In 2021/6, the U.S. news organization ProPublica (ProPublica) published a shocking investigation into the country’s ultra-wealthy. According to these findings, prominent billionaires such as Elon Musk, CEO of the space company SpaceX (SpaceX) and the electric vehicle company Tesla, and Michael Bloomberg, founder of the financial technology firm Bloomberg L.P., have paid very little tax relative to their wealth. At the same time, some among them contribute enormous sums to a variety of philanthropic causes, and many people likely benefit from those activities. Moreover, the very concentration of vast wealth in their hands has wide-ranging effects on society. Overall, are the ultra-rich a positive force for society, or a negative one? In this article, we explore these questions while also focusing on how billionaires acquire and use their wealth.

A ProPublica feature on tax avoidance by billionaires published on its site (Photo: Nao Morimoto)

Global wealth inequality

Before considering the very existence of billionaires, let’s first look at how wealth is distributed around the world.

“Billionaires” come in many sizes of fortunes, but here we focus on individuals with assets equivalent to 1 billion U.S. dollars (around 100 billion yen), i.e., billionaires. According to the 2021 list of the world’s richest published in 2021/4 by the American business magazine Forbes (Forbes), there are 2,755 billionaires worldwide whose total assets amount to 13.1 trillion U.S. dollars. In addition, the top 10 billionaires together own 1.1 trillion U.S. dollars or more, exceeding the GDP of many countries. If we include millionaires with assets of 1 million U.S. dollars, then 1.1% of the world’s population monopolizes 45.8% of global wealth.

 While such billionaires and millionaires exist with enormous wealth, a very large number of people around the world live in poverty. Those with assets of less than 10,000 U.S. dollars number about 2.9 billion people, or about 37% of the world’s population, yet even when combined, their assets amount to only about 1.3% of global wealth. Unsurprisingly, low income underpins low assets. With both income and assets low, people fall into poverty. In 2015/9, the UN Summit adopted the Sustainable Development Goals (SDGs), which set a target to “end extreme poverty,” especially in response to the severe poverty pervasive in Sub-Saharan Africa and South Asia. However, without major change, by 2030 more than 500 million people are projected to remain trapped in extreme poverty.

The poorest neighborhood in Beirut, the capital of Lebanon (Photo: Ghassan Tabet / Flickr [CC BY-NC 2.0])

 Climate change, long a major concern, further exacerbates these disparities. Human activity since the Industrial Revolution has brought about warming, sea-level rise, and more frequent natural disasters. Billionaires are steadily preparing to survive on this planet. For example, some have secured citizenship and land in cooler, sparsely populated regions and obtained housing designed to withstand rising temperatures and extreme weather so they can relocate if necessary. Meanwhile, people living in poverty are consumed with daily survival and cannot devote resources to such preparations. As a result, the poor bear the brunt of climate change and are placed in ever harsher living conditions—an outcome described as climate apartheid.

 COVID-19 then dealt a further blow. The pandemic caused unemployment to soar worldwide, and in 2020 255 million full-time jobs were lost. After more than 20 years of decline, the number of people living in extreme poverty (less than $1.90 per day) rose for the first time; in 2020, compared with the previous year, an additional 119 million to 124 million people were driven into extreme poverty.

Meanwhile, between 2020/3/18 and 12/31, the total wealth of the world’s billionaires increased by an astonishing $3.9 trillion. For example, Jeff Bezos, founder of the multinational technology company Amazon and ranked number 1 for four consecutive years on the global wealth list, saw his wealth increase by $92 billion in just 5 months from 2020/3/18. As a result, even without reducing his pre-pandemic wealth, he could have given all 876,000 Amazon employees a bonus of $105,000 each from his personal fortune.

An Amazon warehouse (Photo: Scott Lewis / Flickr [CC BY 2.0])

 Taken together, the above shows that while a small number of billionaires monopolize much of the world’s wealth, vast numbers of people lack adequate access to food, healthcare, and education—and many lose their lives as a result. It also suggests the gap between the haves and have-nots continues to widen.

 On the other hand, some may argue that billionaires bring innovation to society and the economy, or that they worked hard to earn their wealth and thus deserve it. Is that really the case? How exactly do they obtain their wealth? Let’s look at how they do so.

How wealth is acquired

Billionaires around the world use various means to acquire wealth, such as selling newly developed technologies and goods or trading stocks, but a fundamental reason they can become billionaires lies in unregulated capitalism. Many billionaires are not workers; they are capitalists who extract the value added by workers. They provide capital such as factories and machinery to workers, who then carry out production using that capital. Even under poor conditions, workers must work to survive, and capitalists exploit that to take a great deal. Thus capitalists can obtain wealth without doing the labor themselves and grow into billionaires. Along the way, they also receive government support that protects their wealth. While billionaires receive such support, there are cases in which people living in poverty cannot access welfare. This is both a problem with a social system that permits the existence of billionaires and the result of the wealthy amplifying their political voice and power to shape a society beneficial to themselves. With that in mind, let’s examine their funding sources while also considering how billionaires are protected.

 According to former U.S. Labor Secretary Robert B. Reich, focusing on U.S. billionaires, much of their funding comes from (1) monopolies, (2) insider trading, (3) involvement in politics, and (4) inheritance—these 4 elements. Let’s look at each in detail.

Stacks of cash (Photo: Picture of Money / Flickr [CC BY 2.0])

First, an overview of monopolies. Billionaires amass huge fortunes by monopolizing markets through patents or by acquiring competitors. For instance, Carlos Slim—ranked 16th globally and Mexico’s preeminent billionaire—acquired the state fixed-line operator TELMEX (TELMEX) through joint investment with foreign telecoms. Because the company commanded a 90% domestic share, he came to hold nearly 70% of the mobile market and nearly 80% of the fixed-line market—effectively a monopoly. Under monopoly or oligopoly, competition weakens, prices are prone to unjustified hikes, and rather than rising out of necessity for operating or R&D funds, prices rise simply because they can. Barriers to entry also increase, which stifles innovation not only among firms outside the monopoly but even within the monopolist itself, harming society as a whole. And the more resources you have, the easier it is to buy rivals, sue them, or coordinate with related firms to create monopoly conditions, giving you a competitive advantage. In other words, the system lets those who have, gain even more.

 Next, how does insider trading function as a wealth-generating mechanism? Insider trading is when “insiders of a listed company use material nonpublic information obtained through their duties or position to trade their company’s securities for personal gain,” and it is regulated by law in many countries. For example, in 2009 Raj Rajaratnam, founder of the hedge fund Galleon Group, was convicted for involvement in a large-scale insider trading scheme. In that case, at least $20 million in illicit profits was generated.

 Now consider billionaires’ involvement in politics. As one might expect, wealth readily links to power, and billionaires can be involved in politics directly or indirectly. For example, they can use their vast wealth to make campaign contributions to politicians who advocate policies favorable to them, or wield influence through behind-the-scenes lobbying to shape policy in their favor. By owning media outlets or establishing think tanks, they can also shape public opinion about politicians and policies. Some even become politicians themselves. The well-known investor Warren Buffett’s much-discussed remark that “my effective tax rate is lower than my secretary’s” underscores how, through direct and indirect political involvement, billionaires can shape tax systems on income, corporate profits, and inheritances; deregulation related to monopolies; and stronger regulations on ownership and patents—all in ways that benefit the ultra-rich and large corporations. The result is a society friendly to the wealthy but inhospitable to the poor, with ever-widening inequality.

The well-known investor Warren Buffett (Photo: Fortune Live Media / Flickr [CC BY-NC-ND 2.0])

Lastly, consider the monopolization of wealth through inheritance. In the United States, about 60% of wealth is inherited, passed down from parents to children and grandchildren without flowing out of the family. In other words, one can become ultra-wealthy simply by being born into a rich family. The issue here is how wealth is passed on. Many countries seek to correct the monopolization of wealth by particular families through inheritance taxes. Yet billionaires legally avoid these taxes by setting up trusts or establishing foundations. We will return to these tax issues in more detail below.

 In addition to the above 4 sources, a major funding stream for billionaires is passive income from stocks and real estate. Certainly, some derive fortunes from genuinely innovative inventions and their sales. But building on that, they often pour their amassed assets into stocks and property to gain even more wealth. Once purchased, these assets can appreciate simply by holding them. Of course, selecting effective investments requires study and effort, but typically they entrust this to professionals such as fund managers, enabling billionaires to gain wealth without working. By then plowing those gains back into more stocks and real estate, their assets grow at an accelerating pace. In particular, real estate does not produce new technology or products; it simply extracts profit from what already exists. The myth of trickle-down—that when the rich get richer, their wealth will flow to the poor and society as a whole will advance—does not hold; rather, they are siphoning off excessive wealth from society. While investment via stock purchases can support economically useful activity, short-term trading that chases price movements instead fosters economic instability.

 So how is the vast wealth thus amassed actually used? And what problems lurk therein? Let’s explore.

How wealth is used

First up among billionaires’ uses of wealth is lavish consumption. Although there are exceptions who live relatively modestly, many own palatial homes in multiple countries and cities; maintain multiple modes of transport including private jets, yachts, and luxury cars; adorn themselves with luxury fashion and jewelry; throw glittering parties; and dine extravagantly. Three problems stand out with such consumption.

A superyacht moored in Monte Carlo, Monaco’s city center (Photo: Steve Corey / Flickr [CC BY-NC 2.0])

The 1st is that access to necessities becomes skewed. When limited resources and production lines are used for inefficient luxury goods, things that society truly needs go unproduced. Lavish lifestyles often involve constantly replacing items with new ones and wasting food at parties; even when goods are produced, many are not put to effective use and are wasted. In addition, billionaires’ consumption can drive up prices. For example, the more investment pours into real estate, the more prices and rents rise across society. While this can improve the local environment and safety, long-time residents can be pushed out to worse conditions. In this way, low-income people lose access to what they need.

The 2nd is reduced aggregate demand and employment, which hampers economic circulation. Generally, the larger one’s total assets, the smaller the share spent on consumption. If the income of someone in extreme poverty doubles, nearly all of it goes to necessities like food and clothing, so consumption also doubles. But billionaires already have ample food and clothing; when their income doubles, consumption does not double—it is largely saved. While people’s consumption creates jobs and keeps the economy circulating, when wealth is concentrated among the ultra-rich, aggregate demand falls as described above, and job creation and economic circulation are impeded.

 The 3rd is environmental burden. Although the share of consumption relative to assets is small, billionaires’ absolute consumption far exceeds that of ordinary people, and their environmental impact is correspondingly large. For instance, a four-hour private jet flight emits more CO2 than an average person does in a year. Even if a billionaire can afford to fly private, it remains far less efficient than commercial aviation, and the resulting emissions are a significant driver of global warming. Mansions also require vast amounts of lighting and climate control, and the environmental burden falls on humanity as a whole.

 Many billionaires also allocate part of their wealth to charity. One example is the Bill & Melinda Gates Foundation, a philanthropic organization established by Bill Gates, founder of the world’s largest software maker, Microsoft (Microsoft Corporation). The foundation aims to fight poverty, disease, and inequality around the world, running international development programs that provide sustainable support such as agricultural development and water and sanitation in low-income countries, and global health programs that seek to improve infectious diseases through the spread of vaccines and medicines.

Front of the Bill & Melinda Gates Foundation (Photo: Adbar / Flickr [CC BY-SA 3.0])

Yet even these seemingly positive activities hide major problems. One is the undermining of democracy. Their massive donations can exceed a country’s ODA contributions. With ODA, there is accountability to taxpayers for how funds are used; billionaire philanthropy carries no such obligation. Conducting aid at their own discretion without these responsibilities—and allowing one wealthy individual to decide which problems among the many around the world get how much funding—has been criticized from a democratic perspective. In the case of the Gates Foundation, much of its giving actually goes to corporations such as pharmaceutical firms rather than directly to people in low-income countries. While this can support drug development that improves infectious diseases, these are profit-seeking businesses in which he holds shares. Moreover, founding a namesake foundation and engaging in high-profile philanthropy can serve as personal branding for the billionaire—meaning the foundation’s activities can also increase Gates’s own wealth. Supporting pharmaceutical companies that hold patents and aim to maximize profits also conflicts with the objective of helping the poor who need low-cost treatment.

Fundamentally, such philanthropy should come after meeting one’s obligations—pay the taxes owed, then use the remaining personal wealth for charity. In reality, it is far from that; the ultra-rich often use donations to foundations and the like as tools for tax avoidance. With that in mind, let’s look in more detail at billionaires’ tax-avoidance practices.

Tax issues

As noted at the outset, according to the U.S. outlet ProPublica, many billionaires pay very little in tax. Over the five years from 2014 to 2018, Jeff Bezos, who holds the world’s top wealth, paid less than 1% of his total income in tax, while Warren Buffett, ranked 6th, paid only about 0.1%. How is this possible? Let’s look at tax-avoidance tactics beyond the reach of ordinary people.

 The 1st is shifting assets to tax havens. In 2016/4, the Panama Papers leak shook the world. A tax haven is “a country or region that imposes no tax or very low taxes on foreign companies.” By setting up shell affiliates there and using complex profit-shifting networks to move assets, taxes can be avoided.

A calculator with “taxes” entered (Photo: eFile989 / Flickr [CC BY-SA 2.0])

The 2nd is borrowing. Many billionaires do not take salaries from the companies they run; they hold wealth as real estate and stocks. Under progressive income taxation, receiving large sums as salary triggers very high tax liabilities, but real estate and stocks are not taxed unless sold. Yet they still need cash for a lavish lifestyle, so they borrow from banks and take out loans. Collateral is required, but with more than enough assets, billionaires can borrow at will. Because loans must be repaid, they are not treated as income, thereby avoiding tax. When passing wealth to the next generation, they funnel assets into foundations, etc., to avoid inheritance taxes. In other words, the philanthropy described above is part of a broader tax-avoidance structure. Some call this strategy “buy, borrow, die” (buy, borrow, die).

Looking ahead

We have presented various perspectives on how billionaires affect society, and the downsides of their existence far outweigh the upsides, making it hard to call them a positive force for society. Yet most of what billionaires do is legal; the concentration of wealth in a few hands stems from problems in laws and policies.

What solutions are possible? Domestically, we can close loopholes in income and inheritance taxes to collect taxes commensurate with assets, and strengthen regulations related to antitrust and insider trading. As there is a minimum wage, one option may be to set an effective maximum wage by sharply increasing tax rates above certain income or asset thresholds. Globally, tackling tax havens and strengthening enforcement are indispensable.

In any case, we must confront the reality that while some have vast fortunes, many lives around the world are lost to dire economic conditions. We should not accept these disparities as normal; we must recognize and address them.

Writer: Nao Morimoto

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