Billionaires Don’t Pay Taxes: Here’s Why

For the first time in history, U.S. billionaires paid a lower tax rate than the working class last year“. This is the title of a hit piece from the Washington Post. For the most part, billionaires don’t pay taxes. Here’s why.

Source: Emmanuel Saez, Gabriel Zucman, Washington Post

16th Amendment

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

Notice very carefully that the amendment says “income“, not wealth! Income is money that an individual or business receives in exchange for providing a good or service or through investing capital.

Income is inherently different than wealth. This is the whole reason this site is called Wealthy Diligence!

Many people still confuse income and wealth all the time, even millionaires in this study!

Wealth refers to the net worth of a household. It is calculated as assets – liabilities, or (what you own – what you owe).

Household income is merely realized income to be reported on one’s personal income tax return.

Thus, the Constitution only allows the government to tax realized income.

Elizabeth Warren’s Plan

Democratic presidential candidate Elizabeth Warren proposed an annual wealth tax. It is attempting to combat inequality and raise trillions of dollars with a significant new levy on the very richest Americans.

Photo by Mario Tama/Getty Images

Ms. Warren’s proposal would impose a 2% annual tax on household wealth above $50 million and an additional 1% tax on wealth above $1 billion.

Constitutionality of the Plan

The following is from a WSJ article titled, “Elizabeth Warren’s Unconstitutional Wealth Tax“.

“The 16th Amendment authorizes Congress to tax “incomes, from whatever source derived.” It does not give Congress the power to tax balance sheets as well.

At the Constitutional Convention, Gouverneur Morris explained in plain English what every delegate understood “direct taxation” to be.

It is when the federal government attempts to “stretch its hand directly into the pockets of the people,” rather than acting through the intermediary of a state.

Direct taxes, the delegates decided, would be authorized only if each state paid the same per capita amount. This is only if the taxes were apportioned to population.

Warren’s proposal to stretch her hand directly into the pockets of the people would not be apportioned.

Thus, it would violate both the 16th Amendment (failing as an income tax) and Article I, Section 9, Clause 4 (failing because it is an unapportioned direct tax).

In NFIB v. Sebelius, Chief Justice Roberts got this point wrong and held that the Obamacare tax is not a direct tax.

Notwithstanding Roberts’s obviously hasty and slipshod analysis (it’s all of a page), the facts of that case are unique (he claimed the tax was not on people or property but rather “it is triggered by specific circumstances.”)

Warren’s tax is quite obviously a tax on property. Which the courts have repeatedly held constitutes a direct tax.

Warren might want to characterize her wealth tax as an “excise tax,” since such taxes were held constitutional before the adoption of the 16th Amendment.

But an excise tax is levied on a specific transaction or a specific activity (e.g., gambling; using a truck on a highway).

Will she claim the excise tax is for the privilege of living in America as a rich person?”

Avoid Taxes

In the United States there are over 5,800 pages of tax law. About 30 pages are devoted to raising taxes. The remaining 5,770 pages are devoted entirely to reducing your taxes.

So, if 99.5 percent of the tax law is written to reduce your taxes, then the government must really want you to do that. If it weren’t true, then why would such legislation exist?

This is best evidenced by Ken McElroy and Robert Kiyosaki, who own real estate because the government gives them tax credits for providing housing.

In fact, real estate is such a good tax shelter that a serious real estate investor should never have to pay tax on their cash flow.

Certainly this is a reason billionaires don’t pay taxes.

Capital Gains

As I wrote in “Warren Buffett Pays Less in Taxes Than Secretary“, Warren Buffett does not pay less in overall tax payments than his secretary.

Wealthy Diligence has recently partnered with Audible to provide our readers a 30-day free trial with this exclusive link (no strings attached). Reading has fundamentally changed my life, and I want my followers to have a similar experience.

BUT, he pays a lower tax rate than his secretary.

His entire income is essentially derived from qualified dividends and capital gains. Under the current US tax system, he will never pay more than a 20% tax rate on his income.

There is a net investment income tax that will tack on a few percentage points towards his effective tax rate.

You can read more about the net investment income tax here and how to value a company with dividends.

According to Investopedia, a “Capital gain is a rise in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price.

The gain is not realized until the asset is sold.”

A capital gain may be short-term (one year or less) or long-term (more than one year). They must be claimed on income taxes.

Short-term capital gains are taxed at your ordinary tax-rate. This is why they are extremely tax inefficient.

Here are the tax rates for long-term capital gains. This is any investment that has appreciated and was held for more than one year.

2019 CG Rates: Source IRS

Real Estate

As I mentioned in “9 Legitimate Ways to Earn Passive Income”, there are more billionaires in the real estate industry than any other industry in the world.

billionaires don't pay taxes

This is almost certainly due to the preferential tax treatment that landlords and investors receive.

According to Mad Fientist, a popular finance, investing, and real estate website, “Real estate is an I.D.E.A.L. investment:

Income: Regular cash flow from rents or interest payments. I consistently see unleveraged returns of 5-10% from this one method of making money.

With reasonable leverage, it’s possible to see these returns jump to the 10-15% range or better.

Depreciation: A required accounting method that spreads the cost of an asset over multiple years (27.5 years for residential real estate).

This paper expense can “shelter” or protect other income from taxes and reduce your tax bill.

Equity: If you borrow money to buy a rental property, your tenant essentially pays off the property for you.

You use the rent to pay the mortgage, and each month the principal paydown (aka equity) gets bigger and bigger like a forced savings account. Read my article about house hacking for advanced tips!

Appreciation: Over the long-run real estate has gone up in value about the same rate as inflation (3-4%).

This passive style of inflation helps, but active appreciation is even more profitable. Active appreciation happens when you force the value higher over a shorter period of time, like with a house remodel.

Leverage: Many investors use debt leverage to buy real estate. This means, for example, $100,000 can buy four properties at $25,000 down instead of just one property for $100,000.

Leverage magnifies the profits mentioned above (and potentially the losses). Plus, interest on debt is deductible as a business expense.”

1031 Exchange

A powerful strategy used by savvy real estate investors is something called a section-1031 tax-free exchange.

Named after its section of the tax code, this type of property exchange allows you to defer all federal income taxes due at the time of the sale.

You basically sell one property and move your equity to a new property without touching the funds yourself.

Grant Cardone’s Jet

This is such a great story! Basically, Grant’s accountant called him and said he had a big problem. His problem was that he made too much money and was going to owe the IRS.

Grant asked what he can do to make the problem go away. Well, he ended up buying a $50 million dollar jet that qualified as a business expense.

This jet saved him from paying any taxes that year! Talk about incredible tax avoidance! Grant says billionaires don’t pay taxes all the time because they’re smart.

Conclusion ~ Billionaires Don’t Pay Taxes

Start taking immediate action to enhance your tax efficiency. The key to wealth building is holding onto more of your money (not giving it to Uncle Sam). Learn how to never pay taxes again!

The strategies discussed within this article are all legal, and they work! Remember, 99.5 percent of the tax law is written to reduce your taxes!

Most billionaires don’t pay taxes by implementing these very strategies.

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