The American tax system creates a stark imbalance: a worker earning $600,000 can face combined tax rates exceeding 50%, while billionaires like Elon Musk – with fortunes exceeding $670 billion – pay a fraction in effective taxes. This isn’t tax evasion; it’s a fundamental flaw in how the law treats different types of income.
The Harsh Reality for High Earners
Individuals with substantial salaries are taxed under ordinary income rules. While the top federal rate is 37% (or 35% for those earning $600,000), the true burden is higher. Add in Medicare taxes, state income taxes (up to 13% in states like California), and payroll contributions, and total rates can easily surpass 50% in high-tax areas.
Wage earners have limited options to reduce their tax burden. Salaries are reported on W-2s, taxed immediately, and cannot be deferred or converted without triggering liability. The money is taxed before ever reaching the bank.
Billionaires and Unrealized Gains
Musk’s wealth isn’t derived from a large salary. Instead, it comes from the rising value of his stock in Tesla, SpaceX, and other companies. This appreciation isn’t taxed until the assets are sold – meaning billions in wealth growth can occur without triggering income taxes.
The U.S. currently exempts unrealized capital gains, allowing the wealthy to benefit disproportionately. If you own appreciating stock but don’t sell it, you owe no taxes. This rule applies to everyone, but it favors those whose wealth primarily comes from assets rather than paychecks.
Capital Gains vs. Ordinary Income
When billionaires do sell assets, they pay capital gains tax instead of ordinary income tax. Long-term capital gains rates are 0%, 15%, or 20% – significantly lower than the 37% top rate on ordinary income. Even at the top 20% rate, wage earners also face payroll and state taxes.
This creates an imbalance. A doctor making $600,000 pays 35% federal plus state and payroll taxes, while someone making $600,000 from stock sales pays only 20% federal capital gains tax.
The Data: Billionaires Pay Less
A 2025 UC Berkeley study of the 400 wealthiest Americans found their average effective tax rate was just 23.8% between 2018-2020, down from 30% in the previous period. The average American paid 30% during the same timeframe, while high-earning wage earners paid 45%.
The study revealed billionaires paid lower rates because they sheltered more business income and faced lower tax rates on what they did report.
Tax Avoidance Strategies
Wealthy individuals use legal strategies to minimize tax liability. One method is borrowing against stock holdings instead of selling shares. Loans aren’t taxable income, allowing access to cash without triggering taxes.
Another tactic is holding assets until death, triggering a “step-up in basis.” This resets the asset’s value to its worth at the time of death, erasing accumulated capital gains for heirs.
The Impact of the 2017 Tax Cuts
The 2017 Tax Cuts and Jobs Act further widened the gap. By reducing the corporate tax rate from 35% to 21%, it benefited wealthy business owners whose net worths are tied to corporate valuations. The UC Berkeley study found the top 400 Americans saw their effective tax rate drop from 30% to 23.8% after these changes.
The core issue isn’t effort or contribution; it’s how income is categorized under the tax code. Most Americans pay taxes immediately on wages, while the ultra-wealthy accumulate wealth through untaxed appreciation.
The system gives the wealthy more control over when, if, and how their income is taxed. The wage earner has no such choice.
