How Billionaires Pay Less In Taxes Than Average Americans

This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Welcome to the Invest Like a Billionaire podcast. I am your co-host Ben Fraser, joined by co-host Bob Fraser. And today's episode, we are going to do a short little episode here and talk about how you can use billionaire tax strategies. So we saw an article recently, um, published, and it was talking about how billionaires— surprise, surprise— don't pay as much taxes relative to how much they earn, relative to the ordinary, you know, earning Americans. So, you know, we wanted just to dive in a little bit. You know, the whole point of this podcast, Invest Like a Billionaire, is looking at what the ultra-wealthy are doing, whether that's how are they investing, you know, how are they deferring taxes, and using those strategies for our own situations and maximizing our growth and maximizing minimizing taxes that we need to pay. We're not going to get to the political aspects of should we or should we not tax billionaires more. That's an argument for another time. We really want to look here, what are they doing? These are all legal— you don't even call them loopholes.

They're perfectly legal.

Perfectly legal.

Even many of the billionaires who were questioned on this, why are you paying so little taxes? And hey, we've been saying for years that it's okay to tax us more. But this is the way the laws are set up. And it's actually, there's a reason it's set up like that too. It's not just unreasonable. Many of the articles were presenting it like, gosh, this is so horrible and it's unreasonable. But there's actually a reason why that capital gains are only taxed when realized. Because if every business had to pay capital gains on their growth, literally you put every business out of business. So it would have to be some different way of calculating tax liabilities. But anyhow, these are strategies that everyday folks can use. So let's dive in.

And I think most of us would agree we'd rather pay less taxes than more taxes. So we'll just start from there. Really, to me, what stood out in this article, and you're reading about Bezos and Musk and Steve Jobs and all these billionaires that have grown these big businesses and pay very little taxes relative to the income they're making.

According to the article, 3.4% tax rate.

Right. Which I think we'd all like to pay.

Which most middle class people pay far more than that, especially if you're in six figures, considered a wealthy earner, you're gonna be paying significantly more than that.

Yeah. And to me, like the primary differentiator here was what I will call the difference between an income statement mindset versus a balance sheet mindset. Right. And for those that aren't accountants, you know, this is very critical. Yeah. Income statement is focused on how much am I making right now in earned income and what are my expenses and then what's my net dividends, W-2 income.

You're looking at that number thinking, how am I maximizing my income? Which is normal. Most people, that's the way most people are thinking.

Yeah, they're thinking about what's my monthly budget, how much am I making at my job, and how do I maximize the delta between those two, right? And, um, you know, billionaires and the ultra-wealthy have a different mindset, and we'll call it a balance sheet mindset, right? And the balance sheet shows your assets minus your liabilities and your equity, and they're focused on buying and building assets and businesses that they can maximize the value of, they can grow, and they can grow. And so the really, really interesting thing here, you know, a lot of these, these stats, these headlines that you see about billionaires not paying much taxes, it's a little bit misleading, right? Because you alluded to it, but a lot of the, um, the income or the growth that these ultra-wealthy are experiencing is actually not true income, right? It's It's growth of value of their assets.

Right. So, so the most common example is, you know, let's say Musk with Tesla. So the Tesla stock has gone from very low value to very high value. Well, he owns a lot of stock, so the value of his stock holdings have gone up dramatically. But you don't pay taxes on that until you sell it.

Right.

And so he's focused on building his net worth or his balance sheet versus his income. And so he's not generating a lot of taxable income even though his balance sheet is steadily growing and he's becoming extremely wealthy.

Right. And one of the things I love, a lot of our listeners are probably familiar with Robert Kiyosaki and his perennial bestseller Rich Dad Poor Dad. And really the strategy that he espouses in that is maximize your earned income. To buy assets that pay you passive income to eventually replace your earned income, right? And so it's this kind of virtuous cycle to where you are using the income you're making to go and buy assets that you can, you know, get a lot of tax shelters from. You know, real estate is probably the best example of any kind of asset that you can buy and utilize the, um, you know, tax advantages of that and then get paid income and use that to buy more assets in this great cycle that, again, is focused on the balance sheet. So you're focused on buying the assets that you can maximize the value of to minimize your tax liability and maximize your earnings. I think it's a shift that needs to happen for a lot of investors. A lot of our listeners are already in that mode, but it's really, how do we use these strategies as non-billionaires? Someone may be thinking, well, I'm not Elon Musk, I'm not going to go start the next Tesla. You know, I'm not, you know, Steve Jobs.

But anybody, anybody can do this. And the other key component, so you're building, you're basically buying assets, you're building assets and you're growing these assets. But the other, the other component is you're borrowing from these assets. So, so it's amazing. Why would a Jeff Bezos or Elon Musk, why would they borrow hundreds of millions or billions of dollars when they don't need to borrow any money. And of course, banks, by the way, love to lend to people that don't need it.

Right.

And but that's, that's the issue. So, so you have this stock that's massively appreciating in value. And rather than selling the stock to, to earn your income or invest in something else, you borrow against that stock. Well, when you borrow, it actually creates a tax, a tax deduction because your interest is generally tax deductible.

Right, right.

So you get a tax deduction and because you're not selling your asset, your stock or whatever you have, you're not generating income.

Yep.

And so, so the, so the strategies they're using is basically get appreciating assets and borrow against those assets. And then, by the way, when you have a side investment that you do take a loss on, so you made a bad bet in the stock market, well then take, then sell those. and so you take realized losses. So any of your gainers, you let them run, you don't sell them. Your losers, you sell them and you take losses, which basically counts against earned income. That's the big strategy. So how can a non-billionaire take advantage of this mindset and this strategy?

Yeah, and I think to make one further point of what you said is when you leverage an asset or you borrow against an asset, whether that be real estate or even your stock portfolio or even your business, right? Borrowed monies are not taxable, right? And you also get a deduction from interest. So you can use the banks to basically help you maximize your—

to cash up.

Yeah.

To cash up without generating a tax, a tax event.

Yeah. So, so really what are assets we're talking about, right? It's in my mind, it's 3 main categories. One is starting businesses and having businesses that can grow and appreciate over time and leverage.

That's where most of the billionaires are, right? They've built a unicorn. Most people may not do that.

Most people may not, but what you can do is going back to earlier, maximizing the income that you're generating through your W-2 to then go buy assets. Those can be whether it's a stock bond portfolio in the publicly traded markets or in real estate, growing those assets like you're saying, maximizing the value over time, and using these similar tools and tactics to minimize your taxes against that. A few things just to kind of promote real estate here, which we obviously are biased and love because that's kind of what we do at Aspen Funds, but there are an amazing amount of tax shelter havens, if you want to call them, through real estate investment. Investing. And it's perfectly legal. It's, you know, those that are investing in real estate know about these, right? But it's depreciation.

I wouldn't call them tax shelters, but they're tax advantageous.

Tax advantageous and tax deferral. Um, and, you know, 1031 exchanges, which we've talked about in previous episodes, is an amazing tool to continue to defer taxes and, um, uh, you know, maximize the assets you can buy, as well as depreciation. Depreciation. And then the other one is long-term capital gains, which is not just for real estate but also for any kind of asset, including stocks, bonds. They're taxed at a lower rate, at least currently. So hopefully that doesn't change down the road. But, um, you know what, so again, the kind of final point this article made, and you know, we'll link to in the show notes so you can, you know, read it for yourself because it is some really great information. But they talk about this concept of buy, borrow, die. This is really—

That's a life mantra, right? Buy, borrow, die.

Right. So what does that mean? We've talked about it already, but you're buying assets, you borrow against those assets, you're not paying taxes when you're borrowing, and then you die. It sounds a little morbid, but the idea here is, especially in real estate where you can 1031, we've talked about before. You know, their, you know, phrase is swap till you drop, right? Where you're buying a real estate asset, increasing the value of that, you sell it for a gain. Well, you can roll your original capital plus the gain into the next deal that you're doing, completely tax-deferred. You don't have to pay any taxes when you do that if you utilize the 1031 exchange. And Effectively, you can keep growing, growing, growing, building, you know, keep compounding the growth that you're generating and just keep borrowing against it. You know, another great strategy is, you know, I'm doing it right now on my personal residence, right?

How many times have you refinanced your house?

I shouldn't admit to it, but a lot. And it's, you know, it's a great market.

So every time you refinance, you get a higher appraisal.

Yeah.

And pull money out.

So That keep doing cash-out refis.

Yeah, and you're using that money and you're investing that money.

Investing the funds, yeah.

So it's exactly what, it's the strategy. It's the billionaire strategy, right? You're not selling that house and generating cap gains.

Nope.

You're basically holding that thing, taking cash out, cheap money, and investing it in other—

Other assets. Other assets. That are going to grow beyond that. And so really the last thing we want to talk about here, I put together a little illustration. And these are all just made up numbers. So the point here is to show the difference between if you're having to pay taxes every year versus if you can defer taxes. And I think we all know what the obvious answer is gonna be, right? If over a long course of time— It's better to not pay taxes?

Is that your conclusion?

Right. But I think this might be surprising to see how dramatic the difference is. So I just did a quick little scenario here, and we have it on the screen here, and put a little, snapshot in the show notes. But basically, $100,000, you invest it for 30 years and say you can achieve a 15% annualized return, and that's very achievable in real estate if you know where to invest. Um, and then a 40% tax rate, right? So could be lower, could be higher. Um, but if you're having to pay taxes on your gains every single year, it significantly impedes your growth, right? And so over 30 years, $100,000 You know, if you're paying taxes every year, will grow to about $1.1 million, which is still great, right? It's a million bucks on a $100,000 original investment. But if you can generate the same 15% earnings and you defer taxes until the end of the 30 years, your balance is $5.1 million.

So even if you pay taxes at the end, yes, it's still cheaper if you take— pay 15 or 20% pay capital gains taxes, it's still a better result. And the issue, the reason is compounding. Because you're compounding those gains and then paying taxes. That's better than paying taxes before compounding. So you're using the gains to compound. So it's a much better way to build wealth.

Yeah. Yeah. So the other thing we've talked about in other episodes is the swap till you drop. In real estate, it's pretty incredible that many times, you know, you have your original cost basis of buying a piece of real estate and you do 1031 exchanges and swap into the next asset and keep growing over time. Well, when you die, you generally can pass on the asset to your heirs, your beneficiaries, with a stepped-up cost basis. So then taxes actually get at that point eliminated, which is just liability, tax liability, uh, from that point. And obviously, you know, going forward, you have to pay them on any future gains. But, um, anyway, so it's just, it's a different mindset. This is, you know, how the ultra wealthy are thinking is, um, your balance sheet mindset. How do I leverage the assets that I have? How do I buy more assets? How do I find appreciating assets? And how do I minimize, you know, my taxes so that I can compound down the road and maximize investment growth? So, pretty simple concepts, but they're things that most Americans are not doing.

And if people do this, they're going to multiply wealth way more effectively than if they don't. And I love that way of describing it as having a balance sheet growth mindset versus an income statement growth mindset. So, focus on building your net worth, not just your income, and use debt. And it's interesting how much debt has— so many people that have read this get out of debt type realities. And debt is an incredible tool that is a wealth creation tool that people— so, people who are afraid of debt well, never going to do this strategy.

No. And I think, you know, for all of the positive things that Dave Ramsey has done for some, you know, investors to help them get out of debt and get on a good budget, he's done, I think, at least equal if not greater damage to a lot of investors' mindsets because they have this unhealthy fear of debt.

And have you ever met an ultra-high net worth who was a Dave Ramsey follower?

No, no. And it's, you know, I have friends that are making hundreds of thousands, millions of dollars a year in earned income and they don't know what to do. And they're like, well, I think I'll just, I'll just pay off my house.

Right.

That's it.

Which is the cheapest debt. It's actually, it's actually cheaper than the inflation rate. It's like, it's basically free money.

Yeah. Yeah. With your interest rate deduction and everything, it's, it's, it's just crazy that that would even be like the primary thing is they don't know what to do and they just think, well, that's, that's the ultimate —when you look at most millionaires, they are maximizing debt. They're not using unhealthy debt. They're not using unsecured credit card debt. They're doing it wisely, but they're using leverage in really helpful ways to maximize growth.

I would argue that all wealth, all true wealth has been created by OPM, other people's money. And debt is a key component of that. And people who are afraid of debt, they say, "Hey, debt can burn your house down." you know, and it can, you know. So I say, yeah, debt is like fire, right? It can burn your house down. It can also cook a great steak, you know. And, and I've managed to cook steak all my life without burning my house down, you know. And so, you know, just if there's any, any fear, fear of debt, you know, you know, let's jettison that thing because, yes, you know, true, truly, the high net worth people, ultra wealthy, are not afraid at all debt, right? But they know how to manage it. Yes. And be, you know, and it's, it's an incredible tool. Yeah. Of wealth creation.

So hopefully you guys got some little nuggets out of this, and we're gonna link to the article. You know, pretty, pretty fun stuff. And, um, you know, stay tuned for future episodes, and we'll do little short snippets here and there on kind of fun topics, um, that are kind of related to this podcast. So thanks for joining, and hope to, uh, hear you or see you on different episodes in the future.

See you next time.