If you haven’t heard already, Elon Musk recently tweeted that he’ll pay about $11 billion in federal taxes this year. He’s also doing interviews about it, and tweeting about it some more. And to be fair, that is indeed a large amount of money. I don’t even have a billion dollars, much less so many billions that I’d have to pay 11 of them in taxes one year.
But is that really all that impressive? No. Not one bit. Not even if it’s actually the largest amount anyone’s ever paid in federal taxes in a single year. When you’re the richest man in the world, your tax bill should be higher than everyone else’s.
But, the reason Musk is talking about it is because due to some quirks of US law, he doesn’t usually pay much in tax at all. Between 2015 and 2017, he paid $70,000. In 2018 he paid nothing. The only reason he’s paying now is because he had to sell a bunch of Tesla stock this year or he’d lose it. As CNBC put it:
Musk was awarded options in 2012 as part of a compensation plan. Because he doesn’t take a salary or cash bonus, his wealth comes from stock awards and the gains in Tesla’s share price. The 2012 award was for 22.8 million shares at a strike price of $6.24 per share. Tesla shares closed at $1,222.09 on Friday, meaning his gain on the shares totals just under $28 billion.
The options expire in August of next year. Yet in order to exercise them, Musk has to pay the income tax on the gain. Since the options are taxed as an employee benefit or compensation, they will be taxed at top ordinary-income levels, or 37% plus the 3.8% net investment tax. He will also have to pay the 13.3% top tax rate in California since the options were granted and mostly earned while he was a California tax resident.
The same article also reports that Tesla confirmed Musk had taken out loans against his stock and admitted that if Tesla stock ever drops significantly, those loans could cause further problems for the company:
If the price of our common stock were to decline substantially, Mr. Musk may be forced by one or more of the banking institutions to sell shares of Tesla common stock to satisfy his loan obligations if he could not do so through other means. Any such sales could cause the price of our common stock to decline further.
What’s this about loans? Let’s let friend of Jalopnik Matt Farah explain:
Is it legal? Absolutely. As a country, we don’t tax unrealized capital gains, and Musk doesn’t take a salary, so it’s not like he’s breaking the law. That’s also the rule for the vast majority of Americans, though last I checked, only around half of all Americans own any stock at all, and only a small percentage have anything other than a retirement account.
This 2018 article from Quartz contains some fun and relevant math, like the fact that if you made $46,800 per year (which was the average income for an American back then) and never spent a penny, it would take 21,000 years for that to add up to just a single billion dollars. When you read those headlines about Musk’s visit to the land of the taxed, keep the context in mind.