The wealthiest Americans avoided billions in taxes by voluntarily doing something most only do out of necessity: borrowing money.

• America’s 25 wealthiest people got $401 billion richer from 2014 to 2018, according to Forbes.
• ProPublica reported the income taxes they paid amounted to just 3.4% of that new net worth.
• One way the ultra-rich avoid taxes: borrowing money at low-interest rates, according to ProPublica.
• See more stories on Insider’s business page.

ProPublica reported Tuesday it had obtained a massive trove of IRS documents, revealing that America’s wealthiest individuals have avoided paying billions of dollars in taxes for years, resulting in income tax bills that amount to a fraction of their net worth.

One of the key strategies employed by the ultrawealthy to keep their tax bills low: borrowing money.

Many Americans borrow money only when they have to for large purchases like college tuition or a house, as interest can quickly add up, especially if they’re not able to pay back the loan right away.

But according to ProPublica and independent experts, America’s billionaires have often financed their lavish lifestyles by using their vast fortunes as collateral for loans, which can come with single-digit interest rates.

Borrowing money allows the ultrawealthy to earn minuscule salaries, avoiding the 37% federal tax on top incomes, as well as avoid selling stock to free up cash, bypassing the 20% top capital gains tax rate. Since loans aren’t considered taxable income, the wealthy need only pay back the principal and interest, rather than the higher taxes that would accompany multimillion-dollar incomes and investments.

America’s 25 wealthiest individuals saw their net worth grow by $401 billion from 2014 to 2018, according to Forbes. But they paid a total of $13.6 billion in federal income taxes in that same period, amounting to 3.4% of that newly acquired wealth, ProPublica found.

By contrast, a middle-class American in their 40s who had amassed a “typical amount of wealth for people their age,” saw their net worth grow by $65,000 from 2014 to 2018, but paid $62,000 in income taxes, or 95% of that new wealth, according to ProPublica.

The US does not directly tax individuals’ total wealth, unlike some European countries. Nor does it tax stock holdings until they are sold. And billionaires tend to have a lot of their net worth wrapped up in stocks.

However, ProPublica’s analysis revealed in new detail how America’s tax code allows the ultrawealthy to take advantage of a litany of tax loopholes and wealth-management strategies to increase their wealth without also increasing their tax bills substantially.

To illustrate the gap between wealth and taxes paid by the ultrawealthy, ProPublica created what it called a “true tax rate.” ProPublica defined this as the total federal income tax a person paid, in this case from 2014 to 2018, compared to how much new wealth they acquired in that same time period.

ProPublica did not publish its source data or disclose how it obtained IRS data.

According to ProPublica, the top 25 wealthiest Americans paid a “true tax rate” of 3.4% – a result of tax avoidance strategies that are out of reach for most Americans.

Borrowing, it turns out, is one of those strategies.

In 2014, for example, Oracle cofounder Larry Ellison disclosed he had used 250 million of his Oracle shares as collateral to secure a $9.7 billion personal line of credit.

Elon Musk has similarly put up a massive amount of his equity in Tesla and SpaceX as collateral for loans, rather than sell those shares and pay 20% in capital gains tax to free up the money. From 2014 to 2018, Musk paid $455 million in taxes on a reported income of $1.52 billion, resulting in an effective tax rate of 29.9%. But his wealth grew by $13.9 billion during that time, meaning his “true tax rate,” according to ProPublica’s methodology, was just 3.27%.

Musk replied to ProPublica’s request for comment with: “?”

Investor Carl Icahn also took advantage of borrowing money, paying $0 in federal income taxes despite reporting an adjusted gross income of $544 million, as he had an outstanding loan with Bank of America worth $1.2 billion, ProPublica reported.

“I didn’t make money because, unfortunately for me, my interest was higher than my whole adjusted income,” Icahn told ProPublica, adding that while he does borrow a lot of money, it’s “not at all” meant to lower his tax bill, but rather that he borrows “to win. I enjoy the competition. I enjoy winning.”