Over the past decade America’s wealthiest households have seen their fortunes multiply — often while paying only a tiny fraction of that growth in income taxes. Investigations of IRS data reveal that some ultra-rich Americans enjoy effective tax rates in the single digits despite dramatic increases in their net worth. Under current law, much of a billionaire’s gain in asset value is not taxed until the asset is sold. By never “realizing” these gains, the richest people can, in effect, defer taxes indefinitely.
Economists and tax experts describe a common pattern among the super-rich as the “buy, borrow, die” strategy, which works in three steps:
- Buy and Hold Assets: A billionaire accumulates stocks, real estate or business interests and holds them for years. As the value of these assets rises, the owner’s net worth increases — but no tax is owed until the assets are actually sold. In other words, gains remain “on paper” and untaxed as long as they are unrealized. For wealthy individuals, this means capital gains can accumulate without triggering any immediate tax bill.
- Borrow Against Wealth: Rather than selling stock or property, the billionaire takes out loans using the appreciated assets as collateral. Under U.S. tax law, loan proceeds are not treated as income, so the borrowed money is not taxed. In practice, banks will lend billions against a tech founder’s stock or a real-estate magnate’s property. Since borrowing has to be paid back with interest, the wealthy do incur interest costs, but those payments often work out to be far less than the capital gains tax that would have been due on a sale. In fact, one fiscal study estimates that, all else equal, relying on loans can lower the effective tax rate by roughly a dozen percentage points compared to selling the underlying assets. In a low-interest-rate environment, this makes debt a very attractive way to get cash.
- Die (Step-Up in Basis): Crucially, when the asset owner dies, U.S. tax law resets the tax basis of inherited assets to their value at death. This means the accumulated gains that were never taxed during life are wiped out. The heirs can then sell the assets immediately with little or no capital gains tax due on the history of appreciation. (Under current law, only estates above a very high exemption — about $12 million for an individual — even face any federal estate tax, so most huge inheritances escape tax entirely.)
Taken together, these steps let billionaires enjoy large sums of cash for living expenses without triggering taxable income. They keep their wealth invested (growing untaxed) and pass it on tax-free. A recent analysis notes that under this system, wealthy families “can live off” their expanding fortunes essentially indefinitely. In fact, one report of IRS data on the 25 richest Americans found their combined wealth rose by $401 billion over four years while they paid taxes on only a few billion — an effective tax rate of just 3.4% on their gains.
Borrowing: A Tax-Free Payday
Because borrowed money isn’t income, it effectively serves as a tax-free paycheck. For example, a billionaire with $10 billion of stock (where $9 billion is unrealized gain) could simply borrow the full $10 billion. The loan is collateralized by the stock but not taxed. Analysts show that a loan like this is typically about 12 percentage points cheaper in tax terms than selling the stock and paying capital gains taxes immediately. In practice, many billionaires borrow tens or hundreds of millions per year to finance luxury or investment purchases, repaying it later (often using future gifts or estate plans). Because interest rates on such loans can be relatively low, the overall cost (interest plus small taxes due) is much less than the tax that would have hit if the assets were sold outright.
One study of billionaire finance notes that, under the law, banks are effectively allowed to loan 100% of an asset’s value to a founder and report that loan as if it were income, even though it isn’t taxed. This “borrowing loophole” has attracted attention from lawmakers because estimates suggest Americans with over $100 million hold about $8.5 trillion in unrealized gains. Closing this loophole — for example by treating big loans as taxable or limiting basis — could in theory raise $100 billion or more over a decade. For now, however, it remains a powerful legal tax shelter: even when banks report interest payments, the IRS generally accepts that the borrowing itself is not taxable income.
Death and the Stepped-Up Basis
The step-up in basis at death is the final pillar. By law, when an individual passes away, any inherited stock or property is revalued to its current market price. In effect, the massive gains that built up during the decedent’s lifetime disappear for tax purposes. For example, if a founder bought stock for $100 million and it’s worth $1 billion at death, heirs inherit it at $1 billion basis. They can sell for $1 billion immediately with no capital gains tax on the $900 million gain.
Tax analysts often call this “perhaps the largest loophole in America’s tax code.” The Congressional Budget Office reports that more than half the benefits of the stepped-up basis go to the top 5% of households by income. In dollar terms, experts estimate it costs the federal government tens of billions each year. One projection puts the revenue loss around $58 billion in 2024 alone (another analysis estimated about $42 billion in 2021). By contrast, fewer than one in a thousand estates pay any federal estate tax at all, so most of these inheritances glide through without tax. In short, the tax code lets heirs take over family fortunes essentially tax-free.
Other Tax Code Loopholes
Beyond “buy, borrow, die,” wealthy taxpayers use several other features of the tax code to cut their bills:
- Capital Gains vs. Ordinary Income: Ordinary wage income can be taxed up to 37% (plus 3.8% Medicare tax), whereas long-term capital gains top out at 23.8%. This gap provides a built-in incentive to treat income as gains. For example, private equity and hedge fund managers commonly receive large chunks of compensation as “carried interest,” which is taxed as capital gain rather than ordinary income. In practice this means many fund founders end up paying only the capital-gains rate (and none of the 15.3% payroll tax) on much of their pay.
- Estate and Gift Trusts: Ultra-wealthy families exploit special trusts to shelter gifts and inheritances. A common tool is the grantor-retained annuity trust (GRAT). Investigative reporting has found that over half of the 100 richest Americans have used GRATs or similar devices to move fortunes to heirs without estate tax. Through these trusts, a billionaire can effectively gift hundreds of millions to the next generation for only a nominal tax cost (often far below the actual value transferred).
- Deferred-Sale Exchanges and Exclusions: Certain rules allow billionaires to postpone or avoid taxes on huge transactions. For example, until the 2017 tax overhaul many real estate deals qualified for “like-kind” exchanges, letting owners swap properties without paying capital gains immediately. Likewise, Section 1202 of the tax code can exclude 50–100% of gains on small-business stock sales. Such provisions mean a wealthy investor can sell or swap a large asset and reinvest elsewhere, all without an immediate tax hit. (If they ever do cash out or the exemptions expire, the tax will become due — but in the meantime the wealth grows untaxed.)
- Retirement, Insurance, and Philanthropic Vehicles: The rich often park wealth in tax-exempt accounts and charitable trusts. They may load appreciated stock into private foundations or retirement accounts, where gains grow tax-free. For instance, donating shares to a family foundation yields an immediate deduction at full market value and avoids capital gains tax on that gift. Large life insurance policies (often held in trusts) also pay death benefits that pass income-tax-free to heirs. By funneling billions into these vehicles, ultra-wealthy families significantly reduce their taxable estates and incomes.
Each of the above practices is fully legal and built into the tax law. Together, they form a toolkit enabling the super-rich to steer income into the lowest-taxed channels and defer or eliminate tax on enormous gains. As one analysis notes, under current law a person can hold onto assets for a lifetime, pass them to heirs, and have **“the increase in the assets’ value … not subject to income tax”**. Tax policy experts have called this situation “supremely obscure and yet wildly consequential,” since it effectively lets billionaires avoid a vast amount of tax.
Historical Context and Expert Views
Many of these provisions have deep roots. The rule that capital gains are taxed only when assets are sold dates back to the earliest income tax laws, which largely followed a realization principle. Over time, Congress added breaks for investors but also built in side-rules like stepped-up basis that reflected the era’s tax debates. In fact, the stepped-up basis was introduced in 1921 — five years after the first federal estate tax — precisely to prevent double taxation. At the time, lawmakers reasoned that taxing an inherited asset’s full appreciation after it had just been subject to an estate tax would be unfair, so they set the heir’s basis to the market value. Subsequent changes (like a brief repeal in 1976 and partial repeals in 2010) were reversed due to complexity and political opposition, so the step-up rule remains largely intact today.
Modern analysts often emphasize how these legacy rules benefit today’s rich. Expert commentators note that under current law “much of the income of the wealthiest people in the country is never subject to income tax” because gains aren’t taxed if unsold. One description even calls the step-up rule “the most important tax loophole in America,” enabling billionaires to effectively pay little or no tax on appreciation. Economists Zach Liscow and Edward Fox (Brookings/Equitable Growth) have quantified the impact, showing that loopholes let some of the wealthiest families pay taxes on as little as 1% of their wealth gains.
In recent years these practices have come under scrutiny. Some policymakers have proposed taxing unrealized gains annually, or treating large asset-backed loans as taxable events. These ideas — including a “billionaires’ income tax” that would mark assets to market — reflect concern that the gap between wealth growth and tax paid has become too wide. For now, however, the tax code remains tilted in favor of holding and bequeathing. As one fiscal report observes, because wages and even home sales are taxed but stock appreciation is not until sale, wealthy Americans “can live off” the rise in their fortunes with virtually no income tax.
In conclusion, by the book, America’s billionaires use the tax code’s rules to minimize taxes: they accumulate wealth in assets that aren’t taxed until sold, borrow against those assets to spend cash, and arrange their affairs so heirs never pay tax on gains. The result is that the super-rich can see their net worth skyrocket while contributing only a tiny share of that increase in income taxes. Tax scholars warn that given these dynamics, current law effectively lets the wealthiest enjoy years or decades of wealth gains with minimal taxation.