In practice, ordinary workers shoulder far heavier tax burdens than the nation’s richest. This fundamental imbalance can be illustrated by cases that shocked the public when they became known: in 2018, Tesla founder Elon Musk managed to pay no federal income tax at all, despite adding some $11 billion to his fortune that year. Jeff Bezos likewise paid nothing in income tax in certain years (2007 and 2011) when he was already a billionaire. Billionaire Michael Bloomberg, Carl Icahn, and George Soros also once paid zero federal income tax in a given year. By contrast, a typical middle‐class household making about $70,000 today pays roughly 14% of its income in federal taxes. The human cost of this discrepancy is dramatic: nurses, retail clerks and schoolteachers often lose 20–30% of their modest paychecks to payroll withholding, while the ultra‐rich by and large watch their wealth accumulate untaxed on paper. As Warren Buffett famously pointed out, his own effective tax rate (about 17.7% in 2007) was less than half that of his secretary (around 33%) – a split so stark he declared that the system had “tilted towards the rich and away from the middle class”.
At the heart of this disparity is the structure of U.S. taxes. Wage income is taxed heavily and immediately, while capital and wealth are often spared or deferred. Nearly all workers pay the full payroll tax on their wages (Social Security and Medicare), which is 12.4% of earnings up to a cap (about $168,600 in 2025) plus 2.9% for Medicare (with no cap). In contrast, the super‐rich often derive most of their income from unrealized capital gains – that is, increases in the value of stocks, businesses, or property that they haven’t sold. U.S. law taxes capital gains only when realized, and then at a lower maximum rate (20% plus the 3.8% Medicare investment surtax) than the top 37% rate on ordinary income. Furthermore, when wealthy Americans die, their heirs receive assets at full current value (“stepped-up basis”), so decades of appreciation never face capital gains tax at all. In sum, it is easy for a billionaire’s wealth to explode year after year while producing no taxable income.
These distortions have grown over decades of policy changes. The tax code today is riddled with preferential treatments and loopholes that benefit the wealthy. Carried interest, for example, lets hedge fund and private equity managers treat most of their compensation as capital gains rather than ordinary income. The Tax Cuts and Jobs Act of 2017 even expanded the special 20% deduction for pass‐through business income – a windfall for affluent lawyers, financiers, and real estate moguls – at a cost of hundreds of billions. Meanwhile, trusts, family partnerships and offshore entities enable dynastic wealth to grow largely tax‐free. The result is a system in which poor and middle‐class Americans pay a greater share of their income in tax than the richest 1%.
Payroll Taxes: Regressive by Design
For most Americans, the clearest tax is the payroll tax. Workers see 7.65% of each paycheck withheld (half of the 15.3% combined rate for Social Security and Medicare), with employers matching that amount. But this levy is capped. The Social Security portion (12.4%) applies only up to about $168,600 of annual earnings in 2025. That means a person earning $50,000 pays the full 12.4% on all $50,000 (plus 2.9% on every dollar), whereas someone earning $1 million pays 12.4% only on the first $168,600 and nothing on the rest. Economically, the million‐dollar earner still covers the equivalent of only about a 2% payroll tax on their total income, while the lower‐paid worker pays the full 12.4% (and 15.3% if including Medicare) up to the cap. In fact, studies show that Americans in poverty effectively face a payroll tax rate nearly seven times higher than top‐earners.
This skew is further magnified by capital gains. Many super‐rich get half or more of their “income” from stocks and sale of assets, which are not subject to payroll taxes. Billionaires like Musk or Bezos, for instance, take hardly any salary – almost all their net worth rises from stock price hikes. Because capital gains escape payroll taxes, those gains can blow up their fortunes without adding to their Social Security contributions. Without that payroll ceiling, Social Security’s own trust fund would be vastly larger today, but Congress has left the cap largely intact, shielding multimillionaires from the main tax that sustains the retirement system. As economist David Cay Johnston notes, the wealthy “effectively paid about 1%” of their income in payroll taxes because of these rules.
By contrast, lower‐income workers pay payroll taxes on all their earnings. A single mother earning $20,000 per year nets just over $1,700 per month before taxes, yet more than $3,000 of her total annual earnings disappear to FICA (Social Security/Medicare) withholding (and an additional one‐third in federal and state income taxes). Crucially, this happens even if her employer does not match benefits – she simply loses a large slice of very limited pay before a single dime goes to income taxes. In effect, Social Security acts more like a regressive sales tax than a progressive social program: it takes the same percentage of every dollar up to the cap, hurting those with less disposable income far more. One analysis found that Americans with lower five‐figure incomes face an effective payroll tax above 14%, whereas millionaires pay barely 1–2%. (The difference is made up by capital gains and by hitting only a fraction of their wealth with FICA.)
Income Taxes: Loopholes for the Wealthy
Federal income tax rates are nominally progressive, but in practice the wealthy exploit loopholes. Until Congress altered the estate tax exemption, the richest Americans could pass vast fortunes to their heirs tax‐free – a rule called “stepped-up basis.” Upon death, inherited assets reset to current market value, wiping out any capital gains over the decedent’s lifetime. In effect, someone can accumulate decades of gains on, say, stock or a family farm, and their children can immediately sell for a profit without ever paying tax on the original gains. Bloomberg tax columnist Andrew Leahey calls this “the real capital gains loophole” and notes it will cost the Treasury over a half‐trillion dollars in lost revenue through 2033. In other words, the heirs of billionaires simply inherit unrealized gains without taxation, while ordinary workers pay taxes on every dollar they’ve earned and spent.
Another loophole is “carried interest.” Partners in hedge funds or private equity typically get a 20% share of their fund’s profits as compensation. For tax purposes, much of that is treated as a long‐term capital gain, not salary. Thus a fund manager who earns $1 million in performance fees might pay the 20% capital gains rate (plus a 3.8% Medicare surcharge) instead of the 37% top rate and the 15.3% payroll tax they would owe if it were ordinary income. By one estimate, aligning carried interest with normal income rules would raise only $12 billion over a decade – just a fraction of the national budget but a step toward fairness. In reality, this quirk means Wall Street billionaires often pay significantly lower marginal rates on vast paychecks than middle managers do on theirs.
Meanwhile, the Tax Cuts and Jobs Act of 2017 instituted a 20% deduction for “pass‐through” business income. Ostensibly meant to help small businesses, it overwhelmingly benefits the wealthy. (Since high‐income professionals disproportionately operate as LLCs or S‐corps, they got a 20% rate cut as well.) Conservative estimates show most of these benefits flow to the top 1%, and the Joint Committee on Taxation warned it would cost the government over $300 billion through 2025. And while the 2017 law capped state and local tax (SALT) deductions at $10,000, it inadvertently spawned new loopholes: thirty‐six states later created pass‐through tax schemes so that high earners could sidestep the cap. In Maryland, for example, 84% of these “workaround” deductions went to taxpayers with incomes over $500,000. The end result: one set of tax rules for most Americans, and another (vastly more generous) set for those with lobbyists, accountants and exotic business entities at their disposal.
Offshore Havens and Foreign Schemes
Beyond domestic code tricks, a nontrivial portion of U.S. wealth is stashed overseas to avoid tax. A recent IRS‐backed study found that in 2018 Americans held about $4 trillion in foreign financial accounts. Crucially, much of this is through partnerships or shell companies in low‐tax jurisdictions. Only about 14% of those accounts are in known “tax havens” (like the Cayman Islands or Luxembourg) – but those 14% contain roughly half of all offshore assets, nearly $2 trillion. In practical terms, the richest 0.01% of Americans (those making above ~$3.3 million) control over one‐third of the wealth held offshore. Through trusts and foreign corporations, these individuals can defer U.S. taxes indefinitely. (Notably, the U.S. tax code has anti‐deferral rules like Subpart F, but wealthy investors often structure around them with complex partnerships.) The International Consortium of Investigative Journalists has repeatedly documented how billionaires from Bill Gates to offshore real estate tycoons park assets abroad. In sum, a small clique of elites legally owns enough in foreign accounts to float the entire Social Security trust fund – revenue that goes untaxed while every American worker pays on the first dollar they earn.
Carrying the Privilege of Wealth: Trusts, Estates and Foundations
Even domestically, the super‐rich can bequeath their fortunes to children or charities with minimal tax cost. Aside from stepped‐up basis, the estate tax – once a powerful check on dynastic wealth – has been whittled down to apply only to estates over roughly $13 million (for a couple) in 2025. At that level, fewer than 0.2% of estates owe any tax. Paired with special trust vehicles (including “dynasty trusts” that can exist for generations), this means most assets keep compounding tax‐free indefinitely. For example, a family could fund a trust whose assets grow for decades without ever triggering the 40% estate tax, then transfer it outside the estate tax rules to grandchildren. Few families ever take advantage of the estate tax in practice, and economists estimate that eliminating the stepped‐up basis – requiring heirs to pay tax on inherited gains – would raise revenue almost entirely from the very richest 1%.
Charitable foundations are another form of shelter. A billionaire can donate stock to a private foundation, get an immediate tax deduction at market value, and have the foundation sell it tax‐free and reinvest. Meanwhile, the family still controls the money through board or advisory roles. In effect, massive fortunes can toggle in and out of private use and charitable status, paying little or no tax each time. No comparable giveaways exist for a low‐income worker: their donation of $1,000 worth of groceries to a food bank means they can deduct at most $1,000 against $20,000 income, whereas a billionaire’s private charity can act as a permanent tax shelter.
The Enforcement Gap
It is one thing for the wealthy to pay low taxes, but another that the IRS often cannot catch evasion or even fully audit them. Decades of budget cuts left the tax agency understaffed and outdated. In the 1990s, the IRS audited 10% or more of returns overall; by 2022 that rate had plunged to about 0.4%. The lowest‐income taxpayers — especially those claiming the Earned Income Tax Credit — are hit by automated “correspondence” audits at shockingly high rates (well over 1%), even though they represent very little revenue. By contrast, millionaires see almost no scrutiny. In Fiscal Year 2022 just 1.1% of taxpayers reporting more than $1 million in income were audited by IRS agents. And those audits were often perfunctory letters requesting extra documentation, not the in‐person reviews typical of serious investigations. In effect, nearly 700,000 millionaire households received no audit of any kind that year.
Not surprisingly, reported tax compliance among the rich is opaque. The National Taxpayer Advocate has repeatedly warned that underfunding means the IRS often gives up on complex cases. Indeed, the newest IRS funding – an $80 billion package in the Inflation Reduction Act of 2022 (later trimmed to $24 billion) – was intended to reverse this trend. Treasury Secretary Janet Yellen ordered that new resources be used to go after high-income and corporate tax dodgers, not average Americans earning under $400,000. But as the Kiplinger Institute notes, turning that promise into reality will take years. Meanwhile, suspense over the IRS (some Republicans claimed thousands of new agents would hound middle incomes) has itself become politicized, even as in practice audits continue to skew downward for the wealthy and upward for the poor. One Congressional report found correspondence audits now comprise about 85% of all individual audits – the cheapest kind that IRS can run en masse, mostly on simple wage earners.
Tax History and Political Influence
These outcomes did not arise by accident. U.S. tax policy has generally moved toward wealth‐friendly rules over the last four decades. For example, the 1986 Tax Reform Act under President Reagan cut the top individual rate from 50% to 28% (although it also simplified the code). Subsequent tweaks in the 1990s and 2000s gradually raised rates back up (to 39.6% by 2000) but retained new loopholes. In 2017 Republicans, backed by heavy lobbying, enacted the most recent overhaul (TCJA). It cut the top rate from 39.6% to 37%, slashed the corporate rate from 35% to 21%, and (most significantly for inequality) doubled the tax‐free estate threshold to around $11 million per person. That law also preserved and even enhanced many tax breaks that accrue mainly to the wealthy (mortgage interest, retirement account deductibility, preferential capital gains rates, etc.), but it capped state and local tax deductions – a concession to deficit hawks that ironically fell heaviest on upper‐middle‐class homeowners in blue states.
Lobbying by affluent constituencies helped shape each of these moves. Wall Street and Big Tech were prominent backers of TCJA and have since worked to protect its benefits. Real estate and legal industries fought hardest to keep pass‐through carveouts, even twisting state laws to blunt the SALT cap. Each major party turn has seen pressure: Democrats seeking to raise taxes on the rich (the so‐called “Buffett Rule” or Sanders/Warren proposals) face blowback about “job‐killing taxes,” while Republicans insist on continued rate cuts under the banner of growth. The truth, as Buffett noted, is that the wealthy have more lobbyists and political clout to defend their tax breaksand tailor new ones. One can see it in the silent battles on Capitol Hill (such as partial SALT fix versus leave‐pass‐through loopholes) or in statehouses eagerly crafting exemptions for their rich donors.
Global Context. Internationally, the U.S. tax model looks unusual. Many advanced countries impose top rates on earned income much higher than America’s 37%. Scandinavian nations, for example, routinely have top brackets near 50% (though with generous welfare systems). France once had an 80% rate on very high incomes. However, the U.S. is comparatively unique in its lax treatment of capital and its reliance on payroll taxes (which many countries call social contributions and integrate differently). Even among OECD countries, the U.S. collects a greater share of revenue from payroll levies than from broad‐based consumption taxes, a mix that economists say is inherently regressive. At the same time, the U.S. does not tax capital gains at death (unlike, for instance, France which charges a modest “exit tax” when wealthy individuals move abroad, or Germany which largely abolishes step‐up basis). And while some European states have flirted with wealth taxes, their revenue yields have been poor, often because capital can hide behind holding companies or be moved offshore. (Indeed, as economist Gabriel Zucman notes, the wealthiest 0.0001% in France or the Netherlands pay almost nothing because their fortunes reside inside opaque corporate wrappers.) In short, leading economies have experimented with higher top rates or inheritance levies – but the U.S. has largely gone the other direction, cutting those taxes and tolerating the erosion of progressivity. Even in countries with wealth taxes, experts now say that better enforcement of capital‐income and inheritance taxes would yield more equity.
Why This Matters
The practical upshot is stark: millions of Americans who rely on paychecks fund Social Security and Medicare through every dollar of their earnings, and then pay income tax on what remains, often at rates near the statutory maximum. The richest pay much less of their multifaceted income. A 2020 IRS report confirms this: the middle 60% of households saw after‐tax income drop over recent decades, while the after‐tax share for the richest 1% more than doubled since 1979. Congress’ own experts concede that the tax system has become less progressive over time and effectively redistributes income upward. Without change, this gap will only widen.
By weaving together payroll taxes, capital taxes, loopholes and enforcement shortfalls, the U.S. tax code ensures the poor and middle class pay proportionally more. Every dollar a worker earns is immediately tainted by taxes, but every dollar of a billionaire’s unrealized gain can pass through untouched. Tax policy choices – whether it’s capping deductions, adjusting rates, or closing a loophole – play out against this systemic bias. The result, as Senator Chuck Schumer and others have noted, is an everyday reality where someone scrubbing dishes pays a higher rate on a week’s wages than a software tycoon does on the growth of his stock portfolio.
Tackling the Imbalance
Any solution will have to contend with deep political and economic forces. Proposals to equalize tax burdens have included strengthening the estate tax, eliminating stepped‐up basis, aligning capital gains rates with ordinary income, and investing IRS resources in auditing the rich. Public support for taxing billionaires more fairly is strong, yet each reform faces powerful opposition. Meanwhile, the system quietly continues to collect relatively more from below: the latest data show that the bottom 50% of earners (those making under ~$44,000) paid only about 3% on their incomes in federal taxes, largely because they owe little or get credits – but that same group still sees 7–8% of their incomes taken by state and payroll taxes.
In the end, why the poor pay taxes and the rich largely do not comes down to lawmaking and enforcement choices. It’s not that wealth automatically escapes taxes; it’s that the tax code—and those who shape it—allows it to. As long as preferential rates and loopholes remain entrenched, and enforcement remains skewed, the millstone of taxation will continue to weigh heaviest on those least able to carry it.