Here are the not-so-fun facts: Someone earning $600,000 a year in salary can realistically face combined tax rates approaching half their income in taxes when you add up federal rates, state taxes and payroll contributions. Meanwhile, Elon Musk’s net worth has grown to roughly $670 billion, as of mid-December, and he pays a fraction of what wage earners pay in effective tax rates. This isn’t about tax evasion. It’s about how the tax code treats different types of income completely differently.
The gap between these two scenarios reveals one of the biggest structural inequities in American tax law. Understanding why this happens requires looking at how billionaires actually make money versus how most people do.
High Salaries Face Ordinary Income Tax Rates
Someone making $600,000 in salary income pays taxes under ordinary income rules. The top federal marginal rate hits 37% for high earners — although for someone earning $600,000, their rate would be 35%. It’s important to note that a 35% tax rate doesn’t mean all their funds are taxes at 35% because the U.S. uses a progressive tax system.
But take that 35% and add in the 3.8% Medicare tax on investment income, state income taxes that can reach 13% in California or 10% in New York, and payroll taxes and you’re looking at combined rates that approach or exceed 50% in high-tax states and for taxpayers with limited deductions.
Wage earners also have fewer options to reduce their tax burden. A $600,000 salary shows up on a W-2 form and gets taxed immediately. There’s no way to defer it, convert it to another type of income or avoid it entirely. The money gets taxed before it ever hits your bank account.
Learn More: I Asked ChatGPT What Would Happen If Billionaires Paid Taxes at the Same Rate as the Middle Class
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Billionaires Don’t Make Money From Salaries
Musk doesn’t pay himself a huge salary. Most of his wealth comes from the increasing value of his stock in Tesla, SpaceX and other companies. When stock prices rise, Musk’s net worth can grow by billions without triggering any income tax, because that appreciation isn’t taxed until sold.
Under current U.S. law, unrealized capital gains are not taxed. This means if you own stock that increases in value but you don’t sell it, you owe no taxes on that increase. This rule applies to everyone, but it benefits the ultra-wealthy far more because most of their wealth comes from appreciating assets rather than paychecks.
Capital Gains Get Taxed at Lower Rates
When billionaires do sell assets and realize gains, they pay capital gains tax instead of ordinary income tax. Long-term capital gains rates are 0%, 15% or 20% depending on income level. Even the top rate of 20% is significantly lower than the 37% top rate on ordinary income, and high-income wage earners also face payroll and state taxes on top of that.
This creates a fundamental imbalance. Someone making $600,000 working as a doctor or lawyer pays taxes at 35% federal plus state and payroll. Someone making $600,000 selling stock they’ve held for over a year pays 20% federal capital gains tax.
The Numbers Show the Gap
A 2025 paper from UC Berkeley examined tax data for the 400 wealthiest Americans from 2018 to 2020. The research found that this group paid an average effective tax rate of 23.8%, down from 30% in the previous period.
For comparison, the average American paid an effective rate of 30% during the same period. High earners who made most of their money from wages paid an effective rate of 45%.
The study revealed that billionaires paid lower rates for two main reasons. They were able to shelter more business income from taxes and the income they did report faced lower tax rates.
Borrowing Against Wealth Avoids Taxes Completely
Wealthy individuals often borrow against their stock holdings instead of selling shares. Loans aren’t taxable income, so this strategy lets them access cash without triggering any tax liability.
For example, someone with $100 million in Tesla stock can borrow $25 million using the shares as collateral. They get cash to spend without selling anything and without paying taxes. The loan eventually needs to be repaid, but they can keep refinancing it or repay it with future borrowing.
Death Eliminates Capital Gains Tax Through Step-Up in Basis
If wealthy individuals hold assets until death, their heirs receive what’s called a step-up in basis. This resets the asset’s value to its worth at the time of death, effectively erasing all the capital gains that accumulated during the original owner’s lifetime.
Imagine someone bought stock for $10 million that’s now worth $500 million. If they sell it, they owe capital gains tax on the $490 million gain. But if they die and leave it to their children, the children’s cost basis gets reset to $500 million. If the children sell immediately, they can owe zero capital gains tax on all that appreciation accumulated during the original owner’s lifetime.
The Tax Code 2017 Changes Made It Worse
The 2017 Tax Cuts and Jobs Act reduced the corporate tax rate from 35% to 21%. This directly benefited wealthy business owners whose net worths are tied to corporate valuations.
The UC Berkeley study found that the top 400 wealthiest Americans saw their effective tax rate drop from 30% to 23.8% after these changes took effect. The decline resulted from both lower corporate taxes and a reduced share of business income being taxed at all.
Why This Matters
The difference isn’t about working harder or contributing more to society. It’s about how the tax code categorizes and treats different types of income. Most Americans earn money through wages that get taxed immediately at high rates. The ultra-wealthy accumulate wealth through asset appreciation that isn’t taxed until sold and then gets taxed at lower rates.
This structure creates a system where someone with a high salary pays a larger percentage of their income in taxes than someone whose wealth grows by hundreds of millions or billions annually. The wage earner has no choice about when or how their income is taxed. The billionaire can decide whether, when and if taxes ever apply.
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This article originally appeared on GOBankingRates.com: Why a $600,000 Salary Can Face 50% Tax Rates While Elon Musk’s $670 Billion Often Goes Untaxed
