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Why the Wealthy Pay Lower Tax Rates Than the Middle Class

Beginner Investing • 6 min

A salaried employee pays income tax on essentially 100% of their pay, every single year, automatically withheld. A lot of wealthy individuals' net worth grows completely differently — mostly as unrealized capital gains (stock and business value that's gone up but hasn't been sold), which the tax code doesn't touch until an actual sale happens.

Long-term capital gains (on assets held over a year) are also taxed at lower rates than top-bracket wage income — a real, long-standing, deliberate policy choice in the tax code, not a secret loophole.

Insider Angle: the strategy that ties it together is sometimes called "buy, borrow, die": buy appreciating assets, borrow against their value for spending cash (loan proceeds aren't taxable income at all), and never sell — meaning the capital gains tax is deferred indefinitely, potentially until death, at which point in the US the cost basis often "steps up" to current value, permanently erasing the taxable gain on those specific assets for heirs. None of this requires anything illegal — it's the predictable result of a tax code that taxes realized income and events, not net worth or paper gains.
Try This: Look up the current top long-term capital gains tax rate and compare it to the current top marginal income tax rate on wages — calculate the percentage-point gap yourself.
Try This — Interactive Calculator

Split $500,000 of income between wages and long-term capital gains and see how the blended effective tax rate changes. Uses approximate current top US federal rates (~37% top ordinary income, ~20% top long-term capital gains + 3.8% NIIT) — illustrative, not tax advice.

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