Warren Buffett is one of the richest people in the world, thanks to the company he runs, Berkshire Hathaway.
Essentially, it’s a holding company that owns a variety of businesses, including GEICO, Dairy Queen, a major railroad, and significant stock in companies like Apple and Coca-Cola.
When these companies perform well and their stock prices rise, Berkshire Hathaway’s stock also increases in value. When Buffett took over Berkshire Hathaway in 1965, a single share was worth $19.
Today, it is valued at nearly half a million dollars. Buffett himself owns nearly 240,000 of these shares, making up the majority of his wealth.
However, as he has often pointed out, he still pays a lower tax rate than his secretary. “She pays at twice the rate I pay. I think that’s outrageous,” Buffett has said.
The Tax Disparity Between the Rich and the Middle Class
This discrepancy exists because of the different types of taxes they pay. His secretary pays income tax on her salary, while Buffett primarily pays capital gains taxes on sold stock, which is taxed at nearly half the rate of regular income.
The wealthy are significantly under-taxed in the U.S. The gap between the richest Americans and everyone else has been widening for decades.
In the last 40 years, the after-tax income of the wealthiest has increased by over 400%, while middle-class income has only grown by 50%.
The way the ultra-rich earn money is fundamentally different from how most people earn income, and as a result, they are taxed differently.
How the Wealthy Avoid Taxes
Morris, a former Wall Street professional who is now retired, illustrates this point. He lives off his investments in companies like Berkshire Hathaway, Amazon, and Apple.
He is part of the wealthiest 1%, but he actively supports higher taxes on the rich. “I want to live in a country filled with a middle class of people who can all afford to shop in our businesses,” he explains.
Most Americans earn money through wages and salaries, which are taxed at rates ranging from 10% to 37%. Meanwhile, people like Morris generate most of their wealth through investments, such as stocks and real estate.
These investments are taxed as capital gains, which have a maximum tax rate of just 20%. For example, if Morris sells stock for $400,000, his tax bill is around $50,000—far lower than the tax burden on someone earning $400,000 through a traditional salary.
Moreover, much of the wealth held by billionaires is not even taxable. Wealthy individuals like Morris or Buffett accumulate vast fortunes in stocks, but this money is not considered “real” income unless the stocks are sold.
This means they can see their net worth rise by millions annually without paying taxes on it. Jeff Bezos, founder of Amazon and one of the richest individuals in America, provides a clear example.
His wealth is largely tied to his Amazon stock, which is not taxed unless he sells it, at which point it is subject to capital gains taxes.
Similarly, some billionaires, like Elon Musk, avoid selling stock entirely by taking out loans against their holdings, effectively living off borrowed money while avoiding taxes.
No stock sale means no taxable income. Another major loophole benefiting the wealthy is the “stepped-up basis.”
If Warren Buffett were to sell his stock, he would have to pay capital gains taxes on the profit, calculated as the difference between the selling price and the original purchase price.
However, if he holds onto the stock until he dies, his heirs inherit it at its current market value.
When they sell it, they only pay taxes on any gains from that point forward, leaving all of Buffett’s original gains untaxed. This is part of a tax avoidance strategy often summarized as “buy, borrow, die.”
Proposed Changes to Capital Gains Tax
Given that most taxable capital gains go to the top 1%, lawmakers have looked at reforming the capital gains tax as a way to increase tax revenue from the wealthiest Americans.
Biden has proposed closing the stepped-up basis loophole and increasing the maximum capital gains tax rate from 20% to 39.6%, but only for those earning more than $1 million per year.
Critics argue that such changes could discourage investment in the stock market or lead wealthy individuals to sell fewer shares, limiting the expected tax revenue.
However, estimates suggest that these reforms could generate anywhere from $200 billion to $400 billion in tax revenue over the next decade.
Additionally, it would help bring Buffett’s tax rate closer to that of his secretary. Despite these proposed changes, vast amounts of unrealized wealth remain untaxed.
Some advocates suggest implementing wealth taxes or levying taxes on gains in the stock market even before the assets are sold. Most Americans believe that the ultra-wealthy are not paying their fair share in taxes.
While changing capital gains tax laws wouldn’t be a complete solution, it is seen as a simple and effective first step toward tax fairness. The current system allows the rich to get even richer while leaving everyone else behind.