is often something done out of necessity say for a car or a home But for the ultrawealthy it can be a way to access billions without producing income and thus income taxppThe tax math provides a clear incentive for this If you own a company and take a huge salary youll pay 37 in income tax on the bulk of it Sell stock and youll pay 20 in capital gains tax and lose some control over your company But take out a loan and these days youll pay a singledigit interest rate and no tax since loans must be paid back the IRS doesnt consider them income Banks typically require collateral but the wealthy have plenty of thatppThe vast majority of the ultrawealthys loans do not appear in the tax records obtained by ProPublica since they are generally not disclosed to the IRS But occasionally the loans are disclosed in securities filings In 2014 for example Oracle revealed that its CEO Ellison had a credit line secured by about 10 billion of his sharesppLast year Tesla reported that Musk had pledged some 92 million shares which were worth about 577 billion as of May 29 2021 as collateral for personal loansppWith the exception of one year when he exercised more than a billion dollars in stock options Musks tax bills in no way reflect the fortune he has at his disposal In 2015 he paid 68000 in federal income tax In 2017 it was 65000 and in 2018 he paid no federal income tax Between 2014 and 2018 he had a true tax rate of 327ppThe IRS records provide glimpses of other massive loans In both 2016 and 2017 investor Carl Icahn who ranks as the 40thwealthiest American on the Forbes list paid no federal income taxes despite reporting a total of 544 million in adjusted gross income which the IRS defines as earnings minus items like student loan interest payments or alimony Icahn had an outstanding loan of 12 billion with Bank of America among other loans according to the IRS data It was technically a mortgage because it was secured at least in part by Manhattan penthouse apartments and other propertiesppBorrowing offers multiple benefits to Icahn He gets huge tranches of cash to turbocharge his investment returns Then he gets to deduct the interest from his taxes In an interview Icahn explained that he reports the profits and losses of his business empire on his personal taxesppIcahn acknowledged that he is a big borrower I do borrow a lot of money Asked if he takes out loans also to lower his tax bill Icahn said No not at all My borrowing is to win I enjoy the competition I enjoy winningppHe said adjusted gross income was a misleading figure for him After taking hundreds of millions in deductions for the interest on his loans he registered tax losses for both years he said I didnt make money because unfortunately for me my interest was higher than my whole adjusted incomeppAsked whether it was appropriate that he had paid no income tax in certain years Icahn said he was perplexed by the question Theres a reason its called income tax he said The reason is if if youre a poor person a rich person if you are Apple if you have no income you dont pay taxes He added Do you think a rich person should pay taxes no matter what I dont think its germane How can you ask me that questionppSkeptics might question our analysis of how little the superrich pay in taxes For one they might argue that owners of companies get hit by corporate taxes They also might counter that some billionaires cannot avoid income and therefore taxes And after death the common understanding goes theres a final noescape clause the estate tax which imposes a steep tax rate on sums over 117 millionppProPublica found that none of these factors alter the fundamental pictureppTake corporate taxes When companies pay them economists say these costs are passed on to the companies owners workers or even consumers Models differ but they generally assume big stockholders shoulder the lions shareppCorporate taxes however have plummeted in recent decades in what has become a golden age of corporate tax avoidance By sending profits abroad companies like Google Facebook Microsoft and Apple have often paid little or no US corporate taxppFor some of the nations wealthiest people particularly Bezos and Musk adding corporate taxes to the equation would hardly change anything at all Other companies like Berkshire Hathaway and Walmart do pay more which means that for people like Buffett and the Waltons corporate tax could add significantly to their burdenppIt is also true that some billionaires dont avoid taxes by avoiding incomes In 2018 nine of the 25 wealthiest Americans reported more than 500 million in income and three more than 1 billionppIn such cases though the data obtained by ProPublica shows billionaires have a palette of taxavoidance options to offset their gains using credits deductions which can include charitable donations or losses to lower or even zero out their tax bills Some own sports teams that offer such lucrative writeoffs that owners often end up paying far lower tax rates than their millionaire players Others own commercial buildings that steadily rise in value but nevertheless can be used to throw off paper losses that offset incomeppMichael Bloomberg the 13thrichest American on the Forbes list often reports high income because the profits of the private company he controls flow mainly to himppIn 2018 he reported income of 19 billion When it came to his taxes Bloomberg managed to slash his bill by using deductions made possible by tax cuts passed during the Trump administration charitable donations of 9683 million and credits for having paid foreign taxes The end result was that he paid 707 million in income tax on that almost 2 billion in income That amounts to just a 37 conventional income tax rate Between 2014 and 2018 Bloomberg had a true tax rate of 130ppIn a statement a spokesman for Bloomberg noted that as a candidate Bloomberg had advocated for a variety of tax hikes on the wealthy Mike Bloomberg pays the maximum tax rate on all federal state local and international taxable income as prescribed by law the spokesman wrote And he cited Bloombergs philanthropic giving offering the calculation that taken together what Mike gives to charity and pays in taxes amounts to approximately 75 of his annual incomeppThe statement also noted The release of a private citizens tax returns should raise real privacy concerns regardless of political affiliation or views on tax policy In the United States no private citizen should fear the illegal release of their taxes We intend to use all legal means at our disposal to determine which individual or government entity leaked these and ensure that they are held responsibleppUltimately after decades of wealth accumulation the estate tax is supposed to serve as a backstop allowing authorities an opportunity to finally take a piece of giant fortunes before they pass to a new generation But in reality preparing for death is more like the last stage of tax avoidance for the ultrawealthyppUniversity of Southern California tax law professor Edward McCaffery has summarized the entire arc with the catchphrase buy borrow dieppThe notion of dying as a tax benefit seems paradoxical Normally when someone sells an asset even a minute before they die they owe 20 capital gains tax But at death that changes Any capital gains till that moment are not taxed This allows the ultrarich and their heirs to avoid paying billions in taxes The stepup in basis is widely recognized by experts across the political spectrum as a flaw in the codeppThen comes the estate tax which at 40 is among the highest in the federal code This tax is supposed to give the government one last chance to get a piece of all those unrealized gains and other assets the wealthiest Americans accumulate over their lifetimesppIts clear though from aggregate IRS data tax research and what little trickles into the public arena about estate planning of the wealthy that they can readily escape turning over almost half of the value of their estates Many of the richest create foundations for philanthropic giving which provide large charitable tax deductions during their lifetimes and bypass the estate tax when they dieppWealth managers offer clients a range of opaque and complicated trusts that allow the wealthiest Americans to give large sums to their heirs without paying estate taxes The IRS data obtained by ProPublica gives some insight into the ultrawealthys estate planning showing hundreds of these trustsppThe result is that large fortunes can pass largely intact from one generation to the next Of the 25 richest people in America today about a quarter are heirs three are Waltons two are scions of the Mars candy fortune and one is the son of Estée LauderppIn the past year and a half hundreds of thousands of Americans have died from COVID19 while millions were thrown out of work But one of the bleakest periods in American history turned out to be one of the most lucrative for billionaires They added 12 trillion to their fortunes from January 2020 to the end of April of this year according to ForbesppThat windfall is among the many factors that have led the country to an inflection point one that traces back to a halfcentury of growing wealth inequality and the financial crisis of 2008 which left many with lasting economic damage American history is rich with such turns There have been famous acts of tax resistance like the Boston Tea Party countered by less wellknown efforts to have the rich pay moreppOne such incident over half a century ago appeared as if it might spark great change President Lyndon Johnsons outgoing treasury secretary Joseph Barr shocked the nation when he revealed that 155 Americans making over 200000 about 16 million today had paid no taxes That group he told the Senate included 21 millionairesppWe face now the possibility of a taxpayer revolt if we do not soon make major reforms in our income taxes Barr said Members of Congress received more furious letters about the tax scofflaws that year than they did about the Vietnam WarppCongress did pass some reforms but the longterm trend was a revolt in the opposite direction which then accelerated with the election of Ronald Reagan in 1980 Since then through a combination of political donations lobbying charitable giving and even direct bids for political office the ultrawealthy have helped shape the debate about taxation in their favorppOne apparent exception Buffett who broke ranks with his billionaire cohort to call for higher taxes on the rich In a famous New York Times oped in 2011 Buffett wrote My friends and I have been coddled long enough by a billionairefriendly Congress Its time for our government to get serious about shared sacrificeppBuffett did something in that article that few Americans do He publicly revealed how much he had paid in personal federal taxes the previous year 69 million Separately Forbes estimated his fortune had risen 3 billion that year Using that information an observer could have calculated his true tax rate it was 02 But then as now the discussion that ensued on taxes was centered on the traditional income tax rateppIn 2011 President Barack Obama proposed legislation known as the Buffett Rule It would have raised income tax rates on people reporting over a million dollars a year It didnt pass Even if it had however the Buffett Rule wouldnt have raised Buffetts taxes significantly If you can avoid income you can avoid taxesppToday just a few years after Republicans passed a massive tax cut that disproportionately benefited the wealthy the country may be facing another swing of the pendulum back toward a popular demand to raise taxes on the wealthy In the face of growing inequality and with spending ambitions that rival those of Franklin D Roosevelt or Johnson the Biden administration has proposed a slate of changes These include raising the tax rates on people making over 400000 and bumping the top income tax rate from 37 to 396 with a top rate for longterm capital gains to match that The administration also wants to up the corporate tax rate and to increase the IRS budgetppSome Democrats have gone further floating ideas that challenge the tax structure as its existed for the last century Oregon Sen Ron Wyden the chairman of the Senate Finance Committee has proposed taxing unrealized capital gains a shot through the heart of Macomber Sens Elizabeth Warren and Bernie Sanders have proposed wealth taxesppAggressive new laws would likely inspire new sophisticated avoidance techniques A few countries including Switzerland and Spain have wealth taxes on a small scale Several most recently France have abandoned them as unworkable Opponents contend that they are complicated to administer as it is hard to value assets particularly of private companies and propertyppWhat it would take for a fundamental overhaul of the US tax system is not clear But the IRS data obtained by ProPublica illuminates that all of these conversations have been taking place in a vacuum Neither political leaders nor the public have ever had an accurate picture of how comprehensively the wealthiest Americans avoid paying taxesppBuffett and his fellow billionaires have known this secret for a long time As Buffett put it in 2011 Theres been class warfare going on for the last 20 years and my class has wonppHelp Us Report on Taxes and the UltrawealthyppDo you have expertise in tax law accounting or wealth management Do you have tips to share Heres how to get in touch We are looking for both specific tips and broader expertiseppDoris Burke Carson Kessler and Ellis Simani contributed reportingppAdditional image credits Elon Musk Britta Pedersen POOL AFP via Getty Images Jeff Bezos Leigh VogelGetty Images Michael Bloomberg Johannes EiseleAFP via Getty Images Warren Buffett Jamie McCarthyGetty ImagesppFiled under ppJesse Eisinger is a senior editor and reporter at ProPublicappJeff Ernsthausen is a senior data reporter at ProPublicappPaul Kiel covers business and consumer finance for ProPublicapp
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