How the rich avoid paying taxes

Summary

The video script explores the disparity in the U.S. tax system, highlighting Warren Buffett's lower tax rate compared to his secretary despite his wealth from Berkshire Hathaway and investments. It delves into capital gains tax advantages for the wealthy, such as 'stepped-up basis' and the potential for untaxed wealth through stock holdings. The script also discusses President Biden's proposal to increase capital gains tax rates for high earners and the debate around its impact on investment and tax fairness.

Takeaways

• 💼 Warren Buffett, the CEO of Berkshire Hathaway, has amassed his wealth through the company's ownership of various businesses and investments.
• 📈 Berkshire Hathaway's stock value has increased significantly since Buffett took over, with a single share worth nearly half a million dollars today.
• 🤑 Buffett owns a large number of Berkshire Hathaway shares, which form the basis of his wealth.
• 💰 Despite his wealth, Buffett pays a lower tax rate than his secretary due to the difference in the types of taxes levied on their income.
• 📊 The disparity in after-tax income between the richest Americans and the middle class has been growing, with the rich seeing a much higher increase in income over the past 40 years.
• 🏦 Morris, a retired Wall Street worker, represents the one percent who advocate for higher taxes on the wealthy to support a robust middle class.
• 📈 Investments, such as stocks and real estate, are taxed as capital gains at a lower rate than income tax, benefiting the wealthy.
• 💼 The tax system allows for significant wealth accumulation without taxation until assets are sold, as illustrated by Jeff Bezos' situation with Amazon stock.
• 💡 Some billionaires, like Elon Musk, leverage loans against their stocks to avoid selling and incurring taxes, further minimizing their tax obligations.
• 🔄 The 'stepped-up basis' loophole allows the wealthy to pass on investments to heirs without paying taxes on the original gains, perpetuating wealth accumulation without taxation.
• 🏛️ President Biden has proposed changes to capital gains tax, including closing the 'stepped-up basis' loophole and increasing tax rates for high-income earners, to address tax inequality.
• 💡 Advocates suggest that changing capital gains taxes is a starting point for a fairer tax system, although it is not a comprehensive solution to wealth inequality.

Q & A

Who is Warren Buffett and what is his connection to Berkshire Hathaway?

Warren Buffett is one of the richest people in the world, known for running Berkshire Hathaway, a holding company that owns various businesses including Geico, Dairy Queen, and a significant railroad. His wealth is largely tied to the performance of these companies and the stock he owns.

What was the value of a single share of Berkshire Hathaway when Buffett took over in 1965, and what is it worth today?

When Warren Buffett took over Berkshire Hathaway in 1965, a single share was worth $19. As of the script's date, it's worth nearly half a million dollars.

How many shares of Berkshire Hathaway does Warren Buffett own, and what does this signify about his wealth?

Warren Buffett owns nearly 240,000 shares of Berkshire Hathaway. This signifies a substantial portion of his wealth, as the value of these shares is tied to the success of the companies Berkshire Hathaway holds.

Why does Warren Buffett pay a lower tax rate than his secretary?

Warren Buffett pays a lower tax rate than his secretary because of the difference in the types of taxes they pay. His secretary pays income taxes on her salary, while Buffett primarily pays capital gains taxes on his sold stock, which are taxed at a lower rate.

What is the disparity in after-tax income growth between the richest Americans and the middle class over the last 40 years?

In the last 40 years, the after-tax income of the richest Americans has risen more than 400%, while the middle class income has only risen by 50%, indicating a significant disparity.

How does the tax system treat income from investments differently from income from a regular job?

Income from investments, such as stocks and real estate, is taxed as capital gains, which often have a lower tax rate compared to income taxes paid on a regular job, which can range from 10 to 37 percent.

What is the 'stepped-up basis' loophole in capital gains taxes, and how does it benefit the wealthy?

The 'stepped-up basis' loophole allows the cost basis of an inherited asset to be 'stepped up' to its market value at the time of inheritance. This means that when the inheritor sells the asset, they only pay taxes on the gain since the inheritance, not the original gain made by the decedent, effectively avoiding taxes on the initial appreciation.

What is President Biden's proposal regarding capital gains taxes for high-income earners?

President Biden has proposed closing the 'stepped-up basis' loophole and increasing the maximum capital gains tax rate from 20% to 39.6%, but only for people making more than a million dollars a year.

What are some potential criticisms of changing the capital gains tax rate for the wealthy?

Critics argue that changing the capital gains tax rate might discourage investment in the stock market or lead to current millionaires selling less stock, potentially impacting market dynamics.

How could changing capital gains taxes potentially impact tax revenue?

Changing capital gains taxes could bring in more tax revenue, with estimates ranging from $200 billion over ten years to possibly double that amount, depending on the specifics of the policy change.

What alternative tax measures are suggested to make the tax system fairer for the wealthy?

Some suggested measures to make the tax system fairer include implementing wealth taxes and taxes on gains in the stock market, which could help address the issue of wealth concentration.

Outlines

00:00

💼 Wealth Inequality and Taxation Disparity

The first paragraph introduces Warren Buffett, emphasizing his immense wealth derived from Berkshire Hathaway, a conglomerate with stakes in various companies like Geico and Dairy Queen. It discusses how the increase in stock prices of these companies boosts Berkshire Hathaway's value, and by extension, Buffett's wealth. The script highlights the tax rate disparity between Buffett and his secretary, pointing out that capital gains taxes are significantly lower than income taxes. It also touches on the growing wealth gap in the U.S., where the after-tax income of the richest has surged compared to the middle class. The narrative includes Morris, a retired Wall Street worker advocating for higher taxes on the wealthy, explaining how income from investments is taxed at a lower rate than earned income. The paragraph concludes by illustrating how billionaires like Jeff Bezos and Elon Musk can accumulate wealth without substantial tax implications due to the nature of capital gains taxation and the 'stepped-up basis' loophole.

05:01

💼 Potential Tax Reforms and Public Perception

The second paragraph delves into the potential for tax reform, particularly focusing on capital gains taxes. It mentions President Biden's proposal to close the 'stepped-up basis' loophole and raise the maximum tax rate for those earning over a million dollars annually. The discussion includes estimates of the additional tax revenue that could be generated, ranging from $200 billion to double that amount over a decade. The paragraph also addresses the public's perception of the wealthy not paying their fair share and suggests that changing capital gains taxes could be a starting point for a fairer system. It proposes other potential measures such as wealth taxes and stock market gains taxes. The summary acknowledges that while tax reform alone won't solve wealth inequality, it could be a significant step towards a more equitable system.

Keywords

💡Warren Buffett

Warren Buffett is an American investor and business tycoon known for his role as the chairman and largest shareholder of Berkshire Hathaway. In the video's context, he represents the epitome of wealth accumulation through investments and the disparity in tax rates between the rich and their secretaries, highlighting the theme of wealth inequality.

💡Berkshire Hathaway

Berkshire Hathaway is a multinational conglomerate holding company led by Warren Buffett. It is significant in the video as it exemplifies the mechanism of wealth accumulation through owning stakes in various successful companies, which in turn contributes to Buffett's wealth and the broader discussion on wealth disparity.

💡Capital Gains Tax

Capital gains tax is a levy on the profit made from selling an asset that has increased in value. In the video, it is used to illustrate the preferential tax treatment that the wealthy receive compared to income tax, exemplified by Buffett's lower tax rate despite his substantial wealth.

💡Tax Rate Disparity

Tax rate disparity refers to the difference in tax rates paid by different income groups. The video uses this concept to underscore the unfairness in the tax system where the wealthy, like Buffett, pay a lower rate than their secretaries, which is central to the theme of economic inequality.

💡Middle Class

The middle class is a socio-economic group that falls between the working class and the upper class. The video mentions the stagnation of middle-class income growth compared to the exponential increase in wealth for the richest, emphasizing the widening income gap.

💡Investments

Investments in the video refer to assets such as stocks and real estate that generate income and appreciate in value. They are a key source of wealth for the wealthy, like Morris, and are taxed at a lower rate, contributing to the theme of tax inequality.

💡Stock Market

The stock market is a platform where shares of publicly traded companies are bought and sold. It is highlighted in the video as a primary means for wealth accumulation among the rich, with the taxation of stock sales being a focal point of the discussion on tax fairness.

💡Stepped-Up Basis

The stepped-up basis is a tax law provision that allows the cost basis of an inherited asset to be 'stepped up' to its market value at the time of the original owner's death, potentially avoiding capital gains tax on the asset's appreciation. The video discusses this as a tax loophole exploited by the wealthy to avoid paying taxes on unrealized gains.

💡Unrealized Gains

Unrealized gains are the increases in value of an asset that have not been sold and thus not yet taxed. The video points out that the wealthy, such as Jeff Bezos, can accumulate significant wealth through unrealized gains without incurring taxes until the assets are sold.

💡Wealth Tax

A wealth tax is a levy on the total value of personal assets, including real estate, vehicles, and investments. The video suggests this as a potential solution to address wealth inequality by taxing the rich on their total wealth, not just on income or realized gains.

💡Tax Fairness

Tax fairness is the concept of a tax system that is equitable and does not disproportionately favor one economic group over another. The video's main theme revolves around the perceived unfairness in the current tax system, advocating for reforms that would require the wealthy to pay a more equitable share.

Highlights

Warren Buffett is one of the richest people in the world, thanks to Berkshire Hathaway, a holding company that owns numerous other companies and stocks.

Berkshire Hathaway's stock value has increased dramatically from $19 in 1965 to nearly half a million dollars today.

Buffett owns nearly 240,000 shares of Berkshire Hathaway, which is the primary source of his wealth.

Despite his wealth, Buffett pays a lower tax rate than his secretary due to different types of taxes paid on income and capital gains.

The disparity in after-tax income between the richest Americans and the middle class has been growing, with the richest seeing a 400% increase in the last 40 years compared to a 50% increase for the middle class.

Investments like stocks and real estate are taxed as capital gains, often at a lower rate than income taxes, leading to a tax advantage for the wealthy.

Morris, a retired Wall Street worker, advocates for higher taxes on the rich, despite being a member of the one percent.

Long-term stock investments have a maximum tax rate of just 20%, significantly lower than income tax rates for those with high earnings.

The tax system is based on taxing only when assets are sold, allowing the wealthy to accumulate wealth without immediate tax implications.

Jeff Bezos, the richest man in America, pays minimal taxes due to the valuation of his wealth in Amazon stock, which is only taxed upon sale.

Some billionaires, like Elon Musk, use loans against their stocks to live without selling and thus avoid capital gains taxes.

The 'stepped-up basis' loophole allows the wealthy to avoid capital gains taxes on inherited stocks by only taxing gains post-inheritance.

President Biden has proposed closing the 'stepped-up basis' loophole and increasing the capital gains tax rate for high earners.

Critics argue that higher capital gains taxes may discourage investment or lead to less stock selling by millionaires.

Estimates suggest that changing capital gains taxes could bring in between $200 billion to $400 billion in additional tax revenue over ten years.

The current tax system is criticized for allowing the rich to get richer while others do not see the same benefits.

Advocates suggest that changing capital gains taxes is a starting point for making the tax system more fair.

Alternatives to address wealth inequality include wealth taxes and taxes on stock market gains.

Most Americans are concerned about the wealthy not paying their fair share of taxes, indicating a need for tax system reform.

Transcripts

This is Warren Buffett, one of the richest people in the world.

Thanks to the company he runs — Berkshire Hathaway.

Basically, it’s a holding company that just owns a bunch of other companies:

Geico, Dairy Queen, a huge railroad. As well as lots of stock in other companies,

like Apple and CocaCola.

So when those companies do well and their stock goes up,

Berkshire Hathaway stock goes up.

When Buffett took over the company in 1965, a single share was worth $19.

Today it’s worth nearly a half million dollars.

Buffett owns nearly 240,000 of these shares. This is where his wealth is.

But, as he has been known for pointing out:

Warren Buffett still pays a lower tax rate than his secretary.

She pays twice the rate I pay, I think that’s outrageous.

That’s because they pay different types of taxes.

His secretary pays income taxes on her salary,

but Buffett mainly pays capital gains taxes on his sold stock.

And that’s taxed at nearly half the rate.

The wealthy are definitely undertaxed.

In the US, the disparity between the richest Americans and everyone else has been growing.

And in the last 40 years, the after-tax income of the richest has risen more than 400%,

while middle class income has only risen 50%.

The way these people make money is very different than the way these people make money.

And they’re not taxed the same.

I pay less in taxes than people that work for a living and make as much money as I do.

This is Morris. He used to work on Wall Street,

now he’s retired and lives off his many stock market investments.

I own stock in companies: Berkshire Hathaway, and Amazon, and Apple.

He’s a pretty typical one percenter.

Except that he spends his money advocating for rich people, like him, to be taxed more.

I want to live in a country filled with a middle class of people

who can all afford to shop in our businesses.

Most people have a normal job — they get a paycheck and pay income tax

— ranging from 10 to 37 percent.

But people like Morris, they make a lot of their income from investments,

generally stocks and real estate.

These investments are taxed as capital gains,

and things like long-term stock have a maximum tax rate of just 20%.

I sold some stock recently for $400,000 and my taxes on that were around $50,000.

But that $50,000 is far less tax than anyone who has a job making $400,000 a year would pay.

And most of his wealth, well, isn’t even taxable.

People like Morris — or Buffett — are worth so much money because of the stock that they hold.

But it’s not tangible, spendable, taxable money.

I can look at my stock portfolio and I can say, oh,

I made a million dollars this year. But it doesn't mean I have to pay anything in taxes

because our system is based on only paying taxes when you actually sell something.

Amazon’s Jeff Bezos — the richest man in America

thanks mostly to his Amazon stock — pays almost nothing in taxes.

We value his worth here, but it’s never taxed until it’s turned into real money

when he sells the stock, and it’s taxed as a capital gain.

This is one way billionaires are able to be technically worth so much money,

but pay so little in taxes.

Some billionaires, like Elon Musk, are able to get loans against their stocks,

and live off of that.

They don’t even need to sell the stock to turn it into spendable money.

No sale, no taxes.

The fact is, if you're a billionaire, you don't need any income.

There’s also a big loophole in capital gains taxes that the rich exploit called the "stepped-up basis."

If, hypothetically, Warren Buffett were to sell his stock,

he’d have to pay capital gains taxes based on his profit.

So the cost of the stock, minus the original investment.

But if he holds off selling his entire life, when he dies,

whoever inherits the stock, and then sells it, would only have to pay taxes

on what they earned after they inherited it.

Leaving all those original gains untaxed.

It’s part of what’s called “buy, borrow, die”, and it’s one way the richest families

avoid paying taxes.

It’s this system, and the fact that most taxable capital gains are going to the top 1%,

that lawmakers see changing the capital gains tax as an easy way to tax the rich.

President Biden has proposed closing that “stepped up” loophole and

increasing the maximum tax rate from 20% to 39.6%,

but just for people making more than a million dollars a year.

Critics argue it may discourage people from investing in the stock market,

or that current millionaires would just sell less stock.

But it would bring in more tax revenue,

from more conservative estimates of $200 billion over ten years to double that.

It would also mean Buffett would pay a closer tax rate to his secretary.

But this pile of unrealized money, still goes untaxed.

There's a lot of things we could do to make the system more fair.

We could have taxes on wealth. We could have taxes on gains in the stock market.

Most Americans are bothered that wealthy people don’t pay their fair share.

And changing capital gains taxes wouldn’t be the whole solution,

but advocates argue it’d be an easy place to start.

Our system is making the rich get richer and richer and richer and everyone else just not.