There’s been some considerable buzz the last few days around ProPublica’s Tax Revelation. Never before have has an organization obtained the taxes of the richest people in the United States… and then reported on the results in detail.
I want to get to the content of the report itself, but the reporting is scandalous, because it involves a significant invasion of privacy. ProPublica explained why they ahead with the article, explaining that there was a great public benefit to know what’s going on behind the scenes. They also explained that they feel they have significant legal protection since they didn’t solicit the information. In any case, exposing the privacy of people who have a combined wealth of over a trillion dollars takes an amazing amount of courage. When a news organization is going to take that risk, with minimal profit upside, we owe it to them to read the article and pay attention.
What we Learned from the ProPublica Article?
While I just finished saying that we owe it to ProPublica to read the article, it is L-O-N-G. Because of this, I’m going to tell you a little bit about what’s inside and we’ll go from there.
One reason why the article is so long is because it details a lot of the history of taxation in the United States. I never knew that income tax was unconstitutional until the 16th Amendment in 1909. If you think about it, we’ve only had an income tax for a little more than 100 years. Some of the oldest people in the world would have been alive when America didn’t have an income tax.
The main point the article tries to make relies on a little statistical gymnastics. That’s not to say there’s anything false or even misleading about it. It’s just that it shines the light on some math that I’ve never seen combined. Specifically, it highlights how the wealthy are able to grow their wealth exponentially over a number of years and how they can do it while avoiding paying taxes. The average person earns a salary and pays taxes on it right away. This means that they typically build a little wealth through savings over a long time, while paying around the same amount of taxes during that period.
The wealthy don’t have to pay taxes on a lot of their wealth, because they earn it in stock ownership. They don’t pay taxes unless they sell the stock and it gets converted into gains.
In short, they don’t have to pay taxes on wealth, which is very different than income.
It’s important to note that they may have to pay taxes on dividends, but many of the tech billionaires come from companies that don’t pay dividends. When the wealthy do sell the stock, it gets taxed at the long-term capital gains rates, which is 20% for the ultra-wealthy. That’s a much better tax rate than the 37% top income tax rate.
However, and this is perhaps the big revelation, the ultra-rich borrow money from a bank at a low interest using their stock as collateral. Suddenly they are paying 3-5% interest instead of 20% capital gains. The article cited a couple of instances where Larry Ellison had a $10 billion credit line and Elon Musk had the same for more than $55 billion dollars.
This leads to what is known as “Buy, Borrow, Die.”
What is “Buy, Borrow, Die”
The “buy” part, I think is more accurately described as earn or acquire. In this case, it is about growing assets. If you start a successful company you may have a lot of stock. This can happen if you come on a C-level executive as well. You don’t really “buy” the stock, it is earned. In order to “buy”, you’d have to have the income first which would presumably be taxed at that time. In any case, that’s the nomenclature that we inherit and I don’t have the clout to change it.
I covered the “borrow” part above. The last part is to “die.” This is the easiest step because it will inevitably happen anyway. On a serious note, this is about setting up your estate so that you can pass on money to heirs and escape estate taxes and things like that. The ultra-wealthy have some ways of doing this involving hundreds of trusts according to the article. The article also mentions that they avoid taxes by giving money to charities. In my opinion, that’s a greater good than paying more taxes.
ProPublica put together a quick video about how this “Buy, Borrow, Die” strategy works:
If you want to read more about it, my friend, Jim Wang at Wallethacks, wrote about “Buy, Borrow, Die” strategy last November. As usual, he was ahead of the curve.
Create Your Own “Buy, Borrow, Die”
The point of ProPublica publishing this information is to create awareness of the inequity of the tax code. It’s a time when politicians are looking at revamping the tax code so that the ultra-wealthy pay more. How can you use this information? You can talk to your politicians and try to impact tax policy going forward. Unfortunately, that’s a steep uphill climb.
Can someone of more moderate wealth create their own “buy, borrow, and die”? I’m not sure, but I’m intrigued by the idea. I think some people have created something like that with their FIRE plan. Their general plan is to buy stock (or real estate) and let it compound (piggy-backing on the ultra-wealthy stock gains). Then retire to have little income and have that stock throw off dividends that, for some lower-income levels may be completely tax-free. Tools like a Roth IRA and a Roth IRA conversion ladder may also help you effectively pay no taxes.
In the above scenario, the “borrow” doesn’t come into play unless it is based on real estate. The final step of dying and leaving money to heirs is a lot easier for the moderately wealthy. They don’t have to deal with estate taxes. The heirs also enjoy a step-up tax basis for stock assets. This means that the next generation doesn’t have to pay taxes on all the gains.
I should note that there are ethical questions about avoiding taxes. Most of the responses in the ProPublica article come down to, “We’re doing what’s legal. Don’t hate the player, hate the game.” Many also point out that they give so much away that it’s kind of silly to look at the taxes they pay. For example, Warren Buffett has pledged to give away 99.5% of his wealth. How upset can you be with him for legally avoiding taxes with that in place?