Billionaires vs Millionaires: Who Pays More in Taxes?
Surveys show that 79% of U.S. citizens support raising taxes on the wealthy. But there’s a good deal of variance within that group. For example, you might support raising taxes on a billionaire, but not the business owner who spent the last 30 years working hard to support their family.
That raises the question: Who actually pays more in taxes today, millionaires or billionaires? The answer can vary depending on the circumstances.
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Do Billionaires or Millionaires Pay More in Taxes?
Either a billionaire or a millionaire can pay more in taxes. To understand why, let’s take a quick detour.
Most of the average American’s tax burden comes from income tax — money the government takes from what you earn at work. The percentage of your income that is taken as income tax is determined by your total income. For example, the highest federal income tax rate is 37%. Anyone earning more than $609,350 as the head of a household is taxed at this rate. Therefore, the millionaire or billionaire with the highest income for any given year will pay the most income tax that year.
However, for millionaires and billionaires, income tax is typically only a percentage of their total taxes. Many also pay taxes on equities, real estate and other high-value assets. The amount they pay can vary substantially. Someone with a lot of assets could owe more on those taxes than their income tax.
That’s why it’s impossible to say in the abstract whether billionaires or millionaires pay more in taxes. It all comes down to their income and how they manage their assets each year.
Still, billionaires have a higher net worth than millionaires. That doesn’t necessarily mean they pay a higher tax rate. But 15% of a $200 million stock sale will lead to significantly more taxes than 15% of a $1 million stock sale.
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Tax Strategies the Wealthy Use To Pay Less
The strategies that millionaires and billionaires use to avoid taxes can greatly impact their annual bills. By using the strategies below, an individual can earn more income or have a higher net worth and still pay less in taxes in a given year.
Forgoing a Paycheck
One strategy wealthy people use to avoid taxes is not accepting a traditional paycheck. For example, Elon Musk receives stock options from Tesla instead of a salary. He won’t pay taxes on those shares until he sells them. In the meantime, he gets to avoid paying millions in income tax.
This tactic is common among wealthy founders and CEOs. They tend to look for the most tax-efficient way to get paid for their work, which rarely means taking a massive salary.
Leveraging Different Asset Tax Rates
Different assets have different tax rates, and knowledgeable individuals can choose how they store their wealth to maximize their tax breaks. For example, wealthy people might hold stocks for more than a year to qualify for the lower long-term gain tax rate. Art and antiques have a maximum tax rate of 28%, so investing in these items is a great way to decrease overall taxes.
People also use tax-advantaged accounts like IRAs to reduce their overall tax burden. The bottom line is that the rich understand how tax rates differ between assets and take advantage of this to pay as little as possible.
Making Charitable Donations
Next, many millionaires and billionaires give to charity as a way to pay less taxes. Any money they donate to a registered 501(c)(3) is tax-deductible. This means they’re essentially taking the cash they would’ve given the government and sending it to a cause they care about instead.
These tax deductions help charities get the funding they need to function. But they can also be taken advantage of due to the lack of regulation. For example, Donald Trump famously used money from his foundation to purchase a painting of himself. That money could have come from funds he donated to his foundation to avoid paying taxes.
Writing Off Bad Investments
Other rich people use a strategy called tax-loss harvesting to reduce what they owe. This involves selling assets for less than what they paid for them. When they report this loss, they can write some of the amount they lost off of their taxes.
For example, maybe you like to day trade. But this year, you lost $3,000 on bad investments. You could deduct that $3,000 from your taxes under the IRS’ rules for capital losses.
Note that you can only deduct a maximum of $3,000 per year for bad investments. However, any extra capital losses you incur will carry forward to future years. So, if you lose $5,000 in 2024, you could write off $3,000 of the total this year and then the remaining $2,000 the following year. Wealthy people often sustain enough capital losses to deduct $3,000 from their taxes annually in perpetuity.
Business Write-Offs
Finally, the wealthy tend to claim a high amount of business write-offs. These can range from private jet excursions to stays in luxury resorts. As long as the taxpayer can justify something as a business-related expense, it can help them save money on their annual taxes.
You Can Save on Taxes, Too
The more money you have, the more strategies you can use to save on taxes. But the average person isn’t entirely out of luck. You may be able to save money with write-offs for business expenses and charitable donations and by leveraging tax rate differences between asset classes.
Just remember, the standard deduction for 2024 is $14,600 for singles and $29,200 for married couples. Taking the standard deduction will be the better option unless you have itemized deductions that surpass $14,600 as an individual or $29,200 as a couple.
Final Take
There’s no straight answer to whether a billionaire or millionaire pays more in taxes. Compared to an average American, whose taxes are mostly made up of income tax, the taxes of millionaires and billionaires are far more dependent on assets. Their total taxes depend on a variety of factors, including annual income, asset transactions and the tax-reducing strategies used.
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