How Much Do Billionaires Pay in Taxes?

Headlines often report that some of the world’s wealthiest individuals pay little to no federal income tax in a given year, igniting public debate about the American tax system. Understanding a billionaire’s tax bill requires looking beyond simple assumptions about income. The calculation involves a complex interplay of how money is made, how it is defined by the tax code, and the financial strategies available to those with substantial assets.

The Core Distinction Income vs Wealth

A core concept in the U.S. tax system is the separation between income and wealth. Income is the flow of money a person receives, such as a salary, interest, or business profits. The federal income tax primarily targets this flow of money. When you receive a paycheck, that money is considered income and is taxed in the year it is received.

Wealth, or net worth, is different. It represents the total value of all assets an individual owns, including stocks, real estate, and private businesses, minus any debts. Under current U.S. law, the simple ownership of wealth or an increase in its value is not a taxable event. For example, if a home increases in value by $50,000, no tax is owed on that gain unless the owner sells the house. This increase is an “unrealized gain,” representing a growth in wealth, not income.

For billionaires, the vast majority of their fortune is held as wealth in assets like company stock. These assets can appreciate by billions of dollars, increasing a person’s net worth without appearing on a tax return or generating a tax liability. This allows wealth to grow year after year without being subject to income tax.

How Billionaires Generate Taxable Income

Since most of a billionaire’s fortune is tied up in assets, their taxable income can appear low. Many of the wealthiest individuals take minimal salaries from their companies, sometimes as low as $1 per year. This is a strategic choice, as salary is “ordinary income” and is taxed at the highest marginal rates, which can be up to 37% at the federal level for 2024 and 2025.

The primary way billionaires generate taxable income is by “realizing” gains from their wealth. This occurs when they sell an asset, such as stock, for more than its original purchase price, or “cost basis.” The profit from this sale is a capital gain. If the asset was held for more than one year, the profit is a long-term capital gain and receives preferential tax treatment.

For 2024 and 2025, federal tax rates on long-term capital gains are 0%, 15%, or 20%, depending on total taxable income. For the highest earners, the rate is 20%, which is significantly lower than the top rate on ordinary income. Another source of taxable income is qualified dividends, which are also taxed at these lower rates. An additional 3.8% Net Investment Income Tax may also apply to both capital gains and dividends.

Strategies for Minimizing Taxable Income

Billionaires use legal strategies to minimize or defer the need to generate taxable income. These techniques allow them to access the value of their wealth for living expenses and new investments without triggering a tax event.

Borrowing Against Assets

A widely used strategy is “Buy, Borrow, Die.” Instead of selling appreciated assets to get cash, a wealthy individual uses their stock portfolio as collateral to obtain large, low-interest loans. Loan proceeds are not considered income, so this cash is received tax-free. This allows a billionaire to fund their lifestyle or make new investments without selling shares and realizing a capital gain. This cycle can continue as long as the value of the underlying assets grows at a rate that outpaces the loan’s interest.

Stepped-Up Basis

The “Die” part of the strategy refers to the “stepped-up basis” provision in the U.S. tax code. When an individual dies, the cost basis of their assets is automatically “stepped up” to the fair market value on the date of death, as detailed in Internal Revenue Code Section 1014.

For example, if an individual bought stock for $10 million that is worth $1 billion at their death, the $990 million in appreciation is a massive unrealized gain. Under the stepped-up basis rule, their heirs inherit the stock with a new cost basis of $1 billion. This means the $990 million gain is permanently erased for income tax purposes. The heirs can then sell the stock for $1 billion and pay no capital gains tax.

Charitable Contributions of Appreciated Assets

Another strategy for minimizing taxes is the charitable donation of appreciated assets. Instead of selling stock and paying capital gains tax, a billionaire can donate the stock directly to a qualified charity. This provides a dual benefit. First, they avoid paying the capital gains tax that would have been due.

Second, they can claim a charitable tax deduction for the full fair market value of the asset at the time of the donation. This deduction reduces their taxable income from other sources. The deduction for appreciated property is limited to 30% of the donor’s adjusted gross income (AGI) for the year, but any excess can be carried forward for five years.

Calculating the “True Tax Rate”

The standard way to measure a tax burden is the “effective tax rate,” calculated by dividing the total tax paid by the total taxable income on a tax return. For a billionaire who generates a small amount of income from capital gains, this rate might be around 20%. While lower than the top rate for wage earners, it does not capture the full financial picture.

Investigative reports have popularized the concept of a “true tax rate.” This metric compares the amount of tax paid not to taxable income, but to the total increase in an individual’s wealth over a period. This calculation includes all the unrealized gains in stocks and other assets that are not defined as income by the tax code.

When viewed through this lens, the tax burden of the ultra-wealthy appears much lower. A ProPublica analysis found that between 2014 and 2018, the 25 wealthiest Americans saw their collective wealth grow by $401 billion but paid $13.6 billion in federal income taxes. This equates to a “true tax rate” of only 3.4%.

This low figure is a direct result of the U.S. system taxing income, not wealth, and the wealthiest individuals deriving most of their financial gains from the untaxed appreciation of assets. The public debate is not about illegal tax evasion, but about a tax code structured to favor income from wealth over income from labor.