The math doesn’t add up. Billionaires watch their wealth grow by billions annually, yet many pay lower tax rates than middle-class workers. Some years, they pay nothing at all in federal income taxes.
So I asked ChatGPT to explain how this actually works. The answer wasn’t about illegal tax evasion or secret offshore accounts. It’s simpler than that — and completely legal.
The System Taxes Income, Not Wealth
Here’s the foundation of everything: the U.S. tax code taxes income, not wealth. Billionaires don’t earn traditional income the way most people do. They don’t collect paychecks.
Their wealth grows through asset appreciation — stocks, real estate, businesses — that isn’t taxed until they sell. That one fact unlocks the entire strategy.
Find Out: If Wealth Was Evenly Distributed Across America, How Much Money Would Every Person Have?
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Buy, Borrow, Die: The Core Strategy
ChatGPT said the rich use what’s known as the “buy, borrow, die” strategy, a term coined by Professor Edward McCaffery in the 1990s. It’s exactly what it sounds like.
First, billionaires buy appreciating assets like stocks or real estate. These assets grow in value over time without triggering any tax liability.
Second, instead of selling assets and paying capital gains tax, they borrow against those assets. Banks will lend them 70 to 90% of their portfolio’s value using stocks, bonds or real estate as collateral.
Here’s why that matters. Borrowed money isn’t taxable income. A billionaire can take out a loan for $100 million, live off that cash and never pay a cent of income tax on it.
Third, they die. When billionaires pass assets to heirs, those assets get a “step-up in basis.” That means the IRS erases all prior capital gains. The heirs receive the assets at current market value and owe no taxes on decades of growth.
Capital Gains Tax vs. Income Tax
When billionaires do sell assets, they pay capital gains tax, not income tax. The difference is huge.
Most Americans pay federal income tax rates ranging from 10% to 37% on wages. Billionaires selling long-term investments pay capital gains tax at 0%, 15% or 20% depending on income.
Warren Buffett famously pointed out that he pays a lower tax rate than his secretary for exactly this reason. Wages get taxed at up to 37%. Investment profits get taxed at 20% maximum.
And remember, that’s only if they sell. Most of the time, they don’t.
Real Estate Depreciation Wipes Out Income
Real estate investors use depreciation to eliminate taxable income on paper. Even if a property generates cash flow and appreciates in value, depreciation deductions can show a loss that offsets other income.
ChatGPT said that many billionaires reduce their taxable income to zero legally through business losses, operating costs and depreciation.
Charitable Foundations as Tax Shelters
Billionaire-run foundations aren’t just about philanthropy. They’re also a tax strategy.
When billionaires donate appreciated stock to their own foundations, they avoid capital gains tax on the growth and get an income tax deduction for the donation. The foundation grows tax-free and the billionaire often maintains control over how the money gets spent.
This is why nearly every billionaire has a foundation.
Low-Tax States Save Millions
Most billionaires live in states with no income tax: Florida, Texas, Nevada, Wyoming or Washington. For someone earning hundreds of millions annually, that difference saves tens of millions in state taxes.
It’s not complicated. Pick the right state and keep more money.
The Numbers Tell the Story
In 2021, ProPublica analyzed tax records and found that the 25 richest Americans paid an average true tax rate of just 3.4%. Meanwhile, the average American household pays around 14% in federal taxes.
This isn’t illegal. It’s the system working exactly as designed.
Research from Yale’s Budget Lab confirmed that borrowing against assets is a well-documented tax planning strategy used by wealthy Americans to pay low tax rates on consumed income.
Why This Matters
ChatGPT made it clear that billionaires aren’t breaking laws. They’re using a tax code that treats wealth fundamentally differently than wages.
The ultra-wealthy can choose when, how or if they ever take taxable income. Most workers can’t. Your paycheck gets taxed immediately. Their wealth grows untaxed indefinitely.
This isn’t about demonizing success. It’s about understanding why someone worth $200 billion might pay a lower effective tax rate than a teacher or nurse.
The system was built this way. And until the rules change, billionaires will keep using it.
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This article originally appeared on GOBankingRates.com: I Asked ChatGPT How Billionaires Pay Hardly Any Taxes — Here’s What It Revealed
