While the average American family relies on a taxed salary and faces annual brackets climbing as high as 37 per cent, the nation's wealthiest individuals have mastered a sophisticated financial architecture that keeps their effective tax burden remarkably low.

Recent research published by the National Bureau of Economic Research, spearheaded by economists at the University of California, Berkeley, reveals that the top 400 wealthiest Americans paid an average effective tax rate of approximately 24 per cent between 2018 and 2020.

This stands in stark contrast to the 30 per cent average rate often cited for the broader US population. The findings highlight a structural imbalance where the ultra-wealthy derive their economic power not from traditional wages, but from the massive appreciation of capital assets that often escape individual income taxation entirely.

By utilising legal deferral strategies, these individuals effectively shelter a substantial portion of their true economic income, ensuring their contribution to government revenue remains proportionally lower than that of top labour income earners.

For instance, a billionaire can sell a property and use the proceeds to purchase another property through a 1031 exchange to defer real estate taxes. Many billionaires, such asJeff Bezos and Mark Zuckerberg, are alsomoving to Florida from California to avoid a proposed wealth taxin the Golden State.

The core of this wealth preservation framework is the'Buy, Borrow, Die' strategy, a three-step financial playbook that allows billionaires to live lavishly while their taxable income remains perpetually low.

First, the wealthy focus on the 'Buy' phase, where they aggressively accumulate assets that offer high-growth potential, such as private equity, startup shares, and publicly traded equities. Unlike wages, which are taxed immediately upon receipt, the appreciation of these assets remains unrealised as long as they are held, meaning the owner owes nothing to the IRS. When these individuals need liquidity for lifestyle expenses or new ventures, they enter the 'Borrow' phase. Rather than selling their assets and triggering capital gains tax, they secure low-interest loans using their massive portfolios as collateral. Because loan proceeds are not considered taxable income, they can access millions in cash without triggering a taxable event.

The final, and perhaps most controversial, component of this cycle is the 'Die' phase. Under current US tax law, when an asset holder passes away, the assets in their estate receive a 'step-up in basis.' This pivotal rule resets the cost basis of inherited assets to their fair market value on the date of the original owner's death, effectively wiping out the accumulated capital gains built up over decades. Consequently, heirs can sell these inherited assets to pay off any outstanding loans and retain the remaining wealth, often without having paid a single dollar in capital gains tax on the appreciation that occurred during the original owner's lifetime. This framework creates a perpetual tax advantage that is fundamentally unavailable to the average household, whose net worth is often significantly affected by existing debt.

The majority of ordinary Americans rely on hourly wages or salaries to run their households. However, that money is taxed at increasing rates, ranging from 10% to 37%, depending on their income level. Overall, working Americans are paying a higher share of their earnings toward federal income tax, along with payroll taxes and state and local taxes.

Imagine that you earn $110,000 annually and file taxes jointly; your taxable income comes down to $78,500 after a $31,500 standard deduction for 2025. The first $23,850 is taxed at a 10% rate, while the remaining $54,650 is taxed at $12 for a total tax bill of $8,943, or an effective tax rate of 8.13.%

Source: International Business Times UK