The wealthiest 400 taxpayers in the United States paid an average effective federal tax rate of about 24% between 2018 and 2020, according to a study using confidential IRS data. The general population paid roughly 30%, and top wage earners paid around 45%.1National Bureau of Economic Research. How Much Tax Do US Billionaires Really Pay So when people ask how much billionaires pay in taxes, the honest answer is: less, in proportion to what they actually gain each year, than most people who work for a living. Not because they break the law, but because the federal tax system was built to tax income, and most of a billionaire’s wealth never becomes income.
Why the Rate Looks So Low
Federal income tax applies to money you receive or realize in a given year. Wages, interest, dividends, and profits from selling something. It does not apply to the mere increase in value of an asset you still own. If a founder holds stock that climbs from $1 billion to $5 billion, that $4 billion gain generates zero taxable income until the stock is sold. Tax law calls this the realization principle, and it is the single biggest reason billionaires can accumulate enormous fortunes while reporting relatively modest taxable income.2University of Colorado Law School. The Realization Rule as a Legal Standard
The distinction between paper wealth and taxable income drives nearly every number in this article. Billionaires don’t need to evade taxes. They simply avoid triggering the events that create a tax bill.
Two Honest Ways to Measure the Rate
There are two defensible ways to calculate what a billionaire pays, and they produce very different answers.
The first measures taxes paid as a share of reported taxable income. By that measure, many billionaires pay effective rates above 30%, because the income they do report gets taxed at high marginal rates. This number is technically accurate. It’s also misleading, because it only counts the income billionaires chose to realize and ignores the far larger sums that grew untaxed.
The second measures taxes paid against total economic income, including the annual appreciation of assets a person still holds. That’s how researchers arrived at the 24% figure for the top 400.1National Bureau of Economic Research. How Much Tax Do US Billionaires Really Pay Top wage earners in the same study paid about 45%, roughly twice the billionaire rate, because their wealth comes primarily from salaries that get taxed as they’re earned.
Investigative reporting using leaked IRS records went further, dividing taxes paid by the annual growth in net worth. On that basis, some of the wealthiest Americans paid effective rates below 1% in certain years. The tax code has never attempted to tax unrealized gains as annual income, so this framing is contested. But it captures the central tension: the system operates as written, and the result is that the people with the most economic resources carry a lighter proportional burden than many workers.
Buy, Borrow, Die
The most powerful tax strategy available to the ultra-wealthy has a nickname: buy, borrow, die. The logic is simple. You buy appreciating assets and hold them, never selling and never triggering a taxable gain. You borrow against those assets to fund your lifestyle. You die still holding them, and the tax code wipes the slate clean for your heirs.
Loans Are Not Income
When a billionaire pledges a $10 billion stock portfolio as collateral for a $500 million line of credit, the cash received is debt, not income. No income tax is owed on the proceeds. Interest rates on these securities-backed loans are often lower than what the portfolio earns, so the cost of borrowing is trivial compared to the tax bill selling shares would create. Investment interest is deductible against net investment income, capped at that income and carried forward if it exceeds the cap.3Office of the Law Revision Counsel. 26 US Code 163 – Interest
The result is that a billionaire can live lavishly, funding homes, yachts, and acquisitions with borrowed money, while reporting little or no taxable income for the year.
The Step-Up at Death
The strategy’s final act is the most consequential piece. When someone dies, the cost basis of their assets resets to fair market value on the date of death.4Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent If a founder bought stock for $1 million and it’s worth $20 billion at death, the $19.999 billion in unrealized appreciation is never subject to income tax. Heirs inherit the stock with a $20 billion basis. If they sell it the next day for $20 billion, they owe nothing in capital gains.
The outstanding loans get repaid from the estate or refinanced by the heirs. A lifetime of interest costs less than the capital gains tax would have. The step-up in basis has been in the tax code since 1954. Combined with the borrow-against-assets strategy, it lets the wealthiest families avoid income tax on the bulk of their gains permanently.
Rates When Income Is Actually Realized
When billionaires do realize income, the rate depends heavily on what kind it is. Ordinary income (wages, business income, interest, and short-term gains on assets held a year or less) faces marginal rates topping out at 37% for 2026. That top bracket kicks in at $640,600 for single filers and $768,700 for married couples filing jointly.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Long-term capital gains, on assets held longer than a year, top out at 20%.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses High earners also owe the 3.8% Net Investment Income Tax when modified adjusted gross income exceeds $250,000 for joint filers or $200,000 for single filers.7Internal Revenue Service. Topic No. 559, Net Investment Income Tax The combined maximum federal rate on long-term investment gains is 23.8%, about 13 points below the top ordinary rate. That gap creates a strong incentive to hold assets more than a year and to structure compensation so it qualifies for capital gains treatment rather than wage treatment.
Carried Interest
Hedge fund and private equity managers get a share of fund profits, called carried interest, as compensation for managing money. It’s payment for services, but it’s taxed as capital gains rather than ordinary income, so long as the underlying investments are held for more than three years.8Internal Revenue Service. Section 1061 Reporting Guidance FAQs If the holding period falls short, the gains get recharacterized as short-term and taxed at ordinary rates.9Office of the Law Revision Counsel. 26 US Code 1061 – Partnership Interests Held in Connection with Performance of Services Most large private equity funds hold well beyond three years, so managers pay 23.8% instead of 37% on what is effectively their paycheck.
The Pass-Through Deduction
Many billionaires earn business income through partnerships, S corporations, and LLCs rather than a traditional salary. Under Section 199A, made permanent by the One, Big, Beautiful Bill Act in 2025, owners of these pass-through businesses can deduct up to 20% of qualified business income before calculating tax. At the top bracket, that drops the effective rate on qualifying pass-through income from 37% to about 29.6%. The deduction has limits tied to wages paid and property owned by the business, but for large operations those limits rarely bite.
Estate and Gift Tax Collects Little
The federal estate and gift tax is a separate system that taxes wealth transfer rather than income. For 2026, the basic exclusion is $15 million per individual.10Internal Revenue Service. What’s New – Estate and Gift Tax A surviving spouse can use any unused portion of a deceased spouse’s exemption, so a married couple can shield $30 million from federal transfer tax.11Internal Revenue Service. Estate Tax Anything above the exemption is taxed at 40%.
That sounds like it should raise real money from billionaire estates. It doesn’t. Grantor Retained Annuity Trusts, charitable transfers, family limited partnerships, and other planning tools move the bulk of appreciation out of the taxable estate long before death. The step-up in basis then eliminates the income tax on whatever remains. The NBER study found transfer taxes contributed only about 1% of the total tax burden for the Forbes 400.1National Bureau of Economic Research. How Much Tax Do US Billionaires Really Pay
Roughly a third of states impose their own estate or inheritance taxes, often with lower exemptions than the federal system. Many billionaires establish residency in states without them.
Why the Numbers Aren’t Changing Soon
Proposals to close the gap keep resurfacing. The most prominent recent one was a 25% minimum tax on the total income of taxpayers worth more than $100 million, including unrealized gains. It would have required billionaires to pay tax on wealth growth annually, whether or not they sold anything. It was not enacted.
Taxing unrealized gains raises real practical problems. Asset values swing hard. What happens when a billionaire pays tax on a $5 billion gain one year and the asset drops $3 billion the next? Liquidity is another issue: a founder whose wealth is concentrated in a single company’s stock may not have the cash to pay a large annual tax bill without selling shares, which can affect the company’s stock price and governance. These objections aren’t trivial, even if the status quo produces outcomes many people find unfair.
The One, Big, Beautiful Bill Act signed in 2025 extended and expanded several provisions that benefit the ultra-wealthy. It made the pass-through deduction permanent, raised the estate tax exemption to $15 million, and kept the 37% top income tax rate rather than letting it rise to 39.6%.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 State taxes add to the picture and vary widely, with state-level capital gains rates ranging from zero in states without an income tax to over 13% in the highest-tax states. The federal system is where the real levers are, and for now those levers continue to favor wealth held in assets over wealth earned through work.