COLORADO SPRINGS, Colo. – Whether it’s former Amazon CEO Jeff Bezos leveraging debt, head of Tesla Elon Musk selling stocks or even Colorado Governor Jared Polis donating to charities, there are several ways the ultra-wealthy in America evade paying taxes at a rate much lower than the rest of the nation’s working class.
“Those individuals who have made it, which is great, are figuring out how to use the system in order to reap all the benefits of capitalism while kind of implicitly disincentivizing the small business owner of even the sort of every day worker.” said Tatiana Bailey, Ph.D. economist and director of the Economic Forum at the University of Colorado-Colorado Springs.
Bailey has found six ways the ultra-wealthy commonly use to chip away at the taxes they owe. They’re all legal with some exploiting loopholes to bring the tax bill down.
The first involves leveraging wealth and assets to take out lines of credit, while taking little or no salary. The debt to income ratio brings down a person’s tax rate, while the lines of credit can be used for living expenses.
“Those mechanisms theoretically, sure, they’re open to everyone but, most individuals can’t throw around different assets and you know build these lines of credit on personal wealth of ten, twenty, thirty million dollars,” Bailey explained.
Next, Bailey says many of the wealthiest Americans have money in stocks and investments. The taxes on those gains, she says, are often times less than than the tax brackets many workers fall into.
While many middle class Americans invest in retirement accounts, those aren’t able to provide regular income like some investments and stock options can for the wealthy.
“It’s the ultra-wealthy who can take advantage of it because, if you ask the average construction worker as an example, they don’t play around in the stock market or if they do, it’s a small amount,” Bailey said.
To be fair, Bailey says, many of the wealthiest Americans also make large charitable donations, which also can be deducted from income taxes.
She found some create businesses and other LLCs to manage assets, allowing expenses to be written off for business purposes.
The final way Bailey details is creating trusts, money that can be kept and grown to be used for something like an inheritance down the road.
Bailey doesn’t want to disincentivize innovation or entrepreneurship by overloading taxes but feels like there is a disincentive for lower-earning workers who see themselves paying a higher proportional rate than people worth multitudes of their wealth.
Besides, she points out, it’s not like the rich are over-burdened by historical standards.
“It’s something that not only should be fixed and can be fixes, but kind of has to be fixes.” she said. “It’s not sustainable from an economic perspective. If started taxing these individuals at 70 percent, and we were completely disincentivizing, then that would be a different story. But, how about if they just played by the same rules that everyone else plays by?” Bailey said.