Why Billionaires May Pay 20% Less Income Tax Than the Average American: The 'Buy, Borrow, Die' Strategy Explained

While the average American family relies on a taxed salary and faces annual brackets climbing as high as 37 per cent, the nation's wealthiest individuals have mastered a sophisticated financial architecture that keeps their effective tax burden remarkably low.

Recent research published by the National Bureau of Economic Research, spearheaded by economists at the University of California, Berkeley, reveals that the top 400 wealthiest Americans paid an average effective tax rate of approximately 24 per cent between 2018 and 2020.

This stands in stark contrast to the 30 per cent average rate often cited for the broader US population. The findings highlight a structural imbalance where the ultra-wealthy derive their economic power not from traditional wages, but from the massive appreciation of capital assets that often escape individual income taxation entirely.

By utilising legal deferral strategies, these individuals effectively shelter a substantial portion of their true economic income, ensuring their contribution to government revenue remains proportionally lower than that of top labour income earners.

For instance, a billionaire can sell a property and use the proceeds to purchase another property through a 1031 exchange to defer real estate taxes. Many billionaires, such as Jeff Bezos and Mark Zuckerberg, are also moving to Florida from California to avoid a proposed wealth tax in the Golden State.

The 'Buy, Borrow, Die' Playbook

The core of this wealth preservation framework is the 'Buy, Borrow, Die' strategy, a three-step financial playbook that allows billionaires to live lavishly while their taxable income remains perpetually low.

First, the wealthy focus on the 'Buy' phase, where they aggressively accumulate assets that offer high-growth potential, such as private equity, startup shares, and publicly traded equities. Unlike wages, which are taxed immediately upon receipt, the appreciation of these assets remains unrealised as long as they are held, meaning the owner owes nothing to the IRS. When these individuals need liquidity for lifestyle expenses or new ventures, they enter the 'Borrow' phase. Rather than selling their assets and triggering capital gains tax, they secure low-interest loans using their massive portfolios as collateral. Because loan proceeds are not considered taxable income, they can access millions in cash without triggering a taxable event.

The Inheritance Loophole

The final, and perhaps most controversial, component of this cycle is the 'Die' phase. Under current US tax law, when an asset holder passes away, the assets in their estate receive a 'step-up in basis.' This pivotal rule resets the cost basis of inherited assets to their fair market value on the date of the original owner's death, effectively wiping out the accumulated capital gains built up over decades. Consequently, heirs can sell these inherited assets to pay off any outstanding loans and retain the remaining wealth, often without having paid a single dollar in capital gains tax on the appreciation that occurred during the original owner's lifetime. This framework creates a perpetual tax advantage that is fundamentally unavailable to the average household, whose net worth is often significantly affected by existing debt.

Common People Pay Up to 37% in Taxes

The majority of ordinary Americans rely on hourly wages or salaries to run their households. However, that money is taxed at increasing rates, ranging from 10% to 37%, depending on their income level. Overall, working Americans are paying a higher share of their earnings toward federal income tax, along with payroll taxes and state and local taxes.

Imagine that you earn $110,000 annually and file taxes jointly; your taxable income comes down to $78,500 after a $31,500 standard deduction for 2025. The first $23,850 is taxed at a 10% rate, while the remaining $54,650 is taxed at $12 for a total tax bill of $8,943, or an effective tax rate of 8.13.%

According to ProPublica estimates, the top 25 billionaires in the world leveraged tax strategies to pay an effective tax rate of only 3.4% between 2014 and 2018, even as their wealth jumped by over $400 billion during the same period.

Billionaires use equities as collateral for loans, which are not taxable income, and they might also be able to deduct the interest payments from their annual taxable liability.

'They acquire their assets, they borrow money to sustain their lifestyle, and then they die without ever paying any tax,' Berkeley professor Brian Galle said in a recent podcast.

The professor added that the median American household has a zero net worth because it could have some assets but also considerable outstanding debts.

'So we're talking about billionaires paying a 20% lower tax rate than a household with a net worth of zero. That's obviously not a fair or progressive tax system... Recent news stories reported that many of America's wealthiest individuals, such as Jeff Bezos, have reported taxable incomes lower than those of the IRS agents who audit them,' Galle said.

While the tax strategies used by wealthy people are legal, they could be difficult for a typical US household to replicate. As the gap between the ultra-rich and the rest of the country continues to widen, the 'Buy, Borrow, Die' strategy has moved from a niche financial strategy to a focal point of intense national debate, challenging the foundational premise that the American tax system is effectively progressive for all citizens.