Billionaires do pay income tax on investment income.
If they sell and incur capital gains. But they have so many better alternatives than you or me. And if they do incur capital gains they pay the same tax rate (or maybe 5 basis points higher, depending on your income) as you or me.
What alternatives are those, that enable realizing income without incurring income tax?
Borrowing against assets. Wealthy people get low, low rates, much lower than the hoi polloi would get on a HELOC or brokerage account margin loan. Banks like having them as clients.
Not only they get low rates, but if they have friends in the palace, they tend to be beneficiaries of large governmental contracts; during times of economic upset, they are the beneficiaries of large “monetary injections” that later cause inflation and prices to rise for all of us. During 2008, COVID, and the Mango recession the wealthy got much much wealthier, and all we got was expensive eggs and higher costs of living.
And how do you pay back the loan without realising a gain?
You don't pay back the loan. You die, your assets pass to your heirs, and their cost basis is stepped up. The heirs sell some of the assets to pay the loan back. They don't have capital gains because of the stepped-up cost basis.
That's the gist I got from reading https://www.reddit.com/r/BuyBorrowDieExplained/comments/1f26...
There are finer points I don't understand such as:
1. Is the stepped-up cost basis available to the estate or only to the heirs? If it's to the estate, it's easier for the bank to trust they'll be paid back.
2. If the heir gets the stepped up cost basis, what legal guarantees does the bank have that the heir will pay the loan back?
And probably a lot else. I assume there's expensive lawyering and accounting involved in setting it up, so it isn't cost-effective unless you have a certain amount to shield from taxes in the first place.
Really? They're not going to get below prime. Nobody loans out money with a guaranteed prospect of below market returns. It's going to be above prime.
Usually about the lowest rate you can get is a mortgage on your house.
Of course, if your credit is bad, you're not going to get a good rate.
First of all, prime can be pretty good vs being taxed. Secondly, who knows what kind of sweetheart deal can be pulled for a small (in the big scheme of things) "loan" when banking of billions is at stake.
> Nobody loans out money with a guaranteed prospect of below market returns
Not to you or me. Giving powerful people who can send more business the bank's way a freebie on their personal accounts might make sense as a loss leader.
An ELOC for a HNWI can be significantly lower interest than a mortgage. They can often get "fed funds rate/LIBOR + 0.5%" or so. This is because they can accept a floating rate, while mortgage rates get locked in for 10-30 years.
Adam Neumann and several others in that era famously got very large zero interest personal loans because the bank wanted their corporate business.
Only short term gains are taxed as income. Long term capital gains tax caps at 20%, wildly lower than the top income tax bracket of 37%. And it's always possible to defer short term gains (e.g. put your trading money in an IRA).
IRA contributions are drastically limited to a $7000 cap per year under 50. Whether they should be is another question, and one worth exploring.
Long-term investment is rightly seen as something to be encouraged hence the lower tax rates. You can make the argument that the rate should be more like 0% since the money invested and risked was already taxed most likely...20% is a reasonable value for the market regulating infrastructure provided by gov't entities.
IRA caps are low, but loads of people earning enough that they'd reasonably save more than 7k annually have access to 401ks or similar accounts that raise the annual cap to >30k, vastly more than the typical person is saving.
The middle class isn't taking advantage of low capital gains rates to earn more from their taxable brokerage accounts because they haven't even filled up their tax-advantaged accounts.
There are loopholes to roll all sorts of nonsense into an IRA though. There was a whole news cycle in the 2012 election about Mitt Romney's $4M "IRA" or somesuch. And IRAs are hardly the only shelter from income tax, they're just the most obvious.
The simple truth is that wealth beyond the ~$10M level in the US pays essentially zero "income tax". It just doesn't happen, no one does it. Short term gains are only taxed for small investors who don't know any better.
According to Google:
"Entrepreneur Elon Musk announced on social networks that this year he will pay 11 billion dollars, thus becoming the largest taxpayer in the history of the USA."
Certainly someone we can take at his word, which is why my self driving Roadster flies me to work every day
That was on a sale of Tesla stock that he'd held for much longer than the long term rate threshold. He paid 20% on it, or plausibly less. I, personally pay a higher rate than that. Big numbers notwithstanding, Elon Musk shouldn't be paying less tax than I do, sorry.
If you hold stock long term, you will pay the same or less tax.
From Google: "For the 2025 tax year, individual filers won't pay any capital gains tax if their total taxable income is $48,350 or less"
If you've got a smart phone and a credit card, you can buy stock. See robinhood.com
You're dodging, and I know you're smart enough to know how this goes. I don't make money with long term stock, I make salary. I pay >>20% tax on that salary. Billionaries make, statistically, zero salary. All their income is on long term gains. All of it. So billionaires pay 20%, and that only if they're dumb enough not to find other shelters.
You're just saying "Well, that's the way the tax code works". I'm saying "The tax code sucks", and your point is non-responsive.
You can invest in stocks, too. Over time, it will pay more than your salary.
If you bought a house, and it goes up in value, that increase will be a capital gain taxed at capital gains rates.
So how "over time" do I need to wait until I start paying the same tax rate as a billionaire? Seems like your solution to "the rich pay less tax" is "well, everyone should just be rich then"?
"Let them eat cake" makes for extremely poor federal revenue policy.
Not at rates anywhere near tax rates on wages of a middle class worker.
Because investment income is not the same as wage income. Nor should they be.
Why not? Money is fungible. A dollar is a dollar. Why should investment dollars be taxed less than those earned through the sweat of one's brow?
Mainly to encourage people to save their money. You know, "work smarter, not harder"...
Financial policy is very specifically against people saving their money though - that's why a certain level of inflation is considered desirable to mainstream economists. Spending and borrowing is heavily encouraged at all levels, while investment opportunities are gated based on wealth and income to prevent the poor from being able to "work smarter".
> investment opportunities are gated based on wealth and income
Anyone can install robinhood on their phone and trade using their credit card.
> Financial policy is very specifically against people saving their money
No, it isn't. People who save money are terrified of risk. There's nothing stopping anyone from investing the money.
> that's why a certain level of inflation is considered desirable to mainstream economists
That's the excuse the government makes to inflate the money. You'll never see a politician point out the real reason for inflation. It's so they can spend it without raising taxes, but it does cause inflation, and inflation has to be blamed on something else. Anything but the truth.
> Anyone can install robinhood on their phone and trade using their credit card.
Buying a few stocks on an app is not anywhere near the same thing as being an accredited investor. Access to the most lucrative investment opportunities are not available to the average person, and that's almost entirely due to rules intentionally created to block anyone but the already wealthy.
The methods that institutional investors have, like market making or delta one strategies, aren't available because of the rules, it's because individual investors literally don't have the scale, flow and networks to do it.
Second of all, at the end of the day it's other people money's they're using, and are entrusted to manage. You can't demand people to just lend money to anyone, any sort of free market of loans will quickly coalesce into a few capital allocators.
Please, this thread is about the average wage-grade worker (money earned via the "sweat of one's brow"), not an "accredited investor". In this example, almost anyone in the US can open up a Robin Hood, Vanguard, Schwab, Fidelity, etc account with probably $25. You don't need access to the most lucrative investment opportunities to make money; simply buy a standard S&P 500 ETF and call it a day. Over time, the chances of you making money with your investments are high, and the tax burden is lower, meaning you get to make and keep more money in your pocket. That is a win for everyone - not just the magical "billionaire".
The average worker in the US needs these sorts of opportunities to be self reliant. You don't need to be a billionaire to make money on the market, you just need a few dollars, some time, and the will to take a little risk. Stop hating on the average worker...
To say nothing of insider trading for those connected to folks setting policies that affect the economy
Right, because the average worker has insider connections that set policies that affect the economy. /s
Sorry, nothing prevents the poor from working smarter. Just because you are poor does not mean you are uneducated. And, investment opportunities are NOT gated based on wealth and income. Literally anyone in the US can open an investment account and get started. The lack of desire is the real issue.
> And, investment opportunities are NOT gated based on wealth and income.
What? There is literally a class of people considered accredited or sophisticated investors.
To be considered an accredited investor by the SEC you must have a net worth of over $1M -not including- your primary residence, and you must have an annual household income of over $300K.
It is quite literally a wealth and income gate.
We have tax-advantaged retirement accounts to enable the middle class to save a reasonable amount in order to retire without being a burden on society. A typical saver doesn't have additional extra money leftover for a taxable brokerage account that exposes them to capital gains taxes.
Low capital gains taxes aren't meaningfully encouraging somebody making 75k and saving 10k annually to continue with their saving plan.
So you tax the person extra who needs to eat their money, and let the person who is swimming in money keep more of it?
And you earnestly can't understand why the poor want to increase taxes on the rich?
Short term dividend income is taxed at the same rates as wage income.
When i needed money for a house, without a good security i had to pay 1.6 and with 0.8.
Rich get richer, poor never see this advantage.