How to be a Good Billionaire Part 1: There Shouldn’t Be Billionaires

If you want to be a good billionaire, pay more taxes.

Key Takeaways

• Extreme wealth concentrated in private hands distorts democracy and public policy.

• Tax rules favor investment income, letting billionaires pay less than working professionals.

• Responsible billionaires should contribute their fair share to society. Let’s cancel performative altruism.

A billion dollars buys things like sports teams and blocks in Manhattan. Billions of dollars can change election outcomes and reshape neighborhoods. That kind of influence should not be in the hands of a single person or family. And yet, here we are. After decades of pro-business tax policy and unchecked growth, our country is teeming with billionaires. They crowd our cities and exclusive island getaways. There are about 3,000 billionaires in the world according to Forbes, and about a third of them live in the United States. This is not a good thing. It means too much wealth and power is in the hands of too few. I am not a radical. I am a pro-capitalist financial advisor, but even I think this is just too much and that, in the words of many, we should “tax the rich!”

The “Best” Billionaire: Warren Buffett and the Illusion of Philanthropy

I find the sycophantic devotion to Warren Buffett a little over the top¹. However, us investing nerds salivate over his annual shareholder letter, hoping for scraps of genius so that we might make ourselves and our clients very rich. Depending on the share price of Warren Buffett’s investment company, Berkshire Hathaway, he is worth about a hundred billion dollars. Buffett, known as “The Oracle of Omaha” for his mythical predictions of which companies will be successful (hence his billionaire status), lives a notoriously modest life. He still lives in a small but nice house in Omaha, Nebraska. His long-time partner in investing and friend, Charlie Munger, once described the secret to Buffett’s success as "staying sane for a long time."

Buffett is also praised for his frugality, and of course, his commitment to charity. He’s pledged to give away most of his money, between 85-99% of his net worth. The dude is 94 years old, so while he does make significant philanthropic contributions each year, his fortune has been locked up in his company holdings for multiple decades. Imagine what giving just 5% away could do for his community in Omaha.

Many argue that it’s not up to individuals to give their money away. After all, they earned it. Why shouldn’t they keep more of it? Well, I think because they should never have had that much in the first place. Tax policy is so favorable to the ultra-wealthy that many of my clients actually pay a higher tax rate than these billionaires because my clients tend to be high earners who pay an income tax, rather than investors or owners paying capital gains tax.

It’s worth noting that Buffett has advised us all to invest in low-cost diversified index funds, and not to follow in his footsteps of trying to pick winning individual companies. He famously said on CNBC in 2017, “Consistently buy an S&P 500 low-cost index fund…I think it’s the thing that makes the most sense practically all of the time.”

He is not asking you to try to emulate his success. He’s telling you that his circumstances are exceptional. And yet, the system that enabled his fortune also shields him from taxes that most other Americans can’t avoid.

Buffett’s effective tax rate is lower than that of many of my clients. That’s not a bug in the system…it is the system. My clients pay a lot of income tax in their peak earning years or when a big liquidity event hits, such as when their company goes public. Meanwhile, Buffett pays mostly capital gains tax. And that difference is enormous.

Capital gains tax means you pay taxes on the profits made from selling investments, and that tax rate is lower than the amount of tax typically paid on wages. So if you make money by working, you pay more than someone who makes money by owning a company. It is one of the most quietly regressive features of our tax code. One of the best cheat codes within our tax system is to own a small business, increase its profitability, turn around and sell it, and your share of the proceeds is treated as capital gains, not ordinary income.

Billionaires Shouldn’t Exist

Let’s not get distracted by who gives the most to charities or who lives the humblest. I find Buffet’s performative poor billionaire status a little hypocritical. It’s like the Silicon Valley CEOs who say they only pay themselves $1². With so much money and power and a desire to be altruistic, the best way for someone like Warren Buffett to actually improve the lives of poorer people would be to pay more taxes. While trickle-down economics doesn’t work because there is no system set up to redistribute the money, the tax system on the other hand is quite literally a system by which revenue trickles down through various government departments and is redistributed to fund programs that most people benefit from (like building hospitals, maintaining roads, funding schools, etc). It’s a big behemoth of a system and it’s not perfect. But having billionaires keep their fortunes locked up in private companies and only accessible to other citizens if they deign to make a charitable contribution is just not going to work.

The problem is structural. No one should have this much power over public life.

Not Buffett. Not Bezos. Not anyone.

The presence of billionaires is not proof of economic success. It is a sign that wealth has been hoarded instead of circulated. It’s not that everyone deserves to be wealthy. Wealthy investors and business owners, through a combination of hard work and luck, did something amazing. They should be rewarded for that success with a lavish lifestyle and everything they have ever wanted. As we’ll see in Part II of this series, it’s nearly impossible for “everything you’ve ever wanted” to add up to a billion dollars. For what it’s worth, mega yachts only cost a few hundred million, with a few world-record-setting monstrosities costing a few billion.

Billionaires are proof that we have built a system where the rewards of growth go to the owners of capital, not to the people who make that growth possible. Not to mention, the wealthiest are granted significant investment and tax relief. But again, that’s fine, that’s capitalism. It’s just that the system has become too top-heavy. There is so much wealth stuck at the top of the funnel and very little of it is trickling down.

Capital Gains vs. Income: Taylor Swift Pays More Income Tax than Most Tech CEOs

With her Eras tour earnings in the hundreds of millions over two years, Taylor Swift had an extremely hefty income tax bill. I’m sure her business advisors have a way of reducing her taxes through a series of corporations, but ultimately, she earned income in a year as a performer and must pay the income tax. Taylor Swift likely paid more in income tax last year than the boyish CEOs of Silicon Valley. And that’s because her tour income is classified as wages and performance income and is therefore taxed at the highest marginal income tax rates. Those taxes cannot be deferred and her income is not shielded by favorable capital gains treatment.

By contrast, many billionaires intentionally keep their salaries low so that they can benefit from the lower capital gains tax rate and earn the bulk of their wealth through unrealized capital appreciation. In some cases, they even borrow against their assets to fund their lifestyles rather than selling anything and triggering a tax bill.

Here is how this works in practice.

Income (what you earn from working) is taxed at rates that range from 10 to 37% at the federal level, depending on how much you earn.

Capital gains (what you earn from selling investments) are taxed differently. If you hold an asset for more than a year before selling, it is taxed as a long-term capital gain. The top federal rate on long-term capital gains is 20%, and it applies whether you make $500,000 or $500 million from the sale. There is also a 3.8% net investment income tax layered on top for very high earners, but that still brings the top rate of the capital gains tax to just 23.8%.

This means that a startup founder who sells stock for $200 million will likely pay a lower percentage in taxes than a physician earning $600,000 in wages.

That is not because one is smarter or worked harder. It is because our system rewards people who make money by owning, not by working.

What a Better System Could Look Like: A Wealth Tax

As we’ll see in next week’s issue, a billion dollars is a lot of money for one family to live off, even across a lifetime. And in our exercise, we’re talking about a family with only one billion dollars. The people who top the billionaires list have hundreds of billions of dollars.

I’m okay with people having a few billion dollars. I am not calling for the end of capitalism. I am not calling for asset seizures or punitive rules that punish success. But if we accept that billionaires are going to exist, we also need to accept that they should contribute meaningfully to the society that allowed their success in the first place.

Here is how we could start.

1. Let billionaires exist on paper

There is nothing wrong with holding significant equity in a successful company. Ownership is part of the American story. We do not need to force asset sales or strip people of voting control.

2. Design new tools for taxing untapped wealth

Most billionaires have their net worth tied up in stocks or private companies. Requiring them to sell would destabilize markets and dilute ownership in ways that are unfair.

But there are creative alternatives. One idea would be to apply a small annual tax on unrealized gains above a certain threshold, phased in only at extremely high levels (I’m going to throw out the number of one billion dollars). Another option is to treat borrowing against assets as a taxable event once it exceeds a certain size.

These ideas would take real work to design well. But the goal is simple: find ways to share the public value of private wealth without forcing its liquidation.

3. Make capital gains taxes more progressive

Right now, the top rate on capital gains is 20%, regardless of whether you realize $1 million or $1 billion in gains.

That makes no sense. We already have a graduated income tax system. We should do the same with capital gains.

For example, we could keep the 20% rate for most people, but introduce higher brackets as the gains increase. If someone realizes over $50 million in capital gains in a single year, a portion of those gains could be taxed at 40 or even 50%.

That would not touch the vast majority of investors or even most high-net-worth individuals. It would apply only to those extracting massive amounts of wealth from the system in a given year.

4. Start a wealth tax at truly stratospheric levels

A flat wealth tax on everyone above a certain level sounds simple, but it risks hitting people who had one unusually successful year.

Instead, any wealth tax should be narrowly targeted. It could begin at $5 billion or more in net worth, with a modest annual rate of one to two percent. It would only apply to people whose wealth remains in the stratosphere year after year. It would be a new kind of tax on the total net worth of a person, not just their income, akin to the way an estate is taxed when a person dies.

Of course, with any tax law put in place, the brilliant tax minds of the country’s accountants will come up with a loophole or workaround. But we’ll deal with that later. Lawmakers have proposed a wealth tax in the past, but not in any serious way. Senators Warren and Sanders have proposed taxing wealth for millionaires, but I think we need to look to the billionaires³.

The Point Is Not to Punish

None of this is about punishing billionaires for being successful. It is about acknowledging the structural forces that allowed that success and recalibrating our system to serve more people.

Billionaires are not a sign that capitalism is thriving. They are a sign that the benefits of capitalism are being captured by too few. And the whole system just might topple over if we don’t address the excess.

Next week in Part II, I will walk through what a billion dollars can actually buy, and why it is almost impossible to spend that much in a lifetime, unless you are buying power.

If you want to be a good billionaire, pay more taxes.

Parting shot: Making a ton of money and becoming a billionaire isn’t a bad thing, but we need a system that redistributes that wealth so that not just the owner of that wealth, but all the people who helped build it can also share it.

The best $20 I spent this week: Okay, this was more than $20. It was $60. But I’m experimenting with a Brick, a physical device that blocks distracting apps with a tap.

1. I wrote this post almost 6 weeks ago, before the news that Buffet is stepping down as CEO broke. So this tone of minor distaste feels a bit off amidst all the outpouring of praise in the financial media. Don’t get me wrong, he’s a legendary investor, one of the greatest ever.

2. They don’t need a salary because they make so much money from selling their company stock.

3. Here’s an old NPR piece that discusses a few DOA wealth tax proposals.