Why don’t the rich pay taxes?
IdeaEconomics YouTube video: Why don’t the rich pay taxes?
Why don’t the rich pay taxes? How often have you heard this question or even asked this question yourself? During the height of the pandemic, I constantly asked this question. We saw so many billionaires significantly increase their wealth while most Americans continued to drown in debt.
This is the first article in my new segment dedicated to studying the lives of self-made billionaires across the world! I wanted to create this segment to help you better understand what these billionaires did to escape the matrix and create true financial wealth for themselves.
In this article, I will do my best to explain why the rich don’t pay taxes. By breaking down their lives and highlighting the key things they did, I will recommend suggestions and resources you can utilize to help you start walking down the path towards financial freedom.
However, the first thing you need to understand is why the rich don’t pay taxes? This, of course, is a general question, and you can take many different routes to answer this. I will do my best to give you the real reasons. These are the three main reasons the ultra-wealthy can avoid paying taxes:
1. Low salaries they give themselves every year
We have all heard of those CEOs at global companies making announcements saying the government should tax the rich even more than they are currently doing. In addition, many CEOs commit to receiving $1 a year for their salaries or remain under $100,000 per year to be more in alignment with the working class. Well, here is the news flash for you. Paying themselves such low salaries allows them to avoid MASSIVE taxes.
To help you better understand, the average person who files for taxes as a single person and makes around $539,900 per year will pay 37% of their annual income to the government. THIRTY-SEVEN PERCENT of your yearly income will disappear and go to the government.
For example, let’s say that you make $50,000 a year. According to the government, you must pay 22% in federal taxes since you make $50,000 a year. You paid $6,784 in federal taxes for that year to do the math for you. If you made $50,000 in 2018, you would have paid more federal taxes than Elon Musk did. According to ProPublica, Musk has an average tax rate of about 3.27% that he paid from 2015 to 2018. Sadly, it is both shocking and not shocking, right? Learn more about why we have taxes and why we have to pay them?
At this point, I am sure you can understand that all these millionaires and billionaires would be subject to the 37% tax rate. Income tax directly correlates to your income, so the more you make, the more you will pay to the IRS. To avoid this, CEOs and entrepreneurs will lower their income as much as possible or receive a middle-class salary. For example, Jeff Bezos reported his annual salary income from Amazon in 2020 as $81,840 per year. That falls right into the federal tax bracket of owing 22% per year vs. the 37% that he would have had to pay from the billions he made in that year at Amazon.
Famous CEOs who pride themselves on receiving either $1 or $0 a year for their income salary are Mark Zuckerberg – Facebook, Jack Dorsey – Twitter, Larry Page & Sergey Brin – Alphabet, Evan Spiegel – Snapchat & Donald Trump. The people in this category of wealth are making money through their company’s stocks or real estate, for example, and they don’t specifically rely on their company’s salary. They would rather pay taxes through their own company and be taxed through corporate tax.
It is currently set at 21%, so this is much less than the 37% income tax rate they avoid paying. However, because many of these CEOs can hire serious lawyers & tax professionals, it is easy for them to bypass company corporate taxes by saying the company lost money or that the company has accumulated more debt that year. They consider themselves company assets and expense everything through the company vs. individual citizens.
2. Invest a bulk of their cash into investments that are considered non-cash
The government fears a financial crisis due to a billionaire deciding to move their money to another country. Forbes reported that there are less than 3,000 billionaires globally. This small group can control what happens to the economy when they decide to move their money around. To incentivize this small group of billionaires, the government has said that as long as you leave your money in the market or asset funds and do not try to liquidate the funds to cash, you will not be taxed on that money.
Most people receive their money through a yearly income or salary wage. The 1% is paying themselves from investments like dividends, rental properties, art collections, etc. It allows them to pay themselves through capital gains and never need a job to support themselves financially.
3. Borrow money from the bank to pay themselves
It is an overall strategy that many wealthy individuals utilize to pay themselves. As you just read earlier, many of these CEOs report low income, so how do they pay for their ginormous houses and Lamborghinis? Well, they borrow money in the form of a loan from the bank.
This is how it works, the wealthy have many assets in their name, and those assets are generally worth a lot of money. Most of the time, those assets are not in cash, so the bank agrees to let the person put up 20 million dollars worth of investments (stocks, bonds, etc.). By doing this, that 20 million acts as collateral damage. Hence, the bank gives that person access to the cash value of that investment called a securities-backed line of credit (with cash access ranging between 50% to 100% for that account).
Now, this person has access to cash while keeping their investments in the original funds, which will continue growing over time. Keep in mind that a loan always matures interest over time, which the borrower will have to pay back. However, the interest rate is far less expensive than many other options making it incredibly favorable for the wealthy.
Another popular method is to use real estate property as collateral damage when receiving a loan from the bank. The bank finds this option more favorable and will offer long-term loans with low-interest rates that you have to pay back eventually. When you put up your property as collateral damage, the bank will allow you to access your cash through home equity or cash-out refinance.
The moral of the story is that anytime you hear the government or a new politician running for office shout that they will tax the rich, don’t buy into the hype. Unfortunately, the top 25 wealthiest Americans have so many tax loopholes that the amount of taxes they would have paid throughout the year is generally around a .05% to 5% tax rate (compared to the standard 37%). Learn more about where your tax money is going and the ten reasons why.
The people impacted by higher tax rates are the working middle-class and lower-class. However, all hope is not lost! We can all start implementing strategies and tools into our lives to help us get on the path to financial freedom like the self-made millionaires and billionaires did.
This concludes today’s article, and I hope that it was helpful to you and got you thinking more about financial literacy. I always want to hear your thoughts and questions, especially about finances. Please email me and leave comments below because I want to know what you think. My next article focuses on Elon Musk. I will give you some ideas to help you and your family start turning things around financially.
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And remember, like Earl Nightingale said, “Everything begins with an idea.” See you again next time!