Amazon founder Jeff Bezos was worth about $18 billion in 2011, but he paid no federal income taxes that year. Investment losses exceeded whatever income he received, leaving him with an income tax bill of zero. At the same time, his lack of net income made him eligible for child tax credit payments. Bezos claimed and received $4,000 from the IRS to help offset the cost of raising his children.
Those details are part of an investigative report released Tuesday by ProPublica, which showed that Bezos is not alone in paying little or no income taxes despite staggering wealth. Tesla CEO Elon Musk paid no federal income taxes in 2018, the report says, while financier George Soros paid no income taxes for three years running starting in 2016. Fellow billionaires Michael Bloomberg and Carl Icahn have also recorded years in which they have paid no income tax whatsoever.
The ProPublica report is based on an analysis of data leaked from the IRS on thousands of the wealthiest people in the U.S. over a period of 15 years. Overall, the data show that the wealthiest Americans pay little in income taxes relative to their great wealth. In an analysis of the 25 wealthiest people as determined by Forbes, ProPublica found that their wealth increased by $401 billion from 2014 to 2018, but they paid $13.6 billion in federal income taxes — just 3.4% of their overall increase in wealth.
“Taken together, [the report] demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most,” ProPublica’s Jesse Eisinger, Jeff Ernsthausen and Paul Kiel write. “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 year.”
Income vs wealth: The report highlights the different ways income and wealth are treated by the tax code. In general, wealth is taxed only when capital gains are realized, which means that executives like Bezos can be worth billions of dollars and yet pay little or no income tax as long as they hold onto their assets.
But that isn’t the whole story. ProPublica says that even looking at just income and ignoring wealth, the richest Americans pay a lower tax rate than many middle-class people. Those 25 wealthiest Americans paid $13.6 billion in income taxes between 2014 and 2018 — but reported about $86 billion in adjusted gross income, which means their income tax rate was just 15.8%. “That’s lower than the rate a single worker making $45,000 a year might pay if you include Medicare and Social Security taxes,” the report’s authors say.
Sophisticated strategies: The superrich have the finest financial advisers money can buy, and they’ve developed a variety of techniques to sharply reduce or eliminate the taxes they pay. According to ProPublica, the overall strategy comes down to a simple phrase: buy, borrow, die.
Instead of taking income or selling assets, both of which involve paying taxes, the very rich can simply borrow against their wealth, with the only expense being the interest rate — which, depending on how the loans are structured, can sometimes be deducted as an expense.
These loans can be hard to detect since they don’t have to be reported to the IRS, but ProPublica found disclosures that showed that Tesla’s Musk used 92 million shares worth more than $57 billion to secure personal loans last year. Yet Musk’s income tax bills are on a very different scale, totaling just $65,000 in 2017 and zero in 2018.
The final part of the tax-avoidance strategy involves passing on enormous wealth at death, without paying taxes on the underlying increases in asset values. Heirs can receive millions or even billions in wealth without paying any capital gains taxes at all, thanks to the “step-up in basis” rule that makes those gains disappear at death. And even the estate tax, which tops out at a hefty 40%, can be gamed through the use of trusts and other loopholes.
New focus on a wealth tax: The ProPublica report spurred some lawmakers to renew their calls for a wealth tax. “Our tax system is rigged for billionaires who don’t make their fortunes through income, like working families do,” tweeted Sen. Elizabeth Warren. “The evidence is abundantly clear: it is time for a #WealthTax in America to make the ultra-rich finally pay their fair share.”
At a hearing Tuesday with IRS Commissioner Charles Rettig, Senate Finance Chair Ron Wyden (D-OR) said that he was working on a proposal to increase taxes on wealth. “What this data reveals is that the country’s wealthiest — who profited immensely during the pandemic — have not been paying their fair share,” he said. “I’ll have a proposal to change that.”
Wyden released the outline of a wealth tax in 2019, which included an annual tax on capital gains, but he has not released legislative text. “I'll have it ready to go here shortly,” Wyden said after the hearing. “And today, this article from ProPublica highlights — I've had senators already ask me about it, you know, since then — highlights the need for the reform that I'll be offering.”
The Biden administration, however, has not embraced the idea of a wealth tax. Earlier this year, Treasury Secretary Janet Yellen said that such a tax is “something that has very difficult implementation problems,” and the president’s proposals have focused on taxing wealthy estates more aggressively.
Still, the ProPublica report is bringing more attention to the issue of low taxes paid by the rich, at a time when the Biden administration is proposing ways to raise more revenues to help pay for the president’s ambitious spending plans. “I think this is big because it tells the story of wealth and the way it is taxed in a way everybody kind of expected but didn’t know,” Philip Hackney, a former IRS official, told The Washington Post.
Privacy concerns: The White House, lawmakers and IRS officials expressed concerns about the leak of sensitive tax information. “The unauthorized disclosure of confidential government information is illegal,” said Treasury Department spokeswoman Lily Adams. IRS Commissioner Rettig told lawmakers that federal authorities are investigating the leak. In response to a question from Sen. Chuck Grassley (R-IO) about whether the leakers could face prosecution, Rettig said, “Absolutely.”