The Rich Get Richer: How The Ultra-Wealthy Manage to Keep Their Fortunes

It’s a tale as old as time: the rich get richer, and the poor get poorer. In 2013, Warren Buffet publicly stated that he pays less tax than his secretary and might even be the “lowest paying taxpayer in the office.” It is no surprise that a key way the ultra-wealthy maintain their fortunes is by avoiding taxes. However, this isn’t through criminal or fraudulent activities but through much more disguised ways…

Wealthy people avoid hefty taxes through the “buy, borrow, die” strategy. In essence, they avoid large taxes by manipulating the stock market. For the “buy” portion, they typically already have or acquire many assets, such as stocks or real estate. Additionally, this asset would supposedly grow in value as time goes on. As for “buy,” they must borrow funds from the bank using their assets as collateral. This means that if they cannot pay back the loans, the bank can take their assets to break even. They borrow funds because loans are not taxable, so they can access cash without paying any form of tax. If they were to sell their assets without taking out a loan against them, they would have to pay long-term capital gains tax.

The final aspect of this strategy is the “die.” This means that when an individual dies, their assets will be used to repay the loans. This eliminates any worry of capital-gains tax throughout one’s lifetime and ensures that the loans are only paid off after the person dies. If they have kids, however, there would be a completely different process. For people inheriting wealth or assets, there is a tax policy known as a “stepped-up basis.” Essentially, this law “increases” the base value at which an asset was purchased by looking at its value when it was passed down rather than when it was originally bought. For example, let’s say someone purchases $100 worth of shares that grows over time, and once they pass away, the stocks are worth $6000, which their children will inherit. These shares, however, have their cost basis stepped up to $6000 rather than the original $100 at which they bought it. Capital gains taxes increase with the value of an asset, so this greatly reduces the potential tax deductions. This means his children could sell the stock at $6000 without paying any taxes.

Another common way billionaires avoid taxes is through charity. Many billionaires, such as Bill Gates, Warren Buffet, and Michael Bloomberg, have massive amounts of their wealth in charities. While much of their philanthropy is directed toward helping causes they care about, it is also a way to avoid tax laws. In the current US law code, nonprofit organizations are exempt from federal income tax. For example, the CEO of GoPro, Nicholas Woodman, donated $500 million worth of GoPro stock to the Silicon Valley Community Foundation after taking his company public, making it worth $3 billion. This foundation housed the assets of the Jill and Nicholas Foundation. By doing this, he avoided paying capital gains tax on those stocks, which likely would have been tens of millions of dollars. And despite donating hundreds of millions to charity, Woodman still controls all of it. The foundation, which he and his wife control, can only use his money at his request, so he can enjoy immediate tax benefits without investing all the funds in philanthropic causes.

So one question you may ask yourself is, why can’t average people take advantage of these opportunities? The first answer is that most extremely wealthy people hold their wealth through investments and capital. Most of the population is employed and gets their money through an income from their employer, and it is much more difficult to find loopholes for income tax. Additionally, ultra-wealthy people can afford teams of lawyers and accountants to help them find legal ways to get exempt from taxes, which the general public cannot access.

It is important to note that while these workarounds may seem unfair, they are completely legitimate and legal. Many foundations use their donor’s money for good causes, and tax deductions are just one of the many reasons ultra-wealthy donate to charity. However, the government is responsible for enforcing proper tax laws, allowing everyone to pay their fair share. As a society, this could be one of the first steps in addressing the growing wealth inequality around the globe and creating a more equitable place for everyone.