SACHA PFEIFFER, HOST:
Officially, at least, the United States does not have an aristocracy, but Boston College law school professor Ray Madoff says there are American aristocrats today. In her new book, "The Second Estate: How The Tax Code Made An American Aristocracy," she describes our tax system as one that lets rich people avoid paying taxes because it taxes the income of working Americans but doesn't tax the way that many ultrawealthy people acquire and build wealth. I recently asked Madoff what her sales pitch is for those who, as she writes, might find this issue dull and intimidating.
RAY MADOFF: The answer is that taxes are probably the single most important issue in this country. The amount of taxes that we raise determines what the country can do for its citizens, national defense, the amount of debt that we have, and even more importantly, how we allocate the burden has a direct impact on people's lives, in many cases, affecting things as fundamental as whether they can afford a car or even their housing. So taxes should be the single most important issue for people, and it's really not as complicated as people have been led to believe.
PFEIFFER: So I want to try to make it simple enough to understand, but the basic idea is that you say people are being taxed differently based on how they acquire their wealth, whether they get it from a paycheck or they get it from, say, an inheritance or from stock options. Can you differentiate among those?
MADOFF: Absolutely. Working Americans really carry the lion's share of the costs of government. That's because their earnings, whether it comes in the form of W2 or whether it's earnings from gig working - their earnings are subject to two levels of taxes. First, income taxes at the highest rates - we call those ordinary income rates - rates as high as 37%. And on top of that, additional payroll taxes. Payroll taxes for self-employed people are as high as an additional 15.3%. So we're talking about extremely high taxes that are imposed on earnings from all sources, and those taxes are very difficult to avoid.
On the other hand, when we look at how the wealthiest Americans acquire their wealth - through inheritances and investments - those can avoid taxes altogether because inheritances are specifically written out of the income tax code and because investment income is easily avoided, which our wealthiest citizens do.
PFEIFFER: Your book makes the point that some wealth, some types of wealth, are concentrating at warp speed. And you argue that that's inherently bad. Some people may not think that's a bad thing at all. They want their wealth to accumulate in that way.
MADOFF: That's right, but the problem is the different ways that it grows. So for working Americans, for people who are subject to regular taxes, they can move two steps forward and then one step back as their wealth gets reduced by taxes. However, for the people who have already acquired sufficient wealth that they can avoid salaries and other forms of taxable income, their wealth grows two steps forward, two steps forward, two steps forward.
And so what we have is growing wealth inequality. So we have this massive concentration of wealth amongst our richest Americans, while other people are often struggling to get by. It's the inequity in how we allocate this burden that's so troubling.
PFEIFFER: And do you say that the answer is not creating new taxes; it's making sure that everybody and every type of wealth is taxed and that Congress keeps plugging tax loopholes?
MADOFF: That's right. If we had an annual wealth tax, it would be incredibly difficult for the IRS to monitor, right? They'd have to tally the ownership interest of everybody who is subject to the tax. But even more concerning is that there would be a tremendous incentive for the richest Americans to take their money away from the publicly traded stock market, where it's so easy to value, and move them into more complex assets that are much more difficult to value. And that would have a serious cost on all Americans who tend to put our retirement money and other things in the stock market.
PFEIFFER: Well, you're getting at the reality that there's always been a cat-and-mouse game between tax collectors and taxpayers. And all these things you're talking about are legal. You're suggesting that it's nefarious, but many people would disagree with you.
MADOFF: No. Actually, no, the point that I'm making is not about these individual loopholes that people may or may not take advantage of, things like tax-loss harvesting. My concern is that if we look one level up of generality, once people acquire a certain amount of wealth, for them, taxes are optional. And that is because we do not, under our current system, tax their enormous growth of investments and their inheritances.
So that's what it means to be rich, right? To be rich means you live off of your investments and your inheritances. Most of the public think that our wealthy have become super wealthy through taxable income, through the acquiring of taxable income, and that's just not the case.And one reason for that, of course, is that they do everything to avoid taxable income.
So, for example, they take tiny salaries. Warren Buffett, the greatest stock picker of all time, takes a salary of $100,000, and Jeff Bezos takes a salary of $80,000. Meanwhile, Zuckerberg and Larry Ellison only take $1 a year. They take these tiny salaries to avoid taxable income. And instead, what they do is they rely on their growing wealth, and their wealth is growing at an astronomical pace.
So just, for example, since 2023, Warren Buffett's wealth has grown by 50 billion, Bezos' has grown by 100 billion. So they have this enormous growth of wealth, but they never have to pay tax on it because under our current system, we only impose tax on that growing value if the property is sold. And these people never have to sell their stock because they can simply borrow against it to support their lavish lifestyles.
PFEIFFER: How do you see this being fixed? Or what, you believe, needs to be fixed?
MADOFF: The way to do it is, first of all - and perhaps surprisingly - we need to get rid of the current estate tax. People justify the lack of income tax on investments, inheritances, on the assumption that we have a robust estate tax, but we no longer do. And that's because since 1990, there has not been a single provision adopted to close a loophole in the estate tax. And the effect of it is that the tax exists in name only, providing cover for the rich and not any burden.
PFEIFFER: You teach at Boston College. You get a fresh perspective from your students and that they're often outraged when they learn about this. What do you hear from them?
MADOFF: It's interesting. We just had this happen today. As they learn about things more, there's basically a feeling like they need to take a shower because they often are working jobs and trying to carry the debt associated with law school, and they have a lot of financial burdens. They become tremendously upset when they see how, for the rich, these burdens are entirely optional. Some wealthy people pay taxes, but if they don't want to, they honestly don't have to.
PFEIFFER: And that's why you think there may be appetite for tax change?
MADOFF: Absolutely. Absolutely. When people learn what the system is, they have appetite for change because it's so unfair.
PFEIFFER: That's Boston College law school professor Ray Madoff. Her new book is "The Second Estate: How The Tax Code Made An American Aristocracy." Thank you.
MADOFF: Thanks so much for having Transcript provided by NPR, Copyright NPR.
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