How the Ultra-Rich Pay Less Taxes: Buffett, Bezos, and the Capital Gains Loophole

Warren Buffett and Berkshire Hathaway

Warren Buffett, one of the richest people in the world, built his fortune through Berkshire Hathaway, a holding company that owns businesses like Geico, Dairy Queen, and a major railroad, as well as shares in companies like Apple and Coca-Cola. When these businesses perform well, the value of Berkshire Hathaway shares rises.

Since taking over in 1965, Buffett’s shares have skyrocketed from $19 to nearly $500,000 per share. He owns roughly 240,000 shares — the foundation of his wealth. Yet, he famously pays a lower tax rate than his secretary because he is taxed on capital gains, which are significantly lower than income taxes.

The Growing Wealth Gap

Over the last 40 years, the after-tax income of the wealthiest Americans has grown more than 400%, while middle-class incomes have increased only about 50%. The rich earn money differently and are taxed differently. While most people pay income tax on their salaries, the ultra-wealthy earn through investments like stocks and real estate, taxed at much lower capital gains rates.

Capital Gains vs. Income Taxes

Morris, a retired Wall Street professional, earns most of his money from stock investments. He recently sold $400,000 worth of shares and paid only about $50,000 in taxes — far less than a typical worker earning the same amount. Much of his wealth, like Buffett’s, remains untaxed until stocks are sold. Billionaires like Jeff Bezos or Elon Musk can even borrow against their holdings, living off their wealth without selling a single share, avoiding taxes entirely.

The “Buy, Borrow, Die” Strategy

One major loophole is the “stepped-up basis.” If a billionaire holds stock until death, heirs only pay taxes on gains earned after inheritance, leaving all earlier profits untaxed. This system, often called “buy, borrow, die,” is a key way the ultra-rich avoid paying taxes on enormous wealth.

Proposed Changes and Tax Reform

Lawmakers, including President Biden, have proposed closing the stepped-up loophole and raising the top capital gains rate from 20% to 39.6% for incomes over $1 million. Critics worry this could discourage stock investments, but it could generate hundreds of billions in revenue and bring wealthy tax rates closer to those of ordinary workers.

The Takeaway

Our current tax system favors the richest Americans, allowing them to grow wealthier while the majority of people see modest income growth. While changing capital gains taxes will not solve all inequality, it is widely seen as a practical first step toward a fairer system.