Taxes for billionaires: why the richest people in the world don't pay into the budget.

According to Vox: At the beginning of the 20th century, a new concept of taxation emerged: taxes should be paid according to one's capabilities, with the greatest burden falling on the wealthy.

These views on 'taxing the rich' became the foundation for two main taxes of the modern system: the income tax, enacted in 1913, and the estate tax, which appeared three years later, in 1916. The income tax had 'progressive' rates, meaning those with higher income paid higher taxes; meanwhile, many low-income Americans were exempt from taxation. The estate tax was introduced to tax the richest Americans when they pass their wealth to the next generation.

Initially, these taxes truly only affected very wealthy individuals, leaving over 95 percent of Americans untouched. However, even after the expansion of the income tax system to fund World War II, the focus on the rich remained.

Our income and estate taxes still operate on the same principles: progressive income tax rates and estate tax apply only to the wealthiest Americans. But the facts show that these taxes are not fulfilling their functions.

The ability of the income tax to collect the most from those who can afford it has been undermined by the wealthy's avoidance of taxable income. Economists and tax experts have long noted the wealthy's opportunities to avoid taxation, but due to the secrecy of tax returns, it has been hard to identify real examples. Everything changed in June 2021, when ProPublica journalists published a series of articles based on actual tax returns that became publicly available due to an Internal Revenue Service (IRS) employee, Charles Littlejohn. These returns confirmed that many of the richest Americans, such as Jeff Bezos, Elon Musk, and Michael Bloomberg, were able to avoid paying any income taxes at all by avoiding taxable income.

Another important part of the tax code—the estate and gift tax (along with the generation-skipping transfer tax introduced to strengthen the estate tax in 1986)—was originally designed to curb large intergenerational transfers of wealth. This promised to support equality in American society for decades, and it has been noted that it largely succeeded in doing so.

However, the estate tax, like the income tax, is no longer fulfilling its functions. Although there are not a large number of elite tax returns, tax data shows its effectiveness has decreased. Wealth concentration has risen from historically low levels in the 1970s to levels unseen since the introduction of the modern U.S. tax code. Despite the fact that the richest Americans control more wealth than ever, the amount collected from estate and gift taxes remains meager—less than half a percent of total federal revenues. The ways to avoid the estate tax have long been known, and as a result, wealth is retained within families for decades.

The tax life of wealthy Americans is, by its nature, unique to each individual. However, several central themes emerge in the new practice of tax avoidance and the creation of dynastic wealth—wealth that is passed down through generations.

How the rich avoid income tax

Most Americans rely on taxable earned income to support themselves and their families. Meanwhile, many of the richest Americans evade taxes by opting out of salaries—many, like Larry Ellison (Oracle) and Mark Zuckerberg (Meta), take only $1 a year, while others, like Elon Musk (Tesla), take nothing at all. In many cases, these billionaires pay no income taxes at all, despite their status as some of the wealthiest people in the world.

Avoiding salaries provides other tax advantages as it allows them to avoid payroll taxes, which fund the largest expenses of the state—Social Security and Medicare.

When the rich avoid salaries, they do not give up the financial benefits of their businesses. Instead, they rely on the appreciation of their stock prices to accumulate wealth. Dependence on growth rather than income helps avoid significant taxes since that growth is not taxed until shares are sold. And if they hold onto shares until death, gains evaporate and are not subject to taxes. Then their heirs receive shares at market value and do not pay taxes on the deceased's profits. Meanwhile, by using these assets as collateral for loans, the rich can enjoy all financial benefits without tax burdens.

Besides the question of fair distribution of state costs, the inability to tax the rich also allows this wealth to grow at a dizzying rate, creating even greater concentration of wealth.

The ability to avoid taxation is not limited to billionaire entrepreneurs. Many 'ordinary' rich can also take advantage of loans without paying taxes on growing investments instead of selling shares or receiving dividends. However, the widespread use of stock appreciation, rather than salary or dividends, as a means of accumulating wealth is new.

Until 1982, this path was typically not available since corporations usually distributed profits in the form of salaries and dividends. Both types of income were typically taxed at the highest rates. But since 1982, changes in regulations by the Securities and Exchange Commission (SEC) have led many companies to stop paying dividends to shareholders and start buying back their own shares on the open market, driving up their value. The shift from dividends to share buybacks removed a significant source of tax revenue (taxes on dividends) and provided wealthy investors with a simple way to increase their assets without taxation.

In terms of the volume of taxes paid, no one pays more than working wealthy Americans: high-income earners pay high income taxes and payroll taxes, with no opportunity to avoid taxes available to those who can circumvent the system. This creates an important difference between working wealthy and the rich who can evade the system: the former work and are required to pay taxes, while the latter may work but have the opportunity to circumvent the system using means unavailable to working wealthy.

Typically, in defense of the status quo, it is argued that the income tax system already significantly burdens the wealthy, since the top 1 percent of taxpayers pays 40 percent of all income taxes, while 40 percent of Americans do not pay any income taxes at all. This is partially true: people with the highest taxable incomes indeed pay the most taxes; but this statistic pertains to people with high incomes, typically from labor; it tells us nothing about the tax responsibility of those with the most wealth. Studies have shown that only about 50 percent of the wealthiest people in America have high salaries. Moreover, as the leaked tax returns of several of the richest Americans show, the ability to avoid taxation among wealth owners suggests that they are just as likely to be among the 40 percent of non-payers as among the top 1 percent of payers.

The Death of the Estate Tax

Although the estate tax is a tax levied on inherited wealth above a certain threshold—it still officially exists, its effectiveness and societal perception have been seriously undermined during the PR campaign of the 1990s that sought to portray it as a 'death tax' and an 'unfair double tax that harms family farms and businesses.' The campaign, funded by some of the wealthiest families in America, achieved only limited success in its aim to abolish the estate tax, receiving a temporary pause in 2010, but its main success lay in changing public perception of the tax to negative.

Since then, public hostility and the pressure from the wealthy have kept lawmakers from making changes to close loopholes in the legislation. Indeed, since 1990 Congress has not taken any measures to close any loopholes in the estate tax. As a result, the tax remains only on paper, and wealthy Americans and their financial advisors evade payment through a virtual alphabet soup of loopholes: SLAT, SLANT, GRAT, GRUT, CRAT, CRUT, QTIP, QPRT, NIMCRUT, and Flip CRUT.

The income tax system in the U.S., developed on the assumption of the normal functioning of the estate and gift tax, still does not impose taxes on those receiving gifts, inheritances, or insurance payouts, regardless of their size.

The Mastery of the Rich

The rich often receive recognition for their charity; however, their philanthropy often leads to significant costs for the federal government due to lost revenues and provides uncertain benefits to society. People who earn their money do not actually receive tax benefits from charitable donations, contrary to popular belief. In fact, 90 percent of Americans do not receive tax benefits for their charitable contributions. At the same time, the wealthy who plan their donations wisely—most of them do—can save on income tax, capital gains tax, estate and gift taxes by making charitable donations of appreciated assets, including stocks, real estate, cryptocurrencies, and other assets. Overall, these tax savings can cost taxpayers and thus cost the federal government lost revenue of up to 74 percent of the value of the donation. This makes American taxpayers—who must cover this lost revenue—involuntary sponsors of the charity of the extremely wealthy.

While some donations provide benefits to society, there is no certainty that this will indeed happen. The reason is that the wealthiest Americans typically donate their money not to food banks or shelters for the homeless (or even to their already wealthy alma maters) but to their private family foundations or discretionary funds. These charitable intermediaries provide wealthy donors with all the immediate tax benefits of charitable contributions, without setting any deadlines for spending the funds on charitable purposes. As a result, there is no certainty that society will ever benefit from these donations.

The future of the United States and its economy directly depends on the decisions the country makes today regarding the taxation of the rich.

Besides the question of fair distribution of state costs, inaction regarding taxing the wealthy allows that wealth to grow at a dizzying pace, prompting even greater concentration of wealth. As others note, extreme wealth concentration threatens the continued existence of American democracy. This concerns not only the fact that wealth provides power—over companies, media, philanthropy, and politics—but also that democracy requires elites and common people to unite in a shared pursuit of a democratic republic. This is a problem not only for Democrats or Republicans but for all Americans.

Reprinted with permission from The Second Estate: How the Tax Code Made an American Aristocracy by Ray D. Madoff, published by University of Chicago Press. © 2025 Ray D. Madoff. All rights reserved.