Would it be a surprise if we told you the rich don’t actually live in the same tax system as everyone else?
Tomorrow is Tax Day, when millions of Americans will be filing their taxes or applying for extensions, so Nick and Goldy sit down with Ray D. Madoff, Professor of Tax Law at Boston College, and author of The Second Estate, to pull back the curtain on how wealth really moves—and why so much of it never gets taxed at all.
Because here’s the twist: The system wasn’t supposed to work this way.
But over time, something changed. Now, the people who live off paychecks carry the tax burden… while the people living off wealth often don’t have to play the game at all.
Professor Madoff explains what happened and what it would take to fix it.
Ray D. Madoff is a professor at Boston College Law School and director of the Forum on Philanthropy and the Public Good. She is a leading expert on tax policy, wealth, and philanthropy, and author of The Second Estate: How the Tax Code Made an American Aristocracy.
Social Media:
Further reading:
The Second Estate: How the Tax Code Made an American Aristocracy.
The Atlantic – How to Tax Billionaires
CNBC – Lawsuit over $21 million donor-advised fund highlights risks of DAF giving
Washigton Post – A Signature GOP Issue Is Omitted From Trump’s ‘Big’ Tax Bill. Weird
New York Times – America Builds an Aristocracy
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Nick Hanauer:
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.
Goldy:
The last five decades of trickle-down economics haven’t worked, but what’s the alternative?
Nick Hanauer:
Middle out economics is the answer.
Goldy:
Because the middle class is the source of growth, not its consequence.
Nick Hanauer:
That’s right.
Announcer:
This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the economy from the middle out. Welcome to the show.
Goldy:
You know what tomorrow is, Nick? A very special day, do you know what tomorrow is?
Nick Hanauer:
I think it’s tax day.
Goldy:
Well, I was going to say it’s my birthday, but yeah, it’s also tax day. Makes a lot of sense considering how much I talk about taxes and over the years, how I focused on that. And I’m a tax day baby.
Nick Hanauer:
I did not realize that, but all of a sudden it makes perfect sense.
Goldy:
And so we have a tax day, not really my birthday themed podcast today, but a tax day themed podcast.
Nick Hanauer:
Yeah.
Goldy:
We’re going to be talking about taxes with a tax lawyer, a professor of tax law.
Nick Hanauer:
And why wouldn’t we?
Goldy:
So much better than the way I normally celebrate my birthday as a kid, which was with a [inaudible 00:01:37] birthday cake. If you ever had one of those.
Nick Hanauer:
And the person we’re talking to obviously is a big tax expert. Ray Madoff is a professor at Boston College Law School and director of the Forum on Philanthropy and the Public Good. She’s also a leading expert on tax policy, wealth and philanthropy, and is the author of ‘The Second Estate: How the Tax Code Made An American Aristocracy.’ She has a lot to say on the subject that’ll be very, very interesting.
Goldy:
Yeah, and as a member of the aristocracy that the tax code made, maybe you’ll be looking for some tips.
Nick Hanauer:
I most definitely will be looking for some tips.
Goldy:
So let’s talk to Ray.
Ray D Madoff:
I’m Ray Madoff. I’m a professor of law at Boston College Law School, and I have a new book called ‘The Second Estate: How the Tax Code Made An American Aristocracy’.
Goldy:
We have one of them here, one of the aristocrats from right here. Nick, you want to start off?
Ray D Madoff:
Nice.
Nick Hanauer:
Why don’t you start by just sort of laying out your thesis?
Ray D Madoff:
So we think of the tax code as something that is designed to counter aristocracy. And in fact, that’s the purpose with which it was written, right? If you think about it, our modern tax code came of age in the 1913, 1916, in the wake of the gilded age, and there was a lot of concern about concentrations of wealth. The only taxes that we had at the time were tariffs because the income tax had been found unconstitutional. And these tariffs imposed great burdens on consumers and farmers, much like today.
And so in response, Congress enacted two different tax provisions. First, the income tax after getting an amendment to the Constitution that allowed a new income tax to come into being, an income tax that soon had progressive rates, meaning those that earned more, paid more. And then for the richest Americans, an additional estate tax. And the purpose of the estate tax was to prevent dynastic wealth. Together, these were designed to impose greater burdens on those who had the greatest capacity to pay. A lot of Americans live under a system where they believe this is still the case because the rules are still in place. We still have a progressive income tax and a estate tax. And even if it’s not as progressive as it once was, it’s still pretty progressive. However, what has happened over the past 40 years is that with this same tax code, the wealthy have been able to entirely remove themselves from the system.
So the system we have today is that the Americans that work for a living, that have jobs, at all income levels; low income, mid-income, high income, are paying the vast majority of all the taxes, and the wealthiest Americans are able to avoid taxes, first because they avoid taxable income and then because they’re able to avoid the estate tax. So we have now created a system that does just the opposite. Rather than it being one that particularly burdens the wealthy, it’s one that gives the richest Americans a free pass.
Goldy:
So I want to be absolutely clear on something you stated at the top, that the purpose of the tax code was to reign in this aristocracy, was to make the economy more equal. That was the intent? We talk about that like the intent of the framers, the intent of Congress when they write legislation.
Ray D Madoff:
Well, fair enough. Yeah.
Goldy:
Was that actually a stated intent at the time?
Nick Hanauer:
Yeah, that’s a really interesting-
Ray D Madoff:
Yeah. It’s very hard to know even with legislation that’s enacted today, what is the intent? The intent obviously comes from lots and lots of different people who have lots of interests. A big concern at the time was the fact of these concentrations of wealth. We had Teddy Roosevelt saying it was a problem. We also had the Wall Street Journal saying it was a problem. And the reason it was a problem for people across the political spectrum was because capitalism itself was at risk. This was a time when socialism was really pretty powerful. We had the Russian Revolution, we had McKinley was assassinated. We had a lot of concern about socialism, and there was a belief that capitalism had to prove its worth, and it had to prove that people who profited under the systems like those robber barons and their heirs, would also be supporting the public at large.
Nick Hanauer:
Interesting. I think most of our listeners may understand this, but I think it’s important to elaborate about the difference between earning income from a job and earning income from investments, whether that income turns into actual income that you report in your taxes, right? Or whether it’s just the appreciation of assets that don’t trigger taxable income.
Ray D Madoff:
Right.
Goldy:
Right? Because you haven’t realized the gain-
Nick Hanauer:
That’s right.
Goldy:
But you can borrow against it.
Nick Hanauer:
I think one of the points you’re making is it’s a double whammy. Income that comes from wealth appreciation is taxed at half the rate-
Goldy:
If at all.
Nick Hanauer:
… than if income from salaries is taxed at, which is completely nuts.
Ray D Madoff:
Yeah.
Nick Hanauer:
And income, I mean, we’re using words that don’t really describe-
Ray D Madoff:
Acquisitions of wealth.
Nick Hanauer:
… appreciation, the value of the stock you hold doubling triggers no taxable event until you sell it. And obviously, this is the problem we face at the extremes, right? People like Musk and Zuckerberg and Bezos are worth $100 billion and pay-
Ray D Madoff:
You wish they were worth $100 billion.
Nick Hanauer:
I mean, whatever it is, right?
Ray D Madoff:
Musk is probably worth $800 billion today. It’s very hard to keep up with it. It’s like the number keeps growing faster and faster, but yeah.
Nick Hanauer:
Effectively pays zero taxes.
Ray D Madoff:
So I teach tax law at a law school. And when you teach tax, if you teach income tax, you start with the definition of gross income. What’s subject to the income tax? And it’s this very comprehensive term. Gross income is all income from whatever source derived. That’s Section 61. And then it lists all sorts of things. And so it includes things like you find money on the street, you’re supposed to report it, you’re given a prize, you win the lottery, you win a small amount in the lottery. All of those things you are supposed to report to the federal government and pay taxes on. In addition, even if you do a barter exchange, if you shovel your neighbor’s walk and they build a website for you, then each of you have taxable income based on that barter exchange and you’re supposed to report it to the federal government.
So we have this very broad definition, but then we have things that we do not treat as taxable income, even though they are very much acquisitions of wealth. The biggest ones is any money received by gift, inheritance, or life insurance. No matter how much you receive from those ways, you don’t even have to tell anybody. It is excluded from the definition of income, even though it clearly is income, right? If I give you $100 million-
Nick Hanauer:
Hold on gifts? You have to pay gift tax?
Ray D Madoff:
Oh, I’m talking about income tax, right? So the only system we have is the estate and gift tax. We’re going to talk about that problematic system. Under our income tax system, and I’m so glad you said it that way, because there is a common misperception that gifts in excess of a certain amount, maybe $19,000, are subject to income tax. I get this question all the time. No income tax, no matter how big. So whether somebody gives you 20,000 or 20 million or 20 billion, no reporting of that, that’s just your business.
Nick Hanauer:
No, no. That’s-
Ray D Madoff:
I promise. And that’s something-
Nick Hanauer:
Then Ray, I need you to talk to my attorneys.
Ray D Madoff:
Yes, because what you’re talking about is the estate and gift tax. You’re talking about a tax on donors who transfer more than $15 million, that’s the estate and gift tax. And we’re going to get to that in a minute. We’re starting on the income tax, okay?
Nick Hanauer:
Right, okay.
Goldy:
When I give my daughter… I just paid off a student loan of hers. When I give her money, she doesn’t pay income tax on that. Now, if over the course of my life, including her inheritance, I give her more than, what is it? 15 million now? What is the exception?
Ray D Madoff:
15 million now.
Goldy:
Then there’s a tax on the amount above that.
Ray D Madoff:
On you.
Goldy:
But because I’m not going to leave her that much money, Nick, unless you give me a very generous bonus when I retire.
Nick Hanauer:
Oh, yeah, yeah. No, she will-
Ray D Madoff:
Yeah, that’s coming your way.
Goldy:
She will not have to pay any tax on those gifts-
Nick Hanauer:
Yes, correct.
Goldy:
… whatsoever because it’s the same as-
Nick Hanauer:
Right. I’m aware of that.
Goldy:
… an inheritance.
Nick Hanauer:
I’m aware of that.
Ray D Madoff:
And now here’s the thing, you’re probably thinking… And this is why we have this exclusion. It’s because we have this well-functioning estate and gift tax that’s going to take care of those transfers. That’s why we’ve taken them out. That’s why they were excluded because the idea is that we have this other system that will presumably catch it and more. But we’re going to start with the income tax system, right? No income taxes. We’re going to then see how our estate tax is failing us, by the way, in case you’re wondering where we’re heading with that.
Nick Hanauer:
Yeah.
Ray D Madoff:
And then on top of that, money, as you pointed out, when you have property that grows in value when you buy Apple stock or Facebook stock or any investment, and it grows in value from $10,000 to $10 million, as you pointed out, that’s not subject to tax either, even though you can access those funds by borrowing against them, because it’s not realized. And our system doesn’t ever require realization. You have to sell the property in order to realize the gain.
Nick Hanauer:
Right.
Ray D Madoff:
And if you simply pass the property onto your kids, either when you’re alive or at death, that doesn’t trigger gain for you either. You have to sell it. And this is unlike the rule in Canada where whenever somebody disposes of property, whether by sale or gift or inheritance, it’s going to be subject to tax. All of that gain will be subject to tax to the donor, but we don’t have that system.
Goldy:
I know that there’s the step-up, because I live in a different economy than Nick. There’s the step-up basis on my house. The extent of my estate planning, I have an only child, is to die in my house, which I’ve owned in Seattle since 1997, that way there’s no capital gains tax. Is that true on other assets or is that particular to-
Ray D Madoff:
Every asset. Every asset.
Goldy:
Every asset.
Ray D Madoff:
But the catch is, you have to pass it through your estate at death in order to get the step-up in basis. So step-up in basis means that for your listeners, what it means is that your house, let’s say you bought it for $50,000 and it’s now worth $50 million because of where you’re located, that gain-
Goldy:
Not quite that good.
Ray D Madoff:
Not quite. But Let’s say it’s worth 15 million so we don’t get any estate taxes involved, then if you pass that property on at death, your children are treated as if they had bought it for $15 million. And so when they sell it, they pay no taxes on it. Whereas if you sell it, you have to pay a lot of capital gains taxes, or if you gift it to them during life, they would have your, what we call, carryover basis.
Goldy:
Right.
Ray D Madoff:
So if you gift it, then they would pay tax on the gain if they sold it. The effect of this is that this thing that we call step-up in basis, also called the angel of death loophole, the estate planners are very clever, it’s a tremendous distortion in the market. Which is interesting because conservatives are always saying, “We don’t want to distort the market.” But the biggest distortion in the market is step-up in basis.
Goldy:
Right.
Ray D Madoff:
Because that’s why people don’t sell their houses because they don’t want to have to pay that extra gain. In addition, people don’t sell their stock. Even if they have a stock that they think is no longer doing very well, the market, they are not going to sell their stock because they’re going to have to pay tax on that gain. So it’s a big distortionary effect on the market, our current rules.
Nick, I feel like you’re giving a look like I am definitely not convincing you.
Nick Hanauer:
No, no, no, no, no. I mean, we’re generally aligned, but I watched some of the videos that you made, and I think we’re talking about the same thing. So for sure, the estate tax $15 million exemption is a significant loophole in the system. I mean, people pay zero estate tax on assets less than $15 million.
Ray D Madoff:
I mean, it’s the rule in the system, whether to say that, I don’t think that’s the source of the problem is the exemption amounts.
Nick Hanauer:
If you have a billion dollars and you want that to flow to your heirs-
Goldy:
Are you asking for tax advice here, Nick?
Ray D Madoff:
No, you’re saying, why isn’t the estate tax doing its job?
Nick Hanauer:
You’re most definitely going to pay 40% at least of that, above the 15 million, you’re definitely going to pay 40%.
Ray D Madoff:
You would think.
Nick Hanauer:
Yeah. Dude, if that’s not true, I need to hear about it now.
Goldy:
Yeah, because you need some new advisors, Nick. I thought that was the whole point of your foundation.
Nick Hanauer:
Unless you give it all the charity. So you take Bill Gates and Steve Ballmer, right? These guys are worth whatever it is, more than $100 million.
Ray D Madoff:
Yeah, billion.
Nick Hanauer:
They are going to pay zero estate tax because their kids are already billionaires and everything else is going to go to their foundations.
Ray D Madoff:
So there’s a lot of issues that we’re raising here.
Nick Hanauer:
But there’s no way around that 40%.
Ray D Madoff:
Okay. Yeah.
Nick Hanauer:
You can set up trusts for your kids and stuff like that, but there’s limits to all that.
Ray D Madoff:
Yeah. But there is a tremendous capacity for tax avoidance.
Nick Hanauer:
Like what?
Ray D Madoff:
And so I’m going to tell you.
Nick Hanauer:
Yeah. Let’s hear it. Tell me. I’m going to write it all down.
Goldy:
Are you taking notes here, Nick?
Nick Hanauer:
Yeah, I am.
Ray D Madoff:
I feel a little bit badly though because I feel like I’ve gotten us to this subject without finishing that two-tier system that you had wanted me to talk about.
Nick Hanauer:
Yeah, we can go back to that.
Ray D Madoff:
Should we finish that and then we’ll come back here?
Nick Hanauer:
Yeah.
Goldy:
Yes. And then you’ll tell Nick how to avoid paying taxes when he’s dead.
Ray D Madoff:
When Americans think about the tax system, they typically think of the income tax system, because that’s the system that most people live with. The estate tax is a very large exemption. It’s not relevant for them. And so the income tax system looms large in the visions of most Americans, as it should, because the combination of the income tax and payroll taxes means that anybody who has a lot of income pays a lot of taxes. And somebody who even has modest income, let’s say $60,000, which is the median income in this country, still will pay $13,000… If they’re a self-employed person, they will pay $13,000 in income taxes and payroll taxes. And this is a significant burden for working Americans. If you think about it, if you’re trying to live on $60,000 and $13,000 of it has to go to taxes, that really takes a bite out of what you have.
Goldy:
And that’s the federal taxes because there’s also state and local.
Ray D Madoff:
And that’s just federal. There’s states on top of it, exactly.
Goldy:
Which is going to be like another 11, 12%-
Ray D Madoff:
Depending on where you live.
Goldy:
… depending on where you are. Yeah.
Ray D Madoff:
Yeah. And so the thing that I want to mention also is that high income earners pay the vast majority of the taxes. And the reason I want to mention this… So in 2024, the top 1% of earners paid 40% of all income taxes. And the reason I want to highlight that is because that’s a statistic that is often distorted to tell the public that rich people are already paying all the taxes. We don’t need to worry about rich people paying taxes because then they’ll just say, the top 1% are paying 40% of the taxes, and 40% of Americans pay no income taxes. This is something that misleads the public into thinking our system is very progressive.
And the problem is, first of all, for a lot of working Americans, they’re paying significant payroll taxes on that 40%. But the other issue is that when we’re talking about the top 1% paying 40% of the income taxes, these are people with high incomes; lawyers, doctors, bankers, finance people, they have high incomes. They pay most of the taxes. This is not people like Bezos, Musk, Zuckerberg, all of our billionaires, and even frankly, our centi-millionaires, who also don’t have to pay taxes, because they avoid taxes by avoiding taxable income, and they do so because they avoid salaries, they avoid selling their property, and when they inherit property, none of it is subject to income taxes. So they are not subject to the income tax world at all.
And indeed, they are just as likely to be in the 40% of Americans that pay no taxes as they are in the top 1% of payers. And this is, if your audience takes away nothing from this call, I hope they take away this point about how it is that our system is unfair because they’re constantly being told that, oh no, the system is fair. Top 1% are paying 40% of the taxes. What are you complaining about? But it is the top 1% of earners and wealthy people avoid taxes by avoiding taxable income.
Nick Hanauer:
Okay. But to be clear, if you inherit money-
Ray D Madoff:
We’re going to come to the estate and gift tax too.
Goldy:
You can see the different worlds we live in.
Ray D Madoff:
Yes, I know it.
Goldy:
How focused he is on the inheritance side of it and how much I’m focused on the income and payroll tax side of it, because that’s what I pay.
Ray D Madoff:
Yes, exactly. So I want to just get our income tax world clear because, for example, when we had this campaign against the estate tax, which is going to be relevant for our story, it was like, we have to get rid of the estate tax. It’s so unfair. It’s a death tax that hurts family farms, right? But nobody was noting that none of this money will ever be subject to tax if it’s not subject to estate taxes under our current system.
Nick Hanauer:
Yeah.
Ray D Madoff:
Okay. So now let’s talk about what happened to the estate tax. The estate tax is essentially a 40% flat tax on transfers of wealth, by gift or at death, in excess of $15 million writ large. There’s some exclusions, but that’s basically the rule. It looks like it should do a really great job because that’s a pretty significant tax. And if you’ve got some people that are like multi-billionaires, that’s going to be a lot of money.
The problem is that in order for a tax to work, so tax is my field, I’ve been a tax lawyer a long time, I teach tax, I live in the tax world, but there is a dance that happens in the tax world, which is that Congress makes rules, then people hire lawyers, your lawyers, my students, and they learn their ways around the rules. And then Congress is supposed to come back in, they patch up those loopholes, then people find new loopholes, right? It’s a dance between Congress and taxpayers. And for much of the history of the estate tax, Congress participated in the dance.
I’ll just give two quick examples. In 1976, and then they reissued in 1986, Congress enacted a whole backup set of rules to address long-term trusts that were called the Generation Skipping Transfer Tax. It was an additional tax that was designed to make sure the taxes were imposed at each generation. And if a grandparent gave a gift to a grandchild, that would be subject to two levels of tax, to make sure the tax was exacted at each generation. That was enacted in 1986. 1990, Congress enacted four new sections of the tax code that were all designed to address valuation gaming because people were doing all of these gaming techniques and Congress said, “We got to put a stop to them.” And they adopted these special valuation rules. Both of these rules were enacted under Republican presidents, and they were designed to shore up the estate tax.
So you had a lot of work shoring up the estate tax. However, in 1990 began a campaign funded by 18 of the country’s richest families, the Melons, the Cokes, the Mars family, the Mars family is very big into this area of fighting estate taxes, and they decided that they wanted to push for repeal of the estate tax. And no, they were not arguing that we should bring inheritances into the income tax. They just wanted there to be entirely tax-free wealth that passed from generation to generation, compounding, compounding, where all the rest of us have to pay taxes whenever we find money on the street, but they wanted their heirs forevermore to never pay any taxes.
And they hired this guy, Frank Luntz, who was a great communications expert. Frank Luntz was famous for, if you ever used the phrase global warming, and remember how scary it was, like the world is getting hotter and this is a problem and melting ice caps, but now it’s climate change, not necessarily worse, just different, right? That was brought to us by Frank Luntz. Frank Luntz’s biggest thing though was he introduced the term the Death Tax, and this was hugely successful. Today, I’m sure, you stop a person on the street and you say, “What do people call the estate tax?” They will say, “The Death Tax.” And they will say, “It hurts family farms and businesses.” And they will say, “It’s an unfair double tax.” This was an extraordinarily successful campaign. The goal of the campaign was to get Congress to repeal the state tax. George W. Bush was the big champion, and he enacted a 10-year tax bill that resulted in there being no estate tax in the year 2010.
Goldy:
Yeah. Good year for rich people to die. Yeah. Sadly, I missed it.
Ray D Madoff:
Exactly. Sadly for your kids. The estate planners, ever a jolly group, called it the, ‘Throw Mama from the Train Year’, right? Because it was the year that you’d want somebody to die. George Steinbrenner died, as well as eight other multi-billionaires died that year, and their estates passed entirely free of taxes. Okay.
Nick Hanauer:
I tried to knock off my mom in 2010, but it didn’t work.
Ray D Madoff:
I understand. Well, it was worth the… That was the other thing that the estate planners would say, “Gifts for your parents in 2010, hang gliding lessons and warm chicken salad.”
Nick Hanauer:
Yeah, exactly.
Ray D Madoff:
So anyway, that was the-
Nick Hanauer:
We call it mayonnaise.
Ray D Madoff:
Yes. So this campaign, one would think, just looking at that history, that it failed because the estate tax went away in 2010, but it came back in 2011. So what did it really do? It was so effective in shifting how the public thought of the estate tax that the last time Congress closed a single loophole to the estate tax, you want to guess when it was? 1990, 36 years ago.
So basically what we have had is we’ve had complete quiet quitting by Congress, but we have not had quiet quitting by the estate planning bar, right? My students, others, I teach them how to do it. There are so many devices for the wealthy to avoid taxes. They are dynasty trusts, GRATs, rolling GRATs, QBRs, QTIPs, CRATs, CRUTs, CLATS, CLUTs. You have to go see your estate planner. And basically, typically they are done through lifetime transfers. They are often done through sales. Basically, you sort of shrink the property way down low, then you sell it for a very low interest loan, and then you swap property in and out. And dynasty trusts are really the worst of the worst. And these are vehicles that are designed to be tax-free and creditor proof from generation to generation.
And even here in Boston, which is not New York, not Seattle, not LA, just old folksy Boston, lawyers have multiple clients who have multi-billion dollar dynasty trusts. And these dynasty trusts weren’t supposed to be funded with more than $15 million. They were only exempt with $15 million, but people can leverage, primarily through these sales is the most effective way, and they are shoving assets into these tax-free creditor-proof trusts. I want to just offer up a few more numbers because I think these numbers are useful for people to have.
Okay. So 2024, 2025, the numbers were largely the same, which is that the government took in, in rough numbers, about $5 trillion from all sources and spent about seven trillion, and therefore we had to borrow two trillion. Okay?
Nick Hanauer:
Yeah.
Ray D Madoff:
So we added that two trillion to our national debt. Guess how much wealth was owned by the richest 1% at the end of 2024?
Nick Hanauer:
Oh, it’s got to be like $50 trillion or something like that.
Ray D Madoff:
$50 trillion.
Nick Hanauer:
Was it really 50?
Ray D Madoff:
It’s literally $50 trillion. Plus, we had a $2 trillion shortfall. The top 1% owned $50 trillion, and I think it matters whether this group pays taxes. So remember, this group, arguably a lot of the people in this group, not necessarily everyone, some of those top 1% are also high income earners, right? They’ve paid taxes, but a lot of them aren’t. And a lot of the wealth is owned by people who aren’t. And so the estate tax, 40% tax that applies to all transfers during life and at death, guess how much taxes was raised from this group in estate taxes in 2024? 30 billion.
Nick Hanauer:
30 billion out of 50 trillion.
Ray D Madoff:
Yeah, that’s 0.06%. Okay? Musk on his own earned and lost $30 billion in a single day.
Nick Hanauer:
But what I’d be really interested knowing, and not to put you on the spot is-
Ray D Madoff:
Put me on the spot.
Nick Hanauer:
… the richest people in the country have an aggregate net worth of 50 trillion.
Ray D Madoff:
Yeah.
Nick Hanauer:
What percentage of those people died in 2025?
Ray D Madoff:
No, but what I’m saying is they didn’t have to die. Most of them were gifting their property because anybody who has an estate planner is gifting… You need to see an estate planner who’s telling you to make gifts.
Goldy:
You obviously are too honest, Nick.
Ray D Madoff:
No, it’s honest. It’s all allowed. That’s the thing. Somebody with significant wealth should be doing significant gifting, discounting, GRATs, all sorts of stuff to be getting that money out of their estate. So they’re doing a lot of gifting.
Goldy:
So what you’re telling us is because we haven’t used the tax law to address these innovations, there’s been an evolutionary battle between the tax code writers and the tax attorneys and then that stopped. It’s like antibiotic resistant bacteria in an era where we’re no longer developing new antibiotics.
Ray D Madoff:
Right, exactly. That’s a good one. That’s a good comparison. Yeah. It’s basically, right. So Congress stopped closing loopholes. The grantor trust rules are the number one example. They are the big source of abuse. This is a set of rules that were designed to close a loophole. Am I getting too much in detail here?
Nick Hanauer:
No.
Ray D Madoff:
Okay. This was a set of-
Goldy:
He needs it. He’s taking notes to send off to his tax attorney.
Nick Hanauer:
Yeah, that’s right.
Ray D Madoff:
All right. The biggest friend of estate planners is these grantor trust rules. This is a set of rules that were adopted at a time when trusts were subject to income tax at lower rates than individuals. So individuals would take their money, they would put it into a trust, and it would be subject to tax at a lower rate. Congress, to close that loophole, adopted these rules called the grantor trust rules, that said, “We’re going to treat that trust as if it’s still owned by the grantor.” To close the loophole of people avoiding taxes by putting money into these trusts that were subject to tax at a lower rate.
Starting many, many years ago, trusts were no longer subject to tax at a lower rate. Individuals are subject to a lower rate than trust. So the grantor trust rules are no longer serving any tax avoidance purpose. They’re not closing any loophole. But instead they are being used by estate planners to transfer money into trusts and the trusts are treated as if you’re transferring it to yourself so it’s tax-free. So donors are taking their appreciated property, they’re putting them into their trust, getting it out of their estate for estate tax purposes, but paying no taxes on it for income tax purposes because the trust is treated as themselves. These rules are just as an estate planner’s friend. Congress still hasn’t done anything to get rid of them. This is not rocket science. This is not something that like, “Oh, these problems are way too complicated. We can’t fix them.” They’re not doing anything and they could easily do it.
Everyone thinks the estate tax is unfair. And the estate tax has an Achilles heel that makes it vulnerable to this claim. That for some people it really is a double tax. For people who earned their money through salary, they might’ve paid income taxes up to 50% and then they die and they are going to be subject to another 40% tax. And that feels unfair to people. It feels unfair to me. Of course, for most of our rich people, they’ve never paid taxes on that gain because it’s gone up in value. They never realize the gains. But we have the same rule that applies to people who pay taxes as to people who didn’t pay taxes. Taxes are complicated and people have limited patience and attention span. And so it’s easy to our current estate tax-
Nick Hanauer:
Yeah, that’s an interesting point.
Goldy:
Yeah.
Ray D Madoff:
… makes it vulnerable.
Goldy:
You’ve opened my eyes a bit because we focused a lot on how we have slashed tax rates on individuals and corporations. I don’t know if this is true or not. I’ve seen this statistic a number of times that apart from the extraordinary expenses of the responding to the financial collapse in 2008 and to COVID, that all of the accumulated debt over the past 25 years could be attributed to the Bush and Trump tax cuts. But we’re not talking about tax cuts. We’re just talking about not responding to the innovations of tax attorneys. Nobody cut taxes. They just didn’t close these loopholes.
Ray D Madoff:
Yes. And honestly, I do not agree that the problem is the rates. I think we need to have a broad base and we need to have a reasonable rate. Because back in the day when we had 70, 80 and 90% rates, these types of confiscatory rates, people weren’t paying them. There was widespread tax avoidance. And interestingly, it was actually Ronald Reagan, the Tax Reform Act of 1986 that put an end to those tax shelters, which were very big in allowing rich people to avoid taxes. And the solution was to cut rates and to expand the base.
Now, there were a lot of problems with that bill, but I think that idea was the appropriate idea, because nobody wants to pay 50, 60, 70%. I mean, all across the world, top rates have come down. I think that we no longer live in a society, I don’t think, where people feel good about those types of rates, but we don’t need to do it.
Nick Hanauer:
Well, we don’t have the kind of social cohesion that makes something like that viable.
Ray D Madoff:
Well, also a lot of those countries that have the social cohesion, they also are very homogeneous. We’re a very diverse country and we have a different culture. So I think when people advocate for, we have to raise income taxes on top earners, I think that’s a big mistake. Our top earners are already paying all the taxes. And this is where I feel that Democrats have made a lot of mistakes in their messaging because they just anger people who are already paying a lot of taxes. When they say the problem is people who make $400,000, I think that you take a whole group of people and you’re like, well, these are not people who are living high off the hog. I have a lot of former students, they make four or $500,000. They are barely making ends meet when it comes to owning houses in Massachusetts and putting your kids through childcare and schools and all of that. So I think that we have to be realistic about things and there’s plenty of room. There’s plenty of things to tax. There’s plenty of things that are passing tax-free that shouldn’t be tax-free.
Goldy:
So how about if we tax, in addition to that, we tax as income the proceeds from loans on unrealized gains?
Ray D Madoff:
Yeah. So that’s one that’s another one. It seems like this will be a good solution because people are borrowing against their money. The problem is it barely gets at any of the problem. So if we have our billionaires with like $200 billion now, as I say, it’s constantly keeping up with these numbers are crazy. They’re not borrowing $200 billion, right? Maybe they’d borrow $2 billion. I mean, this is a lot of money, these billions. And because of it, that would be a solution that I think would be a bad one because it would not get at the nature of the problem.
The nature of the problem, so I’m not hiding the ball as I see it, is that we are not taxing the sources of income for wealthy Americans, which is their investment gains and their inheritances. And by inheritances, I mean that writ large to inheritances, gifts and life insurance. Those two things are not subject to tax because we count on the estate tax to do it and the estate tax isn’t doing it. So what I think we need to do is bring them into the income tax system. And we could do that by taxing gains whenever property is transferred, whether by gift or at death or during life, that would avoid the lock-in effect, right? People would get a step-up in basis because somebody had actually paid taxes on the gains. We could exclude things like people’s primary residents if we wanted to do that. We don’t have to treat everybody the same. We could have a certain amount excluded.
But generally speaking, when somebody has an asset that increases by a hundred million or a hundred billion, we should tally the gains at some point. When they give it away or when they die holding it, and impose the tax on the gains then.
Goldy:
And you’re saying an income tax, not an estate tax?
Ray D Madoff:
An income tax. Forget the estate.
Goldy:
Right. Forget-
Ray D Madoff:
You should appeal the estate tax because the estate tax is providing cover for the rich, making the public think that they’re paying a 40% tax and it is not exacting any revenue and it is not working.
Nick Hanauer:
Okay. So Ray, just playing this back to you, you eliminate the estate tax, which you think is just not workable. And in place of it, people just have to pay a 40%, but plus or minus 40% income tax on anything they get, whether it’s a gift, an inheritance, anything else.
Ray D Madoff:
Yeah, we could have exception. Yeah, but-
Nick Hanauer:
Okay. Well, and there are already exemptions. There’s a $15 million exemption for God’s sakes.
Goldy:
That’s a lifetime exemption.
Ray D Madoff:
Yeah. What I would say is that each person… I think that we need to recognize that we have a preference for inherited wealth. So if we go back to your, this is a world, what do you call it? Middle out, what do you call it?
Goldy:
Middle out. Yeah.
Nick Hanauer:
Middle out economics.
Ray D Madoff:
If you think middle out, right, you have two people, you have one person who they’re earning whatever, $100,000. Say they get a pretty good job, they earn $100,000, right? They’re paying $30,000 in taxes. Somebody who is given $100,000 every single year pays no taxes on that, because we have a preference for that type of wealth. We have a preference for this inherited wealth and we need to recognize that’s what we have.
Goldy:
And is it fair to say that an income tax is harder to evade than-
Ray D Madoff:
Yes, because, I’ll tell you another advantage of an income tax. Is that if you bring things into the income tax space, you help not just the federal budget, but all the state budgets that have an income tax based on the income tax, federal income tax base. So we have undermined things and we didn’t get a chance to talk about it, but another big source of income used to be dividends. And true, they’ve changed the rate, but dividends used to be taxed at the highest rate. It meant that people with a lot of stock paid a lot of dividends, but in 1982, the SEC changed the rules to a lot of stock buybacks, and now we got rid of dividends and now we just have tax-free growth. That’s another thing that has undermined our tax system. So it’s time to bring everybody into the tax system.
Nick Hanauer:
Couldn’t agree more. So one final question, Ray, why do you do this work?
Ray D Madoff:
Yes, because I am passionate for the public to understand these rules that have a significant impact on people’s lives. And I think that when they don’t understand the basics of it, they are duped by things like, oh, top 1% are already paying 40% of the taxes. This is fundamentally unfair. It has a significant impact on people’s day-to-day lives. And I think we can do better as a country. I’m fundamentally an optimist, and I think that if people understand things, then we’re going to see change.
Goldy:
So a little tour inside the sausage factory for our listeners, our producer, Freddie, before every episode, provides us with this very detailed sheet of show notes with a bunch of questions. And today, Nick, I think we set the record for not following the outline.
Nick Hanauer:
I think you’re right.
Goldy:
I think we got to question two-
Nick Hanauer:
I know, and then it went off the rails.
Goldy:
… and the just went off on a tangent on estate taxes, and we never fully came back.
Nick Hanauer:
No, but I mean, look, I think we did go off the rails a little bit, but I think we had a really interesting conversation-
Goldy:
Yes.
Nick Hanauer:
… about the right stuff, and I think Ray raised some really interesting points. I do completely agree with her that the tax system is working exactly as it’s designed, right? That it’s not an accident that super wealthy people… Or no, no, no, no, no. I put that wrong. It’s not that super wealthy people are doing something illegal by not paying tax. They’re simply following the rules that we have put in place and-
Goldy:
Or have somehow create… I mean, this is what lawyers do. They create law and they create rules. I mean, we had this conversation. I’m trying to remember the name of the guest who talked about this, how so much of the law is actually created by lawyers in how they interpret it. And you see that in the tax code. These loopholes, these tax preferences were not imagined by Congress-
Nick Hanauer:
That’s right.
Goldy:
… when the tax law was written. They’re created by lawyers.
Nick Hanauer:
Yeah. But also we didn’t have people worth $800 billion.
Goldy:
Right.
Nick Hanauer:
This craziness was not anticipated by the previous framework or the people that built it. And so we now are in a very different kind of economic regime, which requires a different approach and different rules.
Goldy:
Right. And what’s intentional about this has been the way Congress has neglected to go back in and-
Nick Hanauer:
Acts of omission.
Goldy:
Right.
Nick Hanauer:
Yeah.
Goldy:
Throughout the history of the tax code, this was this ongoing battle between legislators and tax lawyers, and you’d have to come back and forth and match what the other was doing. And we have intentionally, over the past few decades, not matched the work of tax lawyers and allowed them to essentially rewrite the code in terms of the norms what the courts allow based on their creativity on behalf of people like you, though from the conversation, either you don’t know what your accountants and tax lawyers are doing, your estate planners, or you need to hire some new ones because you seemed a little-
Nick Hanauer:
I think it’s a little harder to transfer billions of dollars tax-free to your heirs than Ray imagines. Although there are scenarios. I mean, I have friends who put huge amounts of company stock in their kids’ estates, when it was worth nothing, thinking that it wouldn’t probably ever actually be worth very much, and all of a sudden it was worth an insane amount, that is a way that you can do that.
Goldy:
Right.
Nick Hanauer:
But you have to get very, very lucky in order for that to pan out.
Goldy:
But let’s be clear, you’re in the business, as a venture capitalist, if one out of 10 investments pay off, most of them fail.
Nick Hanauer:
Yeah, correct.
Goldy:
So if you gave your kids a taste out of all of your investments when they were young and you gave them their shares, yeah, most of them wouldn’t pay off.
Nick Hanauer:
Yeah.
Goldy:
But obviously some of them would have-
Nick Hanauer:
That’s true.
Goldy:
… and they would benefit very greatly from that. Whereas for somebody like me, the thing that we give our kids is-
Nick Hanauer:
Your house equity.
Goldy:
Yeah. Or when they’re young, a 527 to save for college, I’m not giving her shares in Amazon.
Nick Hanauer:
Yeah. But also, I think that one of her big points is this idea of making everything income, eliminating the estate tax.
Goldy:
Making all transfers income. And that really simplifies everything because even though my stepfather is a tax accountant and he once told me that the four rules of tax accountancy are defer, that’s number one. Number two is defer.
Nick Hanauer:
Defer.
Goldy:
Number three is defer. And then number four is die. So it’s defer, defer, defer, die. That’s how you avoid paying taxes, but then under what she’s proposing, the heirs would pay it and they would pay it as regular income. And something we didn’t talk about, which actually is rather appealing is that a lot of people get small inheritances. Most people are not getting large inheritances. They’re getting small inheritances, and it’ll be based on your income. If you’re a family of five, five kids, and one of thems a doctor making $200,000 a year, and another one is whatever, making $40,000 a year, and they each inherit $25,000, their share of the parents’ estate, the child earning $200,000 a year is going to pay more tax on that than the child earning $40,000 a year. And that makes sense because you’re paying it based on your own income, not on the income of the parent, but it is-
Nick Hanauer:
And certainly, I mean, if you write a rule that says you pay income tax on anything you get, and you could do exemptions, you could even do a $15 million exemption.
Goldy:
Well-
Nick Hanauer:
You could.
Goldy:
You could. But the point being, it simplifies everything tremendously. If you just say, “You know what? No estate tax. When you inherit something, when somebody gifts you something, that’s income.” In the same way as if you, as she said, find money. What came to mind is also if you steal money, if you get it illegally. I mean, that’s how they got Al Capone. It was a tax charge. They got him on tax evasion from his illegal booze and prostitution business. I don’t, maybe that’s apocryphal. That’s how I understood the story. They got him on a tax charge.
Nick Hanauer:
I think it is true. Yeah.
Goldy:
Yeah. So if we could just get Elon Musk on a tax charge.
Nick Hanauer:
Take charge. Yeah, that’d be great. Anyway, well, it’s super interesting discussion and obviously she’s more or less right. The system is a mess. It lets the worst and most able people off the hook in a way that is just deeply unfair and impractical, and we need to find a way to stop it.
Goldy:
Right. And if you want to read more from Ray Madoff, we of course will provide links in the show notes, including a link to her book, ‘The Second Estate: How the Tax Code Made American Aristocracy’, speaking of which you could buy it online at that big bookstore, owned by an Aristocrat, or you could buy it at your local independent bookstore.
Freddy:
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to follow, rate, and review us wherever you get your podcasts. Find us on other platforms like Twitter, Facebook, Instagram, and Threads @pitchforkeconomics. Nick’s on Facebook as well, @NickHanauer.
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