Our tax code pits our money against your sweat, and as things currently stand, it’s crowned our money as the winner.
We talk all the time about how rich people like us pay lower tax rates than working people. We’ve trotted out the same statistics on the subject so many times that we can probably recite them in our sleep:
- Between 2014 and 2018, the richest 25 billionaires paid an average effective federal income tax rate of just 3.4% on over $400 billion in gains.
- Between 2010 and 2018, the richest 400 billionaire families paid an average tax rate of just 8.2% on their income.
- Meanwhile, in 2022, the average American paid a 14.5% federal income tax rate.
There are myriad ways that the wealthy manage to shrink their tax liabilities on their incomes. But one of the most basic, bread-and-butter ways they grow their income is through investments, which are taxed at a lower rate than the wages and salaries most Americans earn through their labor.
For this week’s Closer Look, we’d like to fully explain this process and how it is one of the most unjustifiable parts of our tax code. We’ll also explain how the wealthy are not just rich “on paper” and how they sometimes avoid income tax entirely by using a loophole called the stepped-up basis. Finally, we’ll close by giving you a hint about how we plan to be part of the solution to close these unnecessary tax breaks and make our tax system more equitable. Think of today’s Closer Look as “part 1,” with “part 2” coming tomorrow.
Our money vs. your sweat
While the majority of Americans make their money through their own labor – whether as a home health aide, retail salesperson, or fast food worker (i.e. the top three occupations in the US) – rich people make their money off their investments in assets like stocks, bonds, real estate, art, and jewelry. More specifically, they make their money through capital gains, which are the increase in value of assets over their original purchase price.
For example, if a certain billionaire-turned-president bought stock in Trump Media & Technology Group for $10 million and then sold it for $50 million a few years later, he would have a capital gain of $40 million, which would be subject to income tax in the same way that the weekly wages that most Americans receive are.
While a record high of 58% of American households own stock today, 93% of them are owned by the wealthiest 10%. Similarly, in 2022, the top 1% of households in America reported 39% of all “realized” capital gains, which is a fancy way of saying they earned income by selling assets that increased in value. Meanwhile, in that same year, the bottom 80% reported just 6% of all realized capital gains.
This makes a big difference come Tax Day because capital gains income is taxed at a much lower rate than traditional labor income. Under our current tax code, the top marginal rate for labor income is 37% but only 20% for long-term capital gains, i.e. assets held for over a year and then sold. In fact, a 0% tax rate—that’s right, 0%—applies to capital income up to $96,700 for married couples, while the ordinary income tax starts at a 10% rate for earnings $23,850 or less. In the end, no less than 75% of the benefits of this reduced rate on capital income flows to households in the top 1%.
Here’s what this means in practice. Investors like many of us can sit on the beach drinking a cocktail, press a button on our E*TRADE account on our phone to sell stock, and pay less tax than a nurse working an overnight shift in the ER, a UPS driver risking heatstroke to deliver packages, or a school teacher who just spent $895 out-of-pocket to supply their new classroom.
It’s worth noting that another big way that the tax code privileges capital income over labor income is the fact that assets are only taxed if and when investors decide to sell them, i.e. when they are “realized.” We’ve spoken about this before, and will be sure to do so again in the near future.
In the meantime, to learn more, check out our “Tax the Rich! Save America” roadshow presentation below, where our President and Chair, Erica Payne and Morris Pearl, compare and contrast two fictitious couples to highlight this inequity in our nation’s tax code.
Investors don’t need tax breaks
(This section is lightly edited from our Closer Look from July 9, 2025.)
Politicians and pundits from all sides of the political spectrum like to say that investors like us need lower tax rates on our investment income as incentives to invest, create jobs, and grow the economy. That’s total nonsense, and we’ll explain why.
If you have $1 million and you’re deciding what to do with it, you have two broad options:
1. Keep the $1 million under your mattress in cash. At the end of the year, you’d pay no taxes and have kept your $1 million.
2. Invest the $1 million and make more money. Even if the top marginal tax rate on capital gains rose to 99%, you’d still have more than what you started with.
If you’re business-minded like us, the obvious choice is #2. Making more money than you have now—even if by slim margins because of high taxes—is an incentive in and of itself. You don’t need lower tax rates as an incentive to do something that is already, by its nature, an incentive. We don’t know for sure, but we also highly doubt that most people even know about the lower tax rates on capital income when they decide to start investing.
Research findings support this fundamental idea. A 2024 study from American University that analyzed former President Biden’s proposal to raise the top capital gains rate to 39.6% (to equal that of labor income) found that it would actually increase economic growth, in addition to lowering income and wealth inequality. Decades of historical evidence has also shown that capital gains tax increases typically coincide with strong stock market performance.
“Buy, borrow, die” and the stepped-up basis
Occasionally, you’ll hear some members of our class cry that they’re only wealthy “on paper” so they shouldn’t be taxed as much as everyone else. That’s another whopper that needs and deserves to be fully shut down.
Even though most of the ultra-wealthy’s fortunes are tied up in illiquid assets like stocks, bonds, and real estate properties, that doesn’t mean that they can’t use them to fund their fancy lifestyles. They use a strategy called “buy, borrow, die” to do it, while also avoiding tax. It works like this:
- Buy – Millionaires and billionaires buy up assets that appreciate in value over time.
- Borrow – The rich have to have some liquid cash to fund their extravagant lifestyles, but they don’t do it by selling their assets. They simply use their assets as collateral to secure low-interest loans, which are not taxed as income.
- Die – Eventually, the rich do have to sell off some of their assets to pay back their loans. But often, they die before doing so, and the task is left to their heirs. But even they get tax savings. Thanks to the “stepped-up basis” loophole, when assets are transferred to heirs, any value gains that they accrued over the course of a decedent’s life are wiped clean and not subject to capital gains taxes. Heirs can then pay off outstanding loans by selling those assets without paying tax.
To see an example of how the stepped-up basis works, check out the “Tax the Rich! Save America” roadshow video above at the 8:00 mark.
It’s bad enough that wealthy investors get to pay lower tax rates on their earnings than working people do on theirs. But it’s beyond the pale that they have the opportunity to actually pay no tax at all thanks to the stepped-up basis loophole.
Conclusion
If you’ve scrolled through the news lately, you’ve probably picked up on the fact that our democracy is under attack with Donald Trump in the White House.
In a 2018 speech, former President Barack Obama had the following to say about Trump: “It did not start with Donald Trump. He is a symptom, not the cause.” He was right then, and he’s right now. An authoritarian like Trump in the White House is the inevitable result of decades of out-of-control inequality – and the failure on the part of lawmakers to stop it by making millionaires and billionaires finally pay what they owe the country in taxes.
As we said, there are myriad ways that the wealthy avoid paying their fair share of taxes on their incomes, so naturally, there are a lot of things lawmakers can do to fix our nation’s inequality crisis. But one of the simplest, easiest, and most no-brainer ways to do this would be to tax investment income at the same rate as ordinary labor income. Closing the stepped-up basis loophole would also go a long way to ensure that the rich can’t avoid income tax entirely.
Money is money is money is money. A dollar earned by pressing a button on a phone to sell stock is the same dollar that a McDonald’s cashier earns by ringing up an order. Those dollars should be taxed the same, even if they’re earned in totally different ways. And if it means we get to pull our democracy back from the brink of total collapse, we think it’s worth doing.
The good news is that, for the last few weeks, we’ve been cooking up a solution to this problem. We’ll be in touch tomorrow with all the details, so be sure to check your inboxes later in the afternoon. We won’t spoil the surprise, but rest assured our solution will go a long way to ensuring our money is no longer pitted against your sweat in the tax code.