Many of us have over the course of the past few years, inadvertently or not, heard something about multibillion corporations and businessmen escape from the ambit of paying taxes, and being picked on by the public, since they have not been contributing their fair share to the state, while others have to do so, compulsorily.
This talk of billionaires evading taxes is quite lopsided, since it is always portrayed to look like the rich not contributing their fair share to a society from which they are ‘sucking’ resources from, and this angers a lot of people. So, we have to ask ourselves the question: How can billionaires evade taxes, and why is it possible for them to do so, especially when they’re the richest people on earth?
In order to figure out our path in between this convoluted conundrum, we have to first take a look at all the facts of the case; the premises that have been Ground 0 since Day 1. Well, as per the taxation system of the US, any income that has been received against the sales of goods and/or the rendering of services is taxable, with the income amounts defining the tax bracket for them. However, any capital appreciation in the value of assets that have not yet been realised, is not taxable, since the income from those assets has not yet been recognized.
This is the single largest provision that allows billionaires to avoid taxes for themselves. People like Musk or Bezos, who are very often the two richest people on earth, do not have to pay any taxes on the increase in their stake of the company, and the gain in their stake due to an increase in the stock price of the company. Since gains have not yet been realised, you really can’t tax them since no income has been received from them.
Furthermore, many CEOs, including the likes of Mark Zuckerberg, or even the titan Steve Jobs, earned a sum of $1 as their income from their companies. This ridiculous salary was then offset by stock options and in-kind compensation, that allowed them to not pay any taxes while their companies earned billions of dollars every fiscal year.
So, if billionaires don’t realise any gains from these stock options, how do they afford to lead a lavish lifestyle, unrivalled by anyone else? Well, it is the use of stock options again. Many billionaires are appliers of the “buy, borrow, die” strategy, wherein they use their stake in their multibillion dollar corporations, and use the mass collateral to acquire loans from institutions.
And whenever they do so, they shall always be welcomed, because if they provide collateral in the form of pledging their shares, and when the bank looks at how good the company has been performing, and will do in the future, they provide the loans in a heartbeat, because they know that they can use those stock options to realise gains, because their price is going to keep going up for the foreseeable future.
So even for banks, that collateral keeps on appreciating with every single day. And since that collateral value keeps increasing, billionaires just need to reduce the number of shares pledged with the bank (only to a limit, since a baseline number needs to be established) since they have appreciated in value. And they can keep on doing this as much as they like, and the banks wouldn’t mind it even for a second, because they know that their capital will only increase in the billionaire defaults on his loans.
Another way billionaires avoid taxes on their holdings, even on the event of their death, is called the Step-Up In basis. This provision states that on the event of a person’s death (who is a billionaire) and the person has bequeathed their assets to their children, the children do not have to pay any taxes on it, since in the eyes of the law, whenever an asset is bequeathed, its value ‘resets’, which allows even their kids to bypass billions of dollars in tax money on the inheritance of multibillion dollar worth of assets.
Furthermore, the use of trusts and charitable foundations also allows them to bypass taxes, and allowing them to use their wealth in an untaxable manner after routing it through such corporations.
So, for a deep dive case study, let us take a look at Elon Musk. According to reports, Musk paid only $70,000 in federal taxes between 2015-2017, while his net worth skyrocketed by millions, if not billions, during those two years. And more so, he paid no taxes in 2018, not even a single penny. So, how did he do it?
Musk explained that he takes a loan from Tesla by pledging his shares as collateral, in order to finance his living expenses and other ventures. Since he doesn’t take a salary from his company, he has no source of taxable income, and thereby gets by without paying any big amount in personal taxes. Furthermore, the sale of his stock options only in the case of their expiration, since it is not beneficial for him to pay taxes every time he needs to liquidate stock in order to do whatever he wants to do with the money (which will most likely involve the setting up of another company, but who knows?)
The same is the case with multiple other businessmen like Jeff Bezos, Michael Bloomberg and Carl Icahn, to name a few. They avoid paying any taxes on their personal wealth completely legally since all such provisions are legal, and therefore live a tax-free life. So even if their businesses earn billions and their stock value skyrockets, the owners of such businesses will always be separated from such taxation applications due to the provisions of law, and do so as long as they can afford it to (which doesn’t cost much).