I've seen so many articles claiming that billionaires pay so little in income tax. To justify this claim, they do some math tricks. They calculate the total the individual paid in income tax for the year as a percentage of their total assets. That's not how income taxes or investments work. Unrealized gains on investments are not income.

That's how they mistakenly come up with the number that Jeff Bezos pays less than 1% in income tax. Investments, in general, are not income unless they're held for less than 12 months or pay dividends. Imagine if you had to pay income taxes every year on the unrealized gains of your 401(k), house, and car value. You too would be said to be paying a very low income tax rate.

If Bezos were to sell those shares and actually realize those gains, then he would rightly be taxed. But that would also likely tank the stock, as his 8% ownership stake is significant enough to drastically drop the price. 55% of Amazon is owned by 401(k)s and other retirement accounts, so if the price tanks, average Americans take a huge hit.

Bezos does sell shares all the time, actually. You can see this in SEC filings. And he is rightly taxed on those realized gains. But he's not going to sell all of his shares, as that would be damaging to Amazon, its workers, retirement accounts, and his own investments.

Instead, the money stays in the company, paying worker wages, buying new facilities, and so on. This is arguably even better for the economy because it keeps the funds in circulation. This generates even more tax revenue than if he did a one-time sale of his investments. That's one reason unrealized gains typically aren't taxed: it can lead to worse financial outcomes than keeping the money in circulation.

If you've ever owned a business, you know that you have:

1. Corporate income tax
2. Employee Federal income tax
3. FICA Payroll Tax
4. Sales Tax on transactions
5. Property Taxes

Now multiply that by each node on the graph. Each employee, contractor, vendor, and business that comes into contact with your company spends the money you paid them and is taxed on it as well. It grows exponentially after just a couple of nodes. If each of those nodes is trying to make a profit from their own capital, it generates even more tax revenue for the government.

Contrast that with capital gains tax, which is a one-time event at a maximum of 20%. That 20% needs to be taken out of the business in order to pay the taxes if you're going to tax unrealized gains. That means the 20% only gets taxed once instead of going through the graph and being taxed many more times as it grows.

There's a popular economic debate centered around the idea that r > g. It's a famous formula popularized by French economist Thomas Piketty that says r (the rate of return on capital) is greater than g (the rate of economic growth), meaning the wealth gap continues to grow. The rich get richer, and the poor don't get rich as quickly.

To that I would answer: who cares? If all groups are improving their situation over time, why do we care that some groups are more efficient with their capital than others? There will always be people who are more talented, make better decisions, or are simply luckier. Why should we hold them back out of jealousy or greed when the average person's economic situation is improving over time?

We've seen Americans across all groups and ethnicities improve their economic situation decade after decade. The poor are not getting poorer as the media often portrays. Americans have more buying power today than they did 10 years ago.

It's often a mentality of jealousy and entitlement that demands the rich hand over their assets to the less wealthy, even though by world standards almost all Americans are filthy rich. Now we want the wealthy, who took higher risks of losing their capital if their investments failed, to pay those who took fewer risks just to level the playing field. It's the "keeping up with the Joneses" mentality, and it's a killer of joy and economic progress.

It reminds me of the satirical short story Harrison Bergeron by Kurt Vonnegut, where people are held back from expressing their talents, intelligence, and beauty so that others deemed "less fortunate" won't feel bad about the whole thing.