I Asked Grok How Billionaires Pay Hardly Any Taxes — Here’s What It Revealed
Written by
John Csiszar
Edited by
Brendan McGinley
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Most working Americans see between 22% and 37% of their wages withheld for federal income taxes. Meanwhile, ultra-wealthy individuals often report effective tax rates in the low single digits when measured against total wealth growth — sometimes close to zero. With wealth inequality frequently in the headlines, one question comes up quite often: How do billionaires legally pay so little in federal taxes while their fortunes grow by leaps and bounds?
Curious to see how an AI would explain this, I asked the AI chatbot Grok to break it down. While Grok’s response didn’t uncover any secret loopholes. Instead, it did detail how the tax code structurally favors asset ownership, deferral and leverage, as opposed to income. Here are the highlights of how billionaires avoid paying as much in taxes in you do — frequently in percentage, but often even in real dollar value.
Wealth Isn’t Taxed the Same Way as Income
This is the single biggest reason why billionaires don’t generally pay taxes in the same way as the average American. Grok began its answer by explaining the differences between income and wealth. Most billionaires don’t earn large salaries. Their net worth is tied up in stocks, businesses and real estate.
When those assets rise in value, the increase is considered an unrealized capital gain, which is not taxed until the asset is sold. Even if they are liquidated, the tax rate on long-term capital gains tops out at 20% federally, per the IRS. This is nearly half the top ordinary income tax rate of 37%, making it a major way the wealthy save money.
But many billionaires simply avoid selling major holdings altogether. They hold assets for decades, allowing wealth to compound without triggering taxes. When they die, heirs receive the assets under the step-up in basis rule, which resets the asset’s cost basis to its market value at death. This effectively wipes out decades of unrealized gains from taxation, as said by the Congressional Research Service.
Grok summarized it bluntly: “It’s like the IRS hits a reset button on decades of appreciation.”
“Buy, Borrow, Die” Keeps Taxes Deferred
One of Grok’s biggest takeaways was the so-called “buy, borrow, die” strategy, a practice widely reported by outlets like Bloomberg and The Wall Street Journal.
Instead of selling appreciated stock and paying capital gains taxes, which is how most average Americans handle their wealth, the rich borrow against their assets. These loans are secured by highly valuable collateral, such as shares of Tesla, Amazon and private companies. And here’s the trick: Loan proceeds are not taxable income. In fact, in some cases, interest may even be tax-deductible, per J.P. Morgan and IRS interest deduction rules.
This allows billionaires to fund living expenses, new investments and acquisitions, all without triggering taxable sales. Meanwhile, their underlying assets continue to grow.
Elon Musk has publicly disclosed pledging large blocks of Tesla stock as collateral for loans in SEC filings, according to Forbes, illustrating how this strategy works in practice. Grok said the structure acts as a “self-reinforcing loop that defers taxes indefinitely.”
Charitable Giving Multiplies Tax Benefits
Another major lever Grok explained was donating appreciated assets instead of cash.
If someone donates stock purchased for $1 million that is now worth $10 million, they can generally deduct the full $10 million charitable value while avoiding capital gains tax on the $9 million appreciation, according to IRS charitable contribution rules.
Donor-advised funds further enhance the strategy by allowing donors to take immediate deductions while controlling when and how funds are distributed over time, as outlined by the National Philanthropic Trust.
Real Estate Can Add More Shelter
Grok also pointed to real estate advantages, including:
- Depreciation deductions, which allow owners to claim paper losses even when property values rise, per IRS depreciation rules.
- 1031 exchanges, which defer capital gains when investment properties are swapped for similar properties, according to IRS Section 1031 guidance.
These tools can significantly reduce taxable income while preserving long-term appreciation.
The Data Behind the Controversy
Grok referenced ProPublica’s landmark investigation analyzing IRS data from 2014 to 2018. The report found that the 25 richest Americans paid about $13.6 billion in federal income taxes on $401 billion in wealth growth. That amounts to an effective rate of roughly 3.4%, according to ProPublica’s analysis.
Tax scholars broadly agree that the structural dynamics highlighted in that report still apply, and to its revelations, Grok added a candid observation:
“The tax code rewards people who can afford elite accountants, attorneys and financial engineers.”
According to Reuters, the IRS itself has acknowledged staffing and enforcement limitations in auditing complex high-net-worth returns.
What Everyday Investors Can Still Learn
Most people can’t replicate billionaire strategies at scale. However, Grok noted that some principles translate:
- Maximize tax-advantaged retirement accounts like 401(k)s and IRAs.
- Hold investments long-term to benefit from lower capital gains rates.
- Donate appreciated securities instead of cash when giving charitably.
- Understand how deferral and compounding quietly drive wealth growth.
Grok didn’t uncover anything illegal or mysterious about how billionaires keep their money. It simply clarified how the tax system rewards asset ownership, patience, leverage and expert planning. In a nutshell, billionaires primarily minimize taxes by avoiding income-based sources of wealth, something the 99% simply can’t afford to do.
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