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The richest Americans have avoided billions in taxes by willingly doing something most only do out of necessity: borrow money.

Britta Pedersen-Pool / Getty Images; Arif Hudaverdi Yaman / Getty Images; KENZO TRIBOUILLARD / Getty Images; Mike Cohen / Getty Images; Yuqing Liu / Business Insider

  • America’s 25 richest people grew richer by $ 401 billion from 2014 to 2018, according to Forbes.

  • ProPublica said the income taxes they paid were only 3.4% of this new net worth.

  • One way for the ultra-rich to avoid taxes: Borrow money at low interest rates, according to ProPublica.

  • See more stories on the Insider business page.

ProPublica announced on Tuesday that it had obtained a huge amount of documents from the IRS, revealing that the richest people in the United States have avoided paying billions of dollars in taxes for years, resulting in government bills. income tax representing a fraction of their net worth.

One of the key strategies employed by the ultra-rich to reduce their tax bill is borrowing money.

Many Americans only borrow money when they need to do so for major purchases like college tuition or a house, because interest can quickly add up, especially if it isn’t. able to repay the loan immediately.

But according to ProPublica and independent experts, American billionaires have often financed their lavish lifestyles by using their vast fortunes as collateral for loans, which may come with single-digit interest rates.

Borrowing money allows the ultra-rich to earn tiny wages, avoiding the 37% federal tax on the highest incomes, as well as avoiding selling stocks to free up money, bypassing the capital gains tax rate of 20%. Since loans are not considered taxable income, the rich only have to repay principal and interest, rather than the higher taxes that would accompany multi-million dollar income and investments.

America’s 25 richest people saw their net worth increase by $ 401 billion between 2014 and 2018, according to Forbes. But they paid a total of $ 13.6 billion in federal income taxes over the same period, or 3.4% of that newly acquired wealth, according to ProPublica.

In contrast, a middle-class American in his forties who had amassed a “typical amount of wealth for people his age” saw his net worth increase by $ 65,000 from 2014 to 2018, but paid $ 62,000 in income taxes, or 95% of this amount. new wealth, according to ProPublica.

The United States does not directly tax the total wealth of individuals, unlike some European countries. It also does not tax shares held until they are sold. And billionaires tend to have a lot of their net worth wrapped up in stocks.

However, ProPublica’s analysis has revealed in new detail how the U.S. tax code allows the ultra-rich to take advantage of a litany of tax loopholes and wealth management strategies to increase their wealth without dramatically increasing their tax bill. .

To illustrate the gap between wealth and the taxes paid by the ultra-rich, ProPublica created what he called a “real tax rate”. ProPublica defined this as the total federal income tax a person paid, in this case from 2014 to 2018, compared to the new wealth they acquired during the same period.

ProPublica has not released its source data or disclosed how it obtained the data from the IRS.

According to ProPublica, the 25 richest Americans paid a “real tax rate” of 3.4% – a result of tax evasion strategies that are beyond the reach of most Americans.

It turns out that borrowing is one of those strategies.

In 2014, for example, Oracle co-founder Larry Ellison revealed that he had used 250 million of his Oracle shares as collateral to secure a $ 9.7 billion personal line of credit.

Elon Musk has also put up a massive amount of his equity in Tesla and SpaceX as collateral for loans, rather than selling those shares and paying 20% ​​capital gains tax to free up the money. . From 2014 to 2018, Musk paid $ 455 million in taxes on reported income of $ 1.52 billion, an effective tax rate of 29.9%. But his fortune grew by $ 13.9 billion during that time, meaning his “effective tax rate,” according to ProPublica’s methodology, was only 3.27%.

Musk responded to ProPublica’s request for comment with: “?”

Investor Carl Icahn also took advantage of the loan, paying $ 0 federal income tax despite adjusted gross income of $ 544 million because he had an outstanding loan from Bank of America worth $ 1.2 billion, ProPublica reported.

“I didn’t make any money because unfortunately for me my interest was higher than my total adjusted income,” Icahn told ProPublica, adding that although he borrowed a lot of money, it was “not at all” intended to cut taxes. bill, but rather that he borrows “to earn.” I like the competition. I like to win ”.

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