Why Your Tax Rate Is Higher Than a Billionaire's

A nurse filing jointly probably paid an effective federal rate of around 20% last year — about a fifth of her income, once you count income and payroll taxes together. The wealthiest investors in America — people whose fortunes grow by millions every day — often pay far less. When ProPublica obtained 15 years of IRS data in 2021, it found that the 25 richest Americans paid a "true tax rate" of just 3.4% measured against the growth of their wealth. Warren Buffett's came out to 0.1%. Jeff Bezos paid about 1%. Elon Musk, 3.27%.

None of them were cheating. Every number came straight from their own tax returns. The gap isn't a glitch — it's the system working as designed, built over about a hundred years. Here's how it happened, and what it would take to fix it.

A Hundred Years of Exceptions

The divide between taxes on work and taxes on investment isn't a law of nature. It's a choice, made in pieces, over a century.

In 1913, the federal income tax treated every dollar the same — wages, investment income, all of it. That lasted eight years. In 1921, Congress carved out the first exception, taxing investment gains at a top rate of just 12.5% — far below the 65% top rate on wages — on the theory that high rates made investors sit on their assets. That was the moment the gap opened. It never closed. Every couple of decades since, Congress has cut the rate on investment again, never the rate on work. None of it was inevitable.

How the Deck is Stacked

Here's the part that actually explains the billionaire's 3%. It's a three-step chain that ends in a maneuver with a famous nickname — buy, borrow, die — except, as you'll see, some executives don't even have to do the buying.

Step one: get paid in stock, not wages

For decades, big corporations have paid executives less in cash and more in company stock. When that stock "vests" — becomes theirs to keep — it's taxed like a paycheck: a CEO pays the top 37% rate on its value that day. The trick is what comes after. Every dollar the stock gains from there is untaxed until they sell — and if they never sell, they may never pay. Picture a CEO with $50 million in stock. If it grows to $500 million, that $450 million in new gains just sits there, untouched, for as long as no one sells.

Step two: use company profits to push the stock price up

In 1982, the SEC adopted Rule 10b-18, which made large-scale stock buybacks legal. Before that, companies returned profits to their owners mostly through dividends — cash payouts taxed like a paycheck. Now they could buy back their own shares instead. The incentive is obvious: the company spends its profits buying its them off the market, leaving fewer behind — so each one is worth more. And the people who approve buybacks are the same executives and board members paid in stock; they're voting to make themselves richer. In 2024, S&P 500 companies spent $943 billion buying back their own stock — more than every business in America spent on research and development the year before. Not because buybacks build anything, but because they're the most tax-efficient way to move profit to the people who already own the most stock.

Step three: hold it, borrow against it, never sell

This is where the nickname comes from. The classic move is buy, borrow, die: buy an asset that keeps climbing, borrow against it to live, and die holding it so the gains are never taxed. Some executives are lucky enough to skip the first step — they were paid in stock, and didn't buy it — but the payoff is the same.

They don't sell; selling triggers tax. They borrow against the stock instead — a loan isn't income, so there's no tax — and live off the loan, covering the interest with dividends or by rolling it into a new one. This isn't hypothetical: executives like Elon Musk and Larry Ellison have pledged hundreds of millions of shares as collateral for personal loans, per their own SEC filings. Then they die holding the stock. Heirs inherit it, and the law wipes the slate clean: the gains are now measured from the day they inherit, not from what was originally paid. The lifetime gain is never taxed. A stake worth $1 million that grows to $1 billion passes on with the entire $999 million erased.

Meanwhile, every dollar on your pay stub is taxed when you earn it, and your 401(k) when you withdraw it. The billionaire's stock empire can grow for generations without a single taxable event. This isn't evasion — the law was written to work exactly this way.

We Built Safeguards Against This

The people who founded this country saw this danger coming. Thomas Paine, who wrote Common Sense, proposed a 10% tax on inherited wealth in Agrarian Justice (1797) — an idea the Social Security Administration calls an early version of Social Security. His point was simple: a fortune you inherit is money you didn't earn, and society has a fair claim to part of it. Thomas Jefferson, writing to John Adams in 1813, warned against an "artificial aristocracy" of wealth and birth — "a mischievous ingredient in government" — as the enemy of a country that rewards real merit.

We acted on it. The federal estate tax — a tax on large fortunes when they pass to heirs — was created in 1916 to stop wealth from pooling in the same families forever; Theodore Roosevelt had championed it for years. At its peak, from 1941 to 1976, the top rate was 77%, reaching far enough down that about one in fourteen estates paid something. This was never just a tax on the ultra-rich.

Then we spent fifty years taking it apart. Today fewer than two in a thousand estates pay anything — about 2,100 did in 2019 — raising roughly $32 billion a year, under 1% of federal revenue. Last summer the One Big Beautiful Bill Act, signed July 4, 2025, permanently raised the exemption — the amount that passes tax-free — to $15 million per person, $30 million per couple. This isn't distant history. It happened a year ago.

And the stakes are rising. The top 0.01% of Americans — roughly 18,000 families — now hold about 10% of all U.S. wealth, up from around 2% in the late 1970s. An estimated $84 trillion will pass between generations in the coming decades, most of it now untaxed. The artificial aristocracy Jefferson warned about is being written into law.

The Fix

Every loophole in the rules has a fix to even the odds. None are radical; most have been law before.

Tax big investment gains like wages

Below a million dollars in gains a year, keep the lower rate — it covers most investors. Above it, a dollar is a dollar. Reagan did exactly this in the Tax Reform Act of 1986, setting the top rate on investment gains equal to the rate on wages. He called it closing loopholes. That's still what it is.

Fix the buyback incentive

The 2022 1% tax on buybacks cut them by about a quarter, but the cash mostly just sat on company balance sheets — 1% was too small to change behavior. Raise it to 10–20%, and pair it with letting companies write off the full cost of factories, equipment, and research right away. Then building something is cheaper than buying back stock — the postwar formula that actually worked.

Tax lifestyle borrowing against stock

When someone borrows hundreds of millions against stock to fund their lifestyle, treat it as income — because economically, it is. Not ordinary mortgages, not business loans. A narrow rule for a specific dodge.

Stop erasing gains at death

Tax the gains people pass on at death, above a generous cutoff — say $5 million per heir. It's the single cleanest fix for buy, borrow, die, it spares ordinary estates and family farms, and the CBO ranks it among the largest deficit-reduction options available. Pair it with an estate tax that again has teeth — graduated rates on fortunes well above the family-farm range. One move taxes the gains a fortune piled up; the other taxes its size. Both aim squarely at dynastic wealth.

Why this is good economics

These aren't only fairness fixes. The Federal Reserve Bank of Boston found in 2019 that lower-income households spend roughly ten times more of each extra dollar than wealthy ones do. A dollar in a nurse's pocket keeps moving — groceries, rent, a car repair. A dollar on a billionaire's pile mostly just sits. Taxing that idle money drains the economy's least-used dollars first — far less painful than the usual inflation tools, like raising interest rates or sales taxes. It's not a new idea: during World War II, Washington used tax hikes deliberately to hold inflation to 3.5% a year despite enormous deficits.

Why Your Rate Is Higher

Your tax rate is higher than a billionaire's because Congress decided it should be — in 1921, 1978, 1997, 2003, and again in 2025. Not once, not by accident. A choice, made over and over, for capital over work.

The founders saw it coming. Paine proposed taxing inherited wealth in 1797; Jefferson called inherited aristocracy a threat to the republic. They built safeguards. We spent a century taking them apart, and just made the latest cuts permanent.

None of that is fixed in place. The tax code has been rewritten before, often by people who'd never call themselves anti-capitalist — Reagan equalized investment gains and wages in 1986 and called it closing loopholes. That's all this is. The divide was a choice. So is closing it.