How to Tax Billionaires

If you made money last year, you will almost certainly owe taxes by April 15. And if you made a lot, you will probably owe a lot. That’s true for most Americans—just not the richest ones.

And if that makes you angry, you’re justified in feeling that way. But the solution you’re hearing from a lot of politicians at the state and federal levels—wealth taxes—isn’t the answer. Instead of introducing a new, difficult-to-administer, and potentially unconstitutional tax, we should do something simpler: Bring billionaires back into the income-tax system. Believe it or not, the way to do this starts with abolishing the estate tax.

You probably think that sounds nuts. But the estate tax hardly raises any money—less than 0.5 percent of federal revenue—and yet at the same time makes it seem like the rich pay more in taxes than they do. Our current jumble of tax rules, with separate taxes for income and estates, stokes confusion and misunderstanding.

The tax system that we currently have—a progressive income tax with an additional estate tax—was enacted after the Gilded Age and was specifically designed to impose the greatest taxes on the rich. Over many decades, the richest Americans have cultivated a three-step tax-avoidance playbook.

The first step: Don’t take a big salary. The greatest tax burden is imposed on those who get paid for work. A Californian earning a $10 million salary would owe more than $5 million in combined federal and state taxes. And payroll taxes are imposed on even the lowest earners. A self-employed California Uber driver earning $60,000 would still owe almost $15,000 in taxes.

[Rogé Karma: Buy, borrow, die]

That is why Warren Buffett’s combined salary and bonus was capped at $100,000 for decades. Jeff Bezos’s was set at $82,000 a year, low enough to make him eligible to claim the child tax credit (which he did!). Many others, including Mark Zuckerberg and Larry Ellison, are $1-a-year men. They are all low-salaried and still well compensated. The great bulk of their pay comes from the growing value of their stock. The magnitude of this growth is staggering. Since 2023, Buffett’s wealth has increased by $35 billion, Bezos’s by more than $100 billion, Zuckerberg’s by more than $150 billion, and Elon Musk’s by $500 billion.

By forgoing a salary and instead relying on the value of their shares, these individuals shift their tax bill from the income- and payroll-tax rules applicable to wage earners to the capital-gains rules applicable to investors. Their tax rates are lower: The maximum rate for long-term gains is 23.8 percent, once you factor in a surcharge for high earners known as the net-investment-income tax. But the greatest benefit accrues to those who avoid stock sales, and thereby taxes, altogether. This is the second step of the tax-avoidance playbook.

Deferring taxes on profits until a property is sold is the greatest tax advantage in our system. In the United States, this lets investors and their heirs (and their heirs) avoid taxes indefinitely. By using stock and other properties as collateral for loans, the very wealthy can enjoy the financial benefits of their wealth without the burden of taxes. Many of the richest Americans—including Ellison and Musk—support their lifestyle this way.

An obscure Securities and Exchange Commission rule change in 1982 dramatically increased this opportunity for tax avoidance. Before then, the only way that an American company could share profits with its stockholders was by issuing dividends. For much of the 20th century (though not anymore), dividends were subject to high tax rates, similar to the ones imposed on salaries. People who owned lots of stock typically received lots of dividends and therefore paid lots of income tax.

Beginning in November 1982, the SEC ruled that companies using their profits to buy back their own stock would be given safe harbor from price-manipulation investigations. Buybacks reduce the number of outstanding shares, which tends to boost a stock’s price. The effect of this was to make taxes on these profits optional, because shareholders who did not sell could enjoy tax-free growth indefinitely.

The third step used by rich Americans to avoid income taxes is by acquiring money the old-fashioned way: through inheritance. Someone who inherits $10 million—or even $100 million, or $100 billion—doesn’t even have to report it on their income-tax return. The exclusion from income tax for gifts, life insurance, and inheritances is based on the assumption that a well-functioning estate tax is addressing these assets. This is no longer the case.

In part because of a powerful lobbying campaign funded by 18 of the country’s richest families, much of the public has come to see the estate tax as an immoral “death tax.” Congress has not moved to close any of the loopholes that wealthy Americans and their tax planners have developed to avoid or minimize payment of the estate tax since 1990. As a result, the tax has become functionally eliminated, even though it still appears on the books.

Instead of introducing a wealth tax or trying to reimpose the estate tax to capture the more than $50 trillion in stocks, real estate, art, and other assets owned by the richest 1 percent of Americans, tax reformers should agree to abolish the estate tax. Its reputation has been too tarnished for it to be restored. Calling “uncle” on the estate tax for good would create an opportunity to introduce a simpler and more coherent system that would tax inheritances as well as investment gains using income tax, instead of through a separate system.

To ensure that the person who earns investment gains pays the tax bill, taxes should be paid on gains whenever property is transferred—not just by sale, but by gift or at death as well. A rule like this has worked in Canada for decades. It will work here too.

Without an estate tax, the government can bring gifts, inheritances, and life insurance into the income-tax system, where they rightly belong. Unlike the estate tax, an inheritance tax would not be assessed on the assets of a dead person. It would instead tax the person who receives the money, just as we tax nearly all other acquisitions of wealth.

[Annie Lowrey: How the richest people in America avoid paying taxes]

The income-tax system is designed to be a broad-based system imposed on—in the words of the tax code—“all income from whatever source derived.” This is why lottery winnings, money found on the street, and even barter exchanges are subject to income tax.

This does not mean that every dollar received as a gift or an inheritance needs to be taxed. The system could provide exclusions for education, transfers to spouses, health care, and annual gifts, perhaps using the current $19,000-a-year exclusion for gift taxes. We could make special accommodations for family farms and businesses. In addition, each person could be allowed to inherit $1 million, even $2 million, tax-free. Heirs receiving more than the tax-free limit would pay ordinary income-tax rates, just as lottery winners do. Life insurance, too, would be taxed to the person who receives them.

This expansion of the income tax would raise money not just for the federal government, but also for the majority of states, which use the federal definition of taxable income as a starting point for their own income-tax rules.

These reforms would create a simpler, fairer tax system, wherein the wealthy pay taxes based on the profits they earn and the income they acquire, not the complicated web of loopholes they currently navigate.