How Do Rich People Avoid Paying Taxes?

Some of the wealthiest people in the world pay little or nothing in taxes. You’ve probably heard that before, but is it actually true? How do rich people avoid paying taxes? This honest guide explains the legal methods, who pays what, and what it means for the rest of us.

Quick summary

• Some billionaires legally pay little or no income tax by relying on investment income, asset borrowing, and business structures
• The U.S. tax code heavily favors wealth over wages, creating massive disparities in who pays what
• While the system is unfair, smart planning and investing can still help everyday people build long-term financial independence

How do rich people avoid paying taxes?

Yes, some rich people really do avoid most or all of their income taxes, and they do it legally. This happens because the U.S. tax system rewards wealth, not work. Most ultra-wealthy individuals don’t live on a paycheck like you or me. Instead, they make their money from stocks, real estate, and businesses. These forms of income are often taxed at lower rates or not taxed at all until they’re sold. And even then, there are ways to defer or reduce the tax owed.

For example, Jeff Bezos, Elon Musk, and Warren Buffett have all been reported to pay little to nothing in federal income taxes in certain years. That’s not fraud. It’s a result of how the system is designed. Instead of taking taxable salaries, they often borrow against their assets, which gives them access to money without triggering a taxable event. If they don’t sell their stock or report ordinary income, there’s often nothing to tax.

To make it concrete, imagine a man named Chris who owns $50 million in stock in a company he founded. Rather than sell shares and pay capital gains tax, he takes out a $2 million loan against those shares at a low interest rate. Because a loan isn’t income, he doesn’t owe taxes on it. Meanwhile, someone like Carla, a nurse making $75,000 a year, has taxes withheld from every paycheck and may pay over 20% of her total income in federal, state, and payroll taxes combined.

This is the core of how the rich avoid taxes. They structure their lives so their wealth grows but doesn’t get taxed. And it’s all allowed under current law. Never sell. Never realize gains. Just borrow, live large, and defer forever. It’s a cycle of borrowing against their appreciating assets.

Why it’s legal (and who made it that way)

None of this is a loophole in the sense of being accidental. These strategies exist because the U.S. tax code was written, and continues to be shaped, by lawmakers who often have ties to the financial and business world. The system actively encourages investment and entrepreneurship through tax advantages, which is part of a long-standing economic philosophy that views these activities as engines of growth.

Capital gains, for example, are taxed at a lower rate than regular income because they’re considered long-term contributions to the economy. Real estate investors can claim depreciation, even if their property increases in value, because the law allows it. Business owners can write off travel, meals, home offices, and other expenses. All of this reduces their taxable income, sometimes dramatically.

Take another fictional example. Melissa, a digital marketing consultant, creates an LLC and bills her clients through it. She earns $120,000 a year, but after writing off her internet, travel, part of her rent, and other business-related expenses, she only shows $70,000 in taxable income. She’s still earning good money, but she’s paying less in taxes than a W-2 employee at the same income level.

The IRS’s job isn’t to decide what’s fair. It’s to enforce the tax code Congress writes. And that code is full of options for those with the right knowledge, advisors, and financial setup.

But is it fair? (And should it be legal?)

That depends on who you ask. I’ve definitely felt frustrated knowing that billionaires with private jets and multiple homes often pay a smaller percentage of their income in taxes than someone working two jobs just to survive. And the data backs it up.

The top 25 wealthiest Americans saw their wealth increase by $401 billion between 2014 and 2018, yet paid a true tax rate of only 3.4%, according to ProPublica. Meanwhile, working-class people may pay 10% in federal taxes, another 7.65% in payroll taxes, and state taxes on top of that.

There are real debates about whether the current laws should change. Some lawmakers support the idea of a “billionaire minimum tax,” which would ensure that those with extreme wealth pay something, even if they avoid income in the traditional sense. Others argue that higher taxes on the rich would discourage innovation or hurt investment.

But fairness isn’t just about numbers. It’s about whether the system reflects the values of the country. Right now, it’s clear many people believe it doesn’t.

Who actually pays the most in taxes?

It might surprise you to know that people earning the least sometimes pay the highest percentage of their income in taxes, especially when you include payroll taxes, sales taxes, and other flat costs. Low-income workers often can’t deduct anything, can’t defer income, and don’t benefit from capital gains rates.

Person	Income Source	Income	Effective Tax Rate
Jasmine (Retail Worker)	W-2 Salary	$35,000	18%
Anthony (Small Biz Owner)	LLC Income	$95,000	12%
“Mr. X” (Tech Founder)	Unrealized Stock Gains	$2 Billion (net worth)	<1%

In this system, Jasmine may struggle to pay rent while someone with billions in unrealized wealth can legally avoid paying anything at all.

Why the rich keep getting richer (and what politicians are doing about it)

The advantage of wealth is that it can grow without being taxed. If you don’t need to sell your investments, you can just sit back and let your money work for you. You can use that wealth as collateral to get low-interest loans, defer capital gains taxes indefinitely, and pass on your assets with favorable estate tax treatment.

Some politicians are pushing to change this. Proposals have included taxing unrealized gains, closing the carried interest loophole used by hedge funds, and raising the top marginal tax rate. But these efforts often meet resistance from powerful interest groups and a political system influenced by donors.

There’s also the risk of things going in the opposite direction. Certain tax policy proposals would actually reduce taxes on the wealthy further, especially on inherited wealth and investment income, while cutting public services that lower-income families rely on.

The system isn’t broken. It’s just working exactly as it was designed to, for those it was designed to benefit.

What regular people can do (even in this system)

The system may not be fair, but that doesn’t mean you’re powerless. You can’t borrow against stock you don’t have or write off a private jet, but you can still take advantage of smart strategies that mimic what the rich are doing on a smaller scale.

Here are a few legal, accessible tax strategies:

• Use Roth or Traditional IRAs to reduce or defer taxes on investment growth
• Start a side hustle or LLC and deduct eligible expenses
• Invest long-term to take advantage of capital gains treatment
• Use tax-loss harvesting if you have a taxable investment account

Someone earning $55,000 a year, living modestly, and investing $400 a month could build a six-figure portfolio within 15 years. That portfolio can start generating income, open doors to new opportunities, and give them a real shot at financial independence… even if the playing field isn’t level.

What it all comes down to

Some of the wealthiest people in America really do avoid paying income taxes, not because they’re breaking the law, but because they’re using it exactly as it was written. The rest of us pay more, work harder, and have fewer options. And yes, it’s frustrating.

But while you may not be able to change the system overnight, you can still learn how to make it work better for you. With the right habits, a long-term plan, and a bit of creativity, financial freedom is still possible… even in a system that wasn’t built for you.