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Ever wondered why billionaires can sometimes pay little to no taxes despite owning businesses that generate millions in profits every year? Some of the wealthiest people in the world often pay less taxes as a percentage of their income when compared to people working ordinary jobs. While you most likely believe the opposite to be true, numerous legal loopholes in the tax system enable the wealthy to avoid most of their tax obligations without consequence.
Limiting Direct Income
A common trick used by the super wealthy is to avoid taking a direct salary from their gigantic businesses. Knowing that 25-40% of this salary will go to taxes, they choose to forego the salary entirely and instead compensate themselves through stock options that have comparatively low tax rates. In addition to stock options, they borrow from banks using their assets as collateral, knowing that what they borrow is not subject to taxes. By having no direct salary, business owners can end up paying almost no tax at all, even in years when their businesses make record profits. You may notice as a result that an entrepreneur whose business made profits of over $50 million has paid less tax than a school teacher or a nurse.
Offshore Accounts in Tax Havens
Large businesses and the super wealthy have a special relationship with tax havens such as the Cayman Islands, Bermuda, etc. Since these jurisdictions impose zero taxes on residents and resident companies, businesses in other countries often register their subsidiaries there, without necessarily having any aspect of their operations in these countries. Profits earned by these subsidiaries are as a result not subject to tax, or even when combined with those of the parent company, are subject to less taxes than would have been the case if they were registered in a country with ordinary tax laws. Some super wealthy individuals also change their tax residency entirely to low-tax countries where they will most likely not pay any taxes.
Inflating Costs and Losses
Certain costs, such as depreciation, can be legally manipulated to increase tax-deductible expenses. This is a common tactic that real estate companies often use to claim massive amounts of tax cuts due to depreciation, even in years when their properties appreciate in value. Numerous other tricks can be used to inflate expenses and deliberately make losses to avoid taxes. Private expenses of a CEO and other staff, such as the use of private jets, yachts, and luxury clubs, can, for example, be classified as business expenses, leading to major reductions in profits and, as a result, total taxes payable.
Trusts
Annuity trusts that do not attract estate taxes are also used by the super wealthy to make sure they can pass on their assets to their children without taxes. Individuals setting up the trust can receive fixed payments without accessing the assets, which can then be passed on to appointed beneficiaries without taxes. Charitable trusts that are controlled by the super wealthy can also be used to shelter some assets from taxes. Assets can therefore be passed on in most wealthy families without the substantial estate and inheritance taxes that would otherwise be levied.
Tax Deferrals
Instead of selling income-generating assets, the super wealthy instead use them to borrow cash that is not subject to tax. This can continue for as long as they want and enables them to avoid the capital gains tax they would otherwise have to pay in case they sell these assets. Investing in certain sectors that attract low capital gains tax also enables wealthy individuals to reduce the capital gains tax they would otherwise be required to pay.
The super wealthy generally have unlimited tricks they can use to legally avoid tax on most of their income. The average billionaire, if they want, can pay even less taxes than a nurse or someone working at Walmart. These tricks are unfortunately not available to the average guy, who cannot forego direct incomes they earn. While billionaires and the super wealthy play a crucial role in the economy by creating jobs, the country would be slightly better off if they just paid their fair share of taxes.