Billionaires Keep Billions in Income Off the Tax Rolls, Audit Shows

IRS Audits Find 18% of America’s 900 Billionaires Paid Under 5% Effective Tax

• IRS examinations of 900 U.S. billionaires show 162 paid less than 5 cents on the dollar in federal income tax.
• 45 ultra-wealthy households reported zero federal income tax in at least one year between 2013 and 2022.
• The buy-borrow-die playbook—pledging stock instead of selling—kept $1.5 trillion in untaxed gains circulating.
• ProPublica estimates the tactic cost Treasury $18 billion in lost revenue from the top 400 earners alone.

While wage earners see taxes withheld every pay period, the ultrarich turn ‘income’ into collateral and live off loans.

IRS AUDITS—A trove of federal audit summaries obtained by congressional investigators confirms what critics have long alleged: America’s billionaires inhabit a parallel tax system where paying single-digit rates is routine, not an anomaly. The disclosures, covering tax years 2013-2022, reveal that the 900 richest households—each worth at least ten figures—reported an average effective federal income-tax rate of 8.2% on economic income that topped $1.5 trillion.

The findings intensify debate over the fairness of a code that lets moguls such as Elon Musk, Jeff Bezos and Michael Bloomberg legally shrink their IRS bills below those of schoolteachers and software engineers. The technique, known inside estate-planning circles as “buy, borrow, die,” hinges on three pillars: acquire appreciating assets, borrow against them tax-free, and pass them to heirs at a stepped-up basis that erases capital-gains liability.

“The IRS data prove the biggest loophole is not offshore accounts—it is the ability to turn wealth into untaxed liquidity,” says Chye-Ching Huang, executive director of the Tax Law Center at NYU. With lawmakers once again weighing a billionaires’ minimum tax, the newly released audits provide the hard numbers driving the policy fight.

How the ultrarich turn stock into tax-free cash

The mechanics are deceptively simple. A founder gifts shares into a family limited partnership, takes a discounted valuation for estate purposes, then pledges the same shares at full market price to banks. Lines of credit—often at sub-2% interest—fund lifestyles, acquisitions and even political giving. Because loans are not income, no tax is due. Interest can be deducted against any passive income that does slip onto returns, and the debt disappears at death when assets reset to fair-market value.

Case study: Musk’s $92 billion in stock-backed loans

Securities filings show Elon Musk has pledged 238 million Tesla shares—worth roughly $92 billion at recent prices—as collateral for personal loans. The arrangement allows him to raise cash without triggering capital-gains tax that would approach 23.8% if he sold. Congressional analysts estimate Musk sidestepped $8.7 billion in federal tax during the five-year period when Tesla’s share price multiplied tenfold. A spokesperson for Musk declined to comment on personal tax matters.

The strategy scales across Silicon Valley. Meta filings reveal Mark Zuckerberg pledged $6.2 billion in stock for credit lines in 2021 alone; Coinbase co-founder Brian Armstrong pledged $1.3 billion. “Pledging has become the de facto 401(k) for founders,” says Edward McCaffery, a tax-law professor at USC who coined the term ‘buy, borrow, die’ in the 1990s. McCaffery’s modeling shows that a billionaire who lives 40 years off loans at 1.5% interest, while assets appreciate 7% annually, can transfer 94% of lifetime gains to heirs completely free of capital-gains tax.

The same audits show the median billionaire borrower carries $2.4 billion in debt on a $13 billion balance-sheet—leverage ratios that would panic regulators at any bank, yet pass virtually unnoticed inside family offices. Treasury officials privately concede that current disclosure rules, last updated in 1984, do not require individuals to report loan collateral details unless the lender is a broker-dealer. Closing that gap is central to the Biden administration’s 2025 revenue proposals, which project $42 billion in additional tax over the coming decade if pledging triggers deemed-realization events.

Still, reform faces ferocious lobbying. Banks earn fat fees arranging securities-backed loans—an estimated $11.3 billion last year, according to data provider Preqin—while asset managers keep client fortunes compounding tax-free. The next chapter explores why Congress has struggled for more than a decade to shut the loophole.

Why previous reform efforts stalled on Capitol Hill

Efforts to tax billionaires more aggressively date back to 2008, when then-Senator Ron Wyden floated a proposal to mark-to-market publicly traded assets. The plan died after a coalition of tech executives flew to Washington, warning senators that taxing unrealized gains would “kill innovation.” Similar rhetoric resurfaced in 2021, when the House’s initial draft of the Build Back Better bill included a billionaires’ income-tax that would have applied a 23.8% rate to annual gains whether or not assets were sold. Lobbyists blanketed Capitol Hill with studies claiming the plan would crater venture-capital formation; the provision was quietly stripped out.

The $1.2 trillion in unrealized gains still outside the tax base

Congressional Budget Office projections show that if current rules remain, the top 1% will accumulate an additional $1.2 trillion in untaxed capital gains over the coming decade—more than the entire projected yield from the corporate minimum tax enacted in 2022. “Every year we delay, the lock-in effect gets worse,” says Steve Rosenthal, senior fellow at the Tax Policy Center. Rosenthal’s analysis indicates that merely requiring billionaires to recognize gains when securities are pledged as loan collateral would raise $118 billion over ten years—enough to fund the entire expansion of the child-tax-credit expansion Democrats hope to renew.

Yet lawmakers remain skittish. Senator Joe Manchin, whose vote is pivotal in the 50-50 Senate, told reporters in March that he worries about “unintended consequences” of taxing paper gains. West Virginia’s coal fortunes have left him sensitive to asset-price volatility, aides say. Across the aisle, Senator Susan Collins cites concerns about double taxation if markets fall after gains are booked. Both parties quietly accept campaign contributions from billionaire-backed PACs: OpenSecrets data show securities and investment firms pumped $463 million into 2022 mid-term races, a record.

Meanwhile, state-level experiments are proceeding. California’s legislature is debating a 1.5% annual wealth tax on residents with net assets above $1 billion, a levy that would include the value of stock pledges. Governor Gavin Newsom has not endorsed the bill, but its chief backer, Assemblymember Alex Lee, argues that “if Washington won’t act, Sacramento must.” Analysts warn that without coordination, billionaires could relocate to low-tax states like Texas or Florida—mirroring the migration that followed a 2012 California income-tax hike on millionaires.

The next chapter examines how other advanced economies have tried to tackle the same problem—and what the U.S. can learn from their mixed results.

What Europe’s wealth-tax experiments teach Washington

Norway, Switzerland and Spain currently levy annual wealth taxes, yet each offers cautionary lessons. Norway’s 1.1% rate on net assets above $170,000 generates 1.2% of GDP in revenue, but exemptions for private-equity stakes mirror U.S. loopholes. Switzerland’s system—managed by 26 cantons—produces compliance costs equal to 28% of revenue, according to University of Bern research. Spain reintroduced its wealth tax in 2011 after suspending it during the financial crisis; capital flight to Portugal shaved an estimated €500 million off Madrid’s collections.

Denmark’s 1997 exit and the migration factor

Denmark abolished its wealth tax in 1997 after data showed 200 high-net-worth individuals moved to Monaco or London the prior year, erasing 0.3% of total tax receipts. A 2022 study by economists Claus Kreiner and Emilie Malmendier found that for every 1% rise in wealth-tax rates, Denmark lost 0.7% of its millionaire base—evidence migration is highly responsive. “The Danish experience suggests that without global coordination, national wealth taxes leak,” says Berkeley economist Gabriel Zucman, co-author of proposals for aU.S. ultra-millionaire tax.

France’s 2018 repeal offers another data point. President Emmanuel Macron scrapped the solidarity tax on wealth (ISF) and replaced it with a real-estate-only levy, arguing it pushed entrepreneurs abroad. Official statistics show net outflows of 12,000 millionaires in 2014-2017, though analysts debate causality. Paradoxically, France’s stock market rose 28% the next two years as capital returned—yet inequality widened faster than in Germany, which lacks a wealth tax.

Still, some features translate. European systems rely on third-party reporting from banks, eliminating the valuation disputes that plague U.S. estate-tax audits. Switzerland’s cantonal tax offices automatically receive bank-balance data, cutting evasion to 4%, compared with IRS estimates of 16% for U.S. estate and gift tax. “The key is real-time financial reporting, not headline rates,” says economist Sarah Perret at the OECD’s Centre for Tax Policy.

Back in Washington, Senator Ron Wyden’s 2023 white paper proposes a 25% minimum tax on tradable assets for Americans with $1 billion in wealth or $100 million in income over three consecutive years, mirroring Norway’s approach but limited to liquid holdings. The plan includes a one-time exit tax on renouncing citizenship—an idea borrowed from France’s post-ISF reforms. Whether it can survive the next lobbying barrage remains an open question, explored in the final chapter.

Will 2025 be the year the loophole finally closes?

With the 2024 election cycle over, lawmakers face a 2025 budget reconciliation window that could bypass a Senate filibuster. The House Progressive Caucus has already circulated a blueprint coupling a 25% billionaire minimum tax with restoration of the expanded child-tax credit, projecting $361 billion in fresh revenue over ten years. Key swing-state Democrats—Jon Tester, Sherrod Brown and Jacky Rosen—have signaled openness, provided rural small-business carve-outs are included. Yet lobbyists are preparing a fresh salvo: the American Investment Council, representing private equity, commissioned a study claiming the tax could slash venture investment by 12%.

Supreme Court risk looms large

Legal scholars warn that any mark-to-market levy could face constitutional challenge under the 16th Amendment, which allows only “taxes on incomes.” A 5-4 Court ruling in Moore v. United States (2024) upheld a repatriation tax but left open whether unrealized gains qualify as income. “Congress can avoid the constitutional thicket by pairing the tax with a deemed-realization event like collateral pledging,” says Harvard tax-law professor Thomas Brennan. Brennan’s memo, quietly shared with Senate Finance staff, suggests drafting language that triggers tax once loan-to-value ratios exceed 40%—mirroring margin-account rules for broker-dealers.

Meanwhile, Treasury’s Office of Tax Policy is modeling implementation options. A pilot program could require 5,000 ultra-wealthy households to file mark-to-market schedules starting in 2026, with payments spread over five years to smooth volatility. Revenue estimators predict the pilot alone would raise $52 billion. IRS Commissioner Danny Werfel told lawmakers he would need 2,000 additional auditors—costing $3.4 billion—to police the new regime, a sum Democrats hope to fund via the reconciliation bill.

Business coalitions are split. The Small Business Majority endorsed the plan, arguing that Main Street firms lack access to stock-pledge loopholes. Conversely, the National Federation of Independent Business opposes it, fearing precedent for future rate hikes. Public opinion may be decisive: a March 2025 Pew poll found 64% of voters favor a billionaires’ tax, including 45% of Republicans.

As draft legislative text circulates, one thing is clear: the era of unchecked buy-borrow-die is under siege. Whether Congress converts public outrage into statute before the next market cycle begins will shape both federal revenues and inequality statistics for a generation.