How Should We Tax Wealth?
Why the Richest People in the World Often Pay the Lowest Rates
The billionaire who pays a lower effective tax rate than their assistant isn't cheating the system — they're using it exactly as designed.
The Idea
Most tax systems around the world are built around income — the money that flows to you when you work. But the genuinely wealthy accumulate value in a different way: through assets that appreciate over time. A stake in a company, a portfolio of property, a collection of art — these grow in value year after year, and in most jurisdictions, that growth is not taxed until the asset is sold. This is the concept of 'unrealised gains', and it sits at the heart of almost every serious debate about wealth taxation. The wrinkle is this: if you never sell, you never pay. And the ultra-wealthy have mastered the art of never selling. Instead, they borrow against their assets — using appreciated stock as collateral for loans that, crucially, are not income and therefore not taxable. They live off those loans, let the assets keep growing, and when they die, a rule called the 'step-up in basis' in many countries resets the taxable value of the estate, wiping out decades of unrealised gains in a single legal moment. Wealth taxes — annual levies on net worth rather than income — aim to break this logic. But they come with genuine problems: assets are often illiquid (you can't slice off part of a company to pay a tax bill), valuations of private businesses are contested, and wealth has a way of moving across borders when governments come for it. The debate isn't simply left versus right. It's a genuinely hard problem about what a tax system is actually for.
In the World
In 2021, investigative outlet ProPublica published a leaked dataset of actual tax returns from some of the wealthiest individuals in the United States. The numbers were startling — not because anyone had broken the law, but because of how legal the whole thing was. Over a five-year period, one technology founder saw his wealth grow by roughly 24 billion in net worth while reporting relatively modest taxable income. His 'true tax rate' — calculated by ProPublica as taxes paid relative to wealth increase — came to less than one percent. By contrast, a nurse or a teacher typically pays an effective rate many times higher, because wages are taxed in full as they arrive. The mechanism is exactly what the theory predicts. Shares held, not sold. Loans taken out against those shares. The interest on those loans sometimes tax-deductible. And when philanthropic donations entered the picture, they reduced taxable income further — while also conferring naming rights on university buildings and hospitals. None of this required a tax lawyer to break rules. It required a tax lawyer to read them very carefully. The ProPublica findings reignited a long-simmering policy debate and briefly pushed 'billionaire minimum income tax' proposals into mainstream political discussion — before, as tends to happen, the window closed and the conversation moved on.
Why It Matters
Understanding how wealth actually compounds — and how the tax code interacts with that compounding — changes how you read economic policy debates. When politicians propose a wealth tax, the objections aren't always bad-faith deflection; some are genuine design problems. When those same politicians drop the proposal after industry pushback, that's worth noticing too. For your own financial thinking, the broader principle is genuinely useful: the difference between taxing flows and taxing stocks is one of the most consequential distinctions in economics, and it shapes everything from how pension systems work to why property is treated differently from savings in most tax codes. And there's a civic dimension here. Tax systems encode a society's judgements about fairness, risk, and reward. Knowing that a system taxes labour more heavily than capital ownership isn't just trivia — it's a fact about who bears the cost of running a society. That's worth having a view on, even if the right policy answer remains genuinely contested.
A Question to Ponder
If a tax system was designed from scratch today — with no legacy rules, no inherited categories — what would you want it to measure, and why?
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