Capitalisn’t: How to Fix the American Tax System

Ray Madoff: There's a statistic that's often used to confuse people, that the top 1% of earners pay 40% of the taxes, and 40% of Americans pay no income taxes at all. That talks about the high-income earners, not the high-wealth owners. As we talked about, the high-wealth owners can have no income. They're just as likely to be in the 40% that pay no income tax as they are in the top 1% that pay all the taxes.

So many people are like, "Wow, this made me enraged. I'm a sucker." I think one of the big problems is that the high-income earners have thought that they were aligned with the high-wealth owners. They thought that they were rich, maybe because they have a couple of million dollars, and a house, and things like that. High-income earners have nothing to do from a tax perspective with high-wealth owners.

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Bethany McLean: I'm Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Luigi: More and more people are throwing around the word "feudalism" these days, especially when they're talking about capitalists, but a lot of important distinctions are getting lost.

Bethany: In a capitalist system, wealth is accumulated. In a feudalist system, it's inherited. In capitalism, the wealthy aren't supposed to get special tax breaks. In a feudal society, the nobles, often referred to as the second estate, are completely exempt from taxes.

Luigi: Is the United States becoming a feudal society with the second estate exempted from taxes? Unfortunately, we're sorry to report. The answer might be yes.

Bethany: One-third of our billionaires have inherited their wealth. More importantly, they pay very little in taxes. In 2011, Jeff Bezos paid zero in taxes, even got $4,000 in child tax credit.

Luigi: As Ray Madoff, a tax law professor at Boston College, explains in a fascinating new book, The Second Estate, the wealthy avoid taxes by borrowing against their stock. They can spend freely while showing no income. When they die, their stock passes to their heirs at its current market value, letting the heirs pay off those loans without ever owning capital gain taxes.

Bethany: This isn't just annoying to the rest of us who actually pay taxes. It's dangerous for democracy. As Alexis de Tocqueville warned, what is most important for democracy is not that great fortunes should not exist, but that great fortunes should not remain in the same hands.

Luigi: Bethany, you do pay taxes. I thought that you were smart. President Trump said if you're smart, you don't pay taxes.

[laughter]

Bethany: I don't know whether it's a compliment or an insult to not be considered smart in these times, but I guess, Luigi, I am not smart.

Luigi: [laughs] Neither am I. A fascinating book about taxes may sound like an oxymoron, but it's not. The book is incredibly well-written and entertaining, but also enraging because she expresses what has happened to the tax code and who did it.

Bethany: To find out who killed the estate tax and what it means for the way our political system works, let's bring in Ray Madoff.

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Bethany: How did you get into studying taxes? Is it one of these subjects that is so critically important? You make it interesting, but is it cloaked in boredom as a way of making us all not pay attention to something really pivotally important? How did you get past that in your own time?

Ray: Yes, okay, so two very, very interesting questions. First of all, I was a philosophy major in college. Philosophy has a lot of questions like, what is redness, and is ethics just subjective, all of this type of stuff, right? Tax is very much that type of analytic thinking. Is it debt or is it equity? What is the nature? Instead of what's the nature of redness, it's like what's the nature of debt?

What I would say has made it unbelievably rewarding to me over the course of my career, if you can get yourself past the intimidation factor, you can see the secrets of society. You can see how money moves, and it's all clear to you when you get past that. I think that's what makes it such a tremendously important thing for people to understand. I completely agree with you that there's a problem because people think, "Ugh, tax, yuck." It's like either it's too hard, it's too many numbers, it's too boring.

What's the point in understanding anyway? Because the rich will always game the system. All of those things has been a disservice to the public. It is not actually too hard to understand. I think that was the whole motivation of this book is to be like, "Look, there's three basic rules here that you have to understand that are causing a lot of problems." It's not because of complex gaming. It's because our system is broken and is intentionally, in some ways, riding out the rich by not fixing these problems.

Bethany: In your new book, Second Estate, you explain why the focus of the political debate on tax rates is misleading. In fact, well, fully misleading, and why we should focus instead on taxable income. Can you explain this to our listeners?

Ray: So much of the conversation around taxes has been about the fact that top tax rates have come down significantly since, let's say, the 1970s, 1980s, 1990s. Although that is, in fact, true, raising tax rates would do nothing to actually curb the problem of our wealthiest Americans avoiding taxes. That's because the way the wealthiest Americans are able to avoid taxes is they avoid taxable income, so they don't have income taxes, and they avoid the estate tax, so they don't pay estate taxes. Proposals to raise tax rates would do nothing to bring them into the system.

Bethany: You had an example that actually shocked me, Warren Buffett's famous op-ed calling for everyone to pay higher taxes and pointing out the differential between his tax rate and his secretary's tax rate. You pointed out that that argument was actually incredibly disingenuous. I was shocked by this. Can you just back up and explain this? Because I think it really does illuminate your argument.

Ray: Yes, so Warren Buffett published an op-ed called It's Time to Soak the Rich or something like that. He complained about the fact that his secretary paid taxes at a higher tax rate than he did. So far, that much is true. She paid taxes on her income, so at rates as high as 37% today, and she paid additional payroll taxes at 15.3%. As Warren Buffett said, he himself had capital gains. Capital gains were taxed at 20%. Therefore, this system is unfair.

However, what he left out of the story is that he himself would have paid hardly any more taxes at all under the Buffett Rule because, although he did recognize some capital gains, his biggest tax avoidance was the fact that he didn't have to pay any taxes at all on the enormous growth of his wealth. That's because, first of all, we don't tax gains. Second of all, the way he operated Berkshire Hathaway is to never distribute dividends.

He actually tells quite a funny story about how there was only one time that Berkshire Hathaway issued dividends. As he said, he must have been in the bathroom at the time. Dividends, for much of the country's history, were taxed at the highest ordinary income rates. By not issuing dividends, they didn't have to pay taxes. Prior to 1982, companies were not allowed to buy back their own stocks because it was seen as market manipulation.

Bethany: I didn't know that.

Ray: Yes, so it was a rule that was put in place by Reagan. Reagan, put in place for the very first time, the chairman of the Securities Exchange Commission, was somebody who had worked for EF Hutton. He said, "Let's allow stock buybacks, even though we never have before," because they were seen as a form of market manipulation. In the 1970s, 70% of returns were in the form of dividends. Now, I think since this change of rule in 1982, I don't think it's ever been more than 17% of returns are in dividends. We have the case of the disappearing dividends.

When we look at being taxed on investments, back in the day, when investments were shared in dividends, the federal government collected a tax when the dividends were distributed. Now, when the stock buybacks are occurring, and the pension funds are happy to sell because they don't pay taxes, but the taxable investors, they don't sell. They just have the boosting values of their stock. One of the main victims of this, from my point of view, is the federal government, which no longer is collecting tax revenue on the distribution of corporate profits.

Luigi: What I find fascinating in your book is that there was a time not that long ago, at least for people who are a little bit older, where wealthy Americans were paying taxes. What happened that exempted the rich from paying taxes?

Ray: Right, so one of them is one we've already discussed. If people had a lot of stock and they got a lot of dividends, dividends were taxed as ordinary income, meaning at the same rate as compensation income. If a company shared its profits in the form of dividends, holders of stock had a lot of taxable income. The bigger problem has occurred in connection with inheritances.

We have a system where the income tax backs off of taxing inheritances because we have an assumption that we have this robust estate tax that's doing its job and imposing taxes at what was, at one time, quite a significant rate. What has happened is that beginning in the 1990s, there was an assault on the estate tax. Few people realize that while it stands in form, it has been entirely eviscerated and is no longer serving its function. The estate tax stands in name only and is providing cover for the rich, but not actually imposing taxes.

Bethany: Can you go into some more detail about how it's performing cover for the rich, and also elucidate, perhaps a point that you've made that it's very important that it stands in name only? In fact, that serves as yet another cloak.

Ray: Let's start by looking back about 40 years, when the estate tax was just a normal, well-respected part of the tax system. It wasn't a big political issue. At the time, Congress made regular changes to the code to keep the estate tax working as it was supposed to do. For example, one of the early problems was people would set up these long-term trusts that would pass from generation to generation, and you wouldn't pay taxes.

In 1976, and then revised and reissued in 1986, Congress enacted something called the "generation-skipping transfer tax." It was a whole extra tax designed to ensure that taxes would be imposed at each generation. If a grandparent made a gift to a grandchild, you'd pay two levels of tax: The estate tax or a gift tax, and the generation-skipping transfer tax to make sure the tax was imposed at each generation, right? They did that in 1986.

In 1990, they addressed another big problem in the field, which is people engaging in gaming techniques to reduce the value of an asset, just long enough for it to pass from the older generation to the younger generation. Both of these things happened under Republican presidents. In 1990, 18 of the richest families got together and were like, "We got to get rid of this estate tax. This thing is a big problem for us." They did something very smart, which is they hired this Frank Luntz.

Frank Luntz was a pollster and a communication expert. He said to them, "Look, if you call this thing the estate tax, nobody cares. Everybody's happy to keep it in place, because it sounds like something that applies to rich people. Let's rebrand it. Let's call it the death tax. Something that comes for everyone, and something that's really cruelly timed, really kicking people when we're down. Let's not use you, rich people, the Waltons, the Kochs, the Mars family, famous rich people. You shouldn't be advocating. Instead, let's use small business owners. We are going to convince the public that this is a death tax that is an unfair double tax that hurts family farms and businesses."

Of course, they were unbelievably successful in this, way beyond their wildest dreams. The moment that I realized how much of a losing battle it was. That is when I was being interviewed by a journalist, some vaguely left-leaning journalist. We were talking about the estate tax. He said, "Yes, but isn't that an unfair double tax that hurts family farms and businesses?" I was like, "At two, lefty journalist."

[laughter]

Ray: I realized how thoroughly successful that message was. George W. Bush ran on this, repealed the death tax very successfully. He actually put in this 10-year plan that resulted in one year, the year 2010, there was no estate tax at all. Then Obama came back and we think, "Okay, we're going to fix this." No, Obama didn't try to fix it either. At that time, it was so politically unpopular that Obama raised the exemption amounts and just tried to get rid of the issue.

Then, of course, Trump came in. He raised it even further. However, the bigger problem with the estate tax is not the ever-larger exemptions, which are currently $15 million, but is the fact that all of these planning techniques, the things I teach my students, they go by names of crats and cruts and grats and gruts and nim cruts and flim cruts and dynasty trusts. There is a very popular, very bad planning technique of dynasty trust, when the whole purpose of the estate tax was to eliminate dynastic wealth.

Now, people are embracing it. "Oh, no, we're just calling it a dynasty trust because we want to create dynasties." Guess what? The tax lets us do it. That is because the last time that Congress adopted a reform to the estate tax was 1990, 35 years ago. Estate planners have been developing one tool after another to avoid taxes, and Congress has engaged in complete quiet quitting. They haven't done anything at all in those 35 years.

That's why I think was this very surprising thing that happened this summer with Trump's tax bill. Where was the estate tax repeal? I thought that the death tax was an immoral double tax on family farms and businesses. All of a sudden, no one's advocating for it. I think it's because they know that they are better off with this situation than they would if the tax was actually repealed.

Right now, by having an estate tax, they can say, "Well, of course, inheritances aren't taxed. Of course, we have this thing called 'step-up in basis.' Of course, we don't have to worry about not taxing gains. We don't have to worry about not having a wealth tax because the estate tax is there to serve as a sweep-up tax." Everything is fine in the world. It provides a cover for all of the failures of the income tax.

Luigi: Let me tell you my story with the death tax. The only time I was interviewed at Fox News was 2010. I was interviewed for something else, and then they asked my opinion about the death tax. I answered like an economist. I said, "Look, all the distortion in taxes is because you try to avoid something because it's taxed. You cannot avoid the death, and so it's the perfect tax." That was it. I was never invited to Fox News again. [laughs] Since we are calling from Illinois, how did the Pritzker family avoid paying taxes on their estate? I think that they completely skipped one or two generations of taxes.

Ray: Well, they're all skipping multiple generations of taxes because of the fact that the generation-skipping transfer tax-- so it was enacted in a 1976 version, and then it was enacted again in a 1986 version. The 1986 version created a loophole that people could slip through to create dynasty trusts. Originally, it was just $1 million. It was so small. Who would even notice it? Then as it became bigger, the law morphed in all sorts of ways to enable it to be bigger and bigger and bigger.

Now, I have talked with lawyers who have told me that they have many clients who have multi-billion-dollar dynasty trusts. That's because of all of these tools that can be used that Congress doesn't close. One of the absolute worst ones, I'll just give you the name, are the grantor trust rules. Here's what's crazy about these rules. The grantor trust rules were rules that were enacted to close a particular loophole when trusts were subject to tax at a lower rate than individuals.

It was designed to address a problem, to say, "In certain cases, we're going to ignore the trust because we don't want you to get these lower tax rates." That's no longer the case. For many, many years now, for decades, individuals are taxed at a lower rate. There is no longer an advantage of putting money into trusts. They should just get rid of the grantor trust rules. Instead, they provide a valuable opportunity for estate planners to do all sorts of gaming techniques where they sell assets into their trust because the trust is disregarded under the grantor trust rules.

That's why one of the worst of these devices is called, "I Dig It," intentionally defective grantor trusts. These are trusts that are grantor trusts. Grantor trusts used to be something you didn't want to be because they closed loopholes, but they are intentionally creating grantor trusts because of all of the gaming that's possible. As I think somebody wrote in a student note, "I dig it, but I shouldn't be allowed to." This is just an example of all of the proliferation of gaming tools. Why is Congress leaving them there? Why are they allowing those things to persist? There's no reason for those rules to be there.

Luigi: You point out that this happened in 1990, basically. That's a structural change. This is awfully close to 1989 and the fall of the Berlin Wall. Is that just a coincidence?

Ray: No, I think that you're absolutely right. If we look at it historically, there have been two things that have played a strong role in when we tax the rich. One of them is when there has been a real threat of socialism and then communism. Our income tax and estate tax system were enacted in 1913 and 1916. What's interesting is if you look at the newspaper articles and things of the time, you had lots of people advocating for the importance of taxing inherited wealth.

We had our new rich people, the Gilded Age, the robber baron era. Now, their kids had all this money. They were running around acting like royalty and wearing crowns and having lavish parties and conspicuous consumption and massive wealth inequality, like we have inequality today, but there was an important difference. At the time, there was a real risk of socialism. There were lots of countries in socialism. There were lots of socialist movements. Lots of Americans were socialists.

People that wanted to keep capitalism felt that they had to prove that capitalism could work for the public. That's why the initial income tax and estate tax were only imposed on the richest 5% of Americans. Nobody else was subject to the tax. It wasn't until World War II where there's a big growth of government, and that's when they expanded it from a class tax to a mass tax.

Then later on, there was, of course, the threat of communism. Tony Judt and others have said that the elimination of communism, and as Branko Milanovic has talked about, I think he was on your show, the fact that capitalism reigns supreme and there is no alternative, means that there is less pressure on the wealthy to prove that capitalism can work for everyone, because what are people going to do?

Luigi: Very often, you portrayed all the stories in which there are some rich people assembling in a room and deciding as conspiracy theories without any foundations.

Ray: [laughs] I respectfully disagree, but go on.

Luigi: No, no, no, I disagree as well, but that's where I went. In your book, you talk about two real-world conspiracy of this type that are well-documented. Can you remind us of these two conspiracy? Some people claim that the term "conspiracy theory" has been invented by the CIA to basically delegitimize any attempt to attack any real conspiracy. Can you tell us the two conspiracies that are actually true?

Ray: Well, the one is about the estate tax. Is that the one that you're talking about?

Luigi: Yes, the one is that, and the second one is about the philanthropy.

Ray: Yes, the one about philanthropy, yes. The larger view of philanthropy is that it's a great deal for society. People will often, economists in particular, love to use the example of, "Well, somebody gives a dollar, and it saves them $0.30 in taxes." You're luring in charitable dollars. The problem with that description is all sorts of falsehoods behind it. One of it is that 90% of Americans get no tax benefits for their charitable giving.

Charitable giving is often supported on this idea that it promotes pluralism. Let a thousand flowers bloom. Different people, they all get to have their interests supported because we all get this 30% matching grant, right? For 90% of Americans, they get no tax benefit for their charitable giving because they itemize their deductions. Their income tax benefits are severely limited by a number of means.

Also, by the way, for working Americans, they can never eliminate their tax liability through charitable giving. Even somebody who gives their entire salary to charity does not get to pay no taxes. They still have to pay payroll taxes. Their income tax deduction is limited to about half of their income because it matters to us that people pay taxes, at least when it comes to working Americans.

When it comes to the richest Americans, however, they get some income tax benefits. If they don't have any taxable income, then they don't get that many income tax benefits. In addition, they give appreciated property. They get capital gains benefits, which are worth 20% of the gift, and estate and gift tax benefits, which are worth 40% of the gift. Their tax benefits are between 60% and 74% of the value of their donation.

Somebody who gives a well-planned gift of $1 billion is being supported by $740 million of foregone taxes from the rest of us. Then we look at what it is that the wealthy do with their giving. Increasingly, more and more money is going into their own donor-controlled entities, either private foundations or donor-advised funds. They're basically bank accounts that hold the money of the rich, give upfront tax benefits.

The way the rules have developed, they no longer impose any requirement at all for that money to ever be spent to charitable ends. Instead, it can just be available for use by future generations to throw their weight around, get legacy admissions and special floors in hospitals, and all of the elite connections that one gets when one has the capacity to give big dollars. Our current system is really in need of fixing because we are losing massive amounts of tax dollars for very uncertain benefits.

Luigi: Sorry, this is not just an accident. There was a meeting, another secret meeting, taking place in 2009.

Ray: [laughs]

Luigi: Tell us about the secret meeting.

Ray: Oh, the secret meeting, yes. Okay, so I mentioned, there have been times where we have raised taxes on the rich. Sometimes in connection with wars, and sometimes in connections with massive societal problems like the Depression. Of course, we had these problems in 2008, 2009. At that time, Bill Gates, Warren Buffett, and David Rockefeller got together and said, "Whoa, we got to do something about this."

They sent out letters to the 400 richest families, which, of course, we all now know because of the Forbes 400. They wrote to them all to say, "Hey, there's a problem now. The country, everybody is suffering. We've got all this money. It's being advertised to the world that we have all this money." They didn't exactly put it that way, but they said, "We need to do something to address this situation."

What they decided to do after a year of meeting, secret dinners, was they decided to do the Giving Pledge. The Giving Pledge has just had its 15th year. The Giving Pledge, it was such fanfare. Gates said it was like redistributive taxes. It was the equivalent of that. Bill Ackman, he had my favorite quote in his letter, although his letter has since been pulled. At the time, he wrote, "It's what John Rawls would have wanted in his theory of justice."

Here's what the plan was. The richest Americans would make a non-binding commitment to give 50% of their wealth to whatever they thought good. That was it. That's what the Giving Pledge was. There was tremendous fanfare about what a great thing this was for society, and how we're all going to be benefited by all of this charitable thing. There was no payout requirement. There's no money of actually spending it.

If you just put it in your private foundation and you never spent it at all, that qualified for your 50%, for your non-binding 50%. If you used it like the Mars family used it to fight tax reform, that also counted. Whatever you thought was good, that would be good enough for them. It does seem like the Giving Pledge was a little bit of a story to make it seem like the rich were going to really care, and I think probably to take the heat off them from taxes.

Bethany: Is it that Congress is captured by the very wealthy, or is it that Congress is clueless and doesn't want to understand?

Ray: I think it's three things. One is, sure, they're captured by the wealthy, as we know. They're always interested in serving the interests of the wealthy, as is everybody else in the world. Probably, they think taxes are boring. However, the bigger problem is that the public isn't advocating for this because the public has been duped. That's why it is so important that the public be educated about what's actually going on here. I think that one way of seeing it is to actually look at some numbers to see how it is that we are in the situation that we're in, and why it's as bad as it is. I'm going to wait to be invited to actually talk about numbers before jumping into them because I know how numbers can be.

Bethany: Luigi is an economist. He should like numbers. I was, once upon a time, a math major. I'm supposed to, somewhere in my deep, dark past, like numbers, too. Let's talk about some numbers. [chuckles]

Ray: Thank you so much. You know I've been wanting to. I just want to throw a couple of numbers out there. I'm going to use the most simplified version of them because we don't have a chart to look at. In 2024, the country took in from all sources, income taxes, payroll taxes, estate taxes, corporate taxes, and tariffs, and fees at the national parks, everywhere. We took in about $5 trillion, $4.9 trillion, but we'll call it $5 trillion, okay?

We spent a little under $7 trillion on all the things that the country spends money on, national defense, interest, Social Security, Medicare, everything. We took in $5 trillion. We spent $7 trillion. We had a shortfall of just under $2 trillion. Guess how much wealth, but you don't have to guess because you read the book, is owned by the richest 1% of Americans in 2024? I know you know the answer.

Bethany: $47 trillion? [chuckles]

Ray: Actually, $50 trillion by the time you put in Q4. The book only gets up to Q3. By Q4, it was $50 trillion. Now, people might say, "You're confusing stocks and flows or whatever it is." Is that what you economists say, Luigi?

Luigi: Yes. [laughs]

Ray: Love to say stocks and flows. The issue is that when it comes to the richest Americans, we don't know their flows of income because they're not reporting it. They don't have to report the increase of their wealth by investment gains, and they don't report the inheritances. Somebody inherits $100 million. On our records, on our tax returns, they look the same as a person who has earned nothing. They look identical. Obviously, their capacity to pay is very different. How much taxes were collected by the estate tax?

Let me tell you a little bit about what the estate tax is imposed on. It is imposed on a flat 40% on all transfers by gift and at death. You get the first $15 million free, and then all those other transfers are supposed to be subject to tax at a flat 40% when the person transfers it. By the way, gifting is happening in every single law office around the country right now because it is the most effective way of reducing one's tax liability. 40% tax on all of those transfers. I mentioned the billions of dollars in these dynasty trusts and things.

The amount of revenue raised on this $50 trillion of wealth, obviously, it wasn't all transferred in 2024. We'd have no idea how much it was transferred. The total tax raised, $30 billion. 0.06% of all of that wealth was $30 billion. That's an amount that Elon Musk has both earned and lost in a single day in 2024. The estate tax is really doing nothing, except for supporting my students and me as the lead author of a book on estate planning. It's in terms of generating revenue for the country. It's not doing a single thing.

Luigi: If you were queen for a day, what would be your reform?

Ray: I have a few reforms. First of all-- [chuckles] I love that reference of queen for the day, by the way. That is a very old school. Here's what I would do. First of all, I think we need to abandon this idea of having the separate tax on the rich, the estate tax, because the effect of it is to provide cover for the rich, right? When we have this tiny tax that raises less than one-half of 1%, people think of it as some big, huge burden. It doesn't do anything.

It's been so pumped up in people's minds that they think it's really real. We have to get rid of the estate tax and bring inheritances into the income tax. I also think that what we need to do is we need to bring investment gains into the income tax. Right now, when somebody has assets, like let's take Mark Zuckerberg, since 2023, he's acquired $142 billion of wealth. His current wealth is over $200 billion.

This will not be subject to tax during his life. If he passes it on, either at death or during life, to his kids or to anybody else, it will never be subject to tax, either because none of those are taxable events. As we know, the wealthy people don't have to sell. They can simply borrow against their assets and live a tax-free existence. We need to find a way of taxing gains. This is a very hot topic now. Obviously, the wealth tax would be one way that would try to currently tax that amount of that enormous wealth.

Biden had a version where we would tax the gains each year. I personally am concerned about something that would have an annual tax because of the tremendous incentive it would provide for people to hide their value of their assets. I'm concerned that the first way they would do so is to stop investing in the stock market because it's so easy to value. The reason that we can say, "These are their interests. We can track them," is because their values are all publicly traded.

There's all sorts of other super-rich people who own partnership interests and tangibles and all different types of property interests that are much more difficult to value. I'm concerned that we would see money whooshing out of the stock market and into these hard-to-value assets. That would impose a tremendous burden on all the rest of us who count on a robust stock market for our retirements and other savings.

There's a midpoint between taxing every year and never taxing, and that is to say that when property is transferred, whether by sale, by gift, or at death, and as Luigi said, one of those is going to happen, right? One of them is certain to happen, that we impose tax on the gains then. This is a rule they have in Canada, and it was proposed here in the United States by both Obama and Nixon.

There's no reason for us not to have that rule. We should tax gains either whenever the person disposes of the property, and we should tax inheritance to people who receive it. Finally, we need to do something about our rules regarding philanthropy, which is a complete escape hatch for people who want to avoid taxes, and I think we need to reform those rules as well.

Bethany: What about the arguments that aggressive tax reforms here could push wealth offshore? These days, Scott Galloway is one of the people who makes this argument that the ultra-rich are bound to no country, and they can just simply pick up and move their wealth. In a world where countries are competing for the rich, just as states here are competing to have businesses located in them, what stops people just from leaving the country?

Ray: I think that's 100% wrong. I do agree about states. I think that states are vulnerable in their capacity to impose taxes on the rich because it is so easy to move from a state. Maybe in Europe, where people can freely move within different countries, right? It's very different. Here in the United States, first of all, if you leave the country, you're still subject to tax for 10 years, just the same as if you were in the country. You have to give up your citizenship. I just don't think people are really freely giving up their US citizenship. It doesn't really seem likely to me.

Luigi: I'm sorry to break to you. You're not queen for a day, so you need to have a majority to reach this goal. How do you do politically to implement this? In a world in which both Republicans and Democrats rely heavily on financing by billionaires, I don't see this coming anytime soon.

Ray: First of all, I think you have to realize that the current problem is that there's some pressure from the public, right? Much of the pressure from the public is ill-informed like we should raise tax rates, or we should get rid of billionaires, or things like that. There's an uninformed public. I do believe the first step is that the public needs to get more informed, and that would make a big difference.

I think that Democrats have played a role in creating this problem by framing things like we have to raise income taxes on people who have more than $400,000. We're conflating high-income earners and high-wealth owners, so that was like a Biden proposal. I think that high-income earners really are paying a lot of taxes. There's a statistic that's often used to confuse people that the top 1% of earners pay 40% of the taxes, and 40% of Americans pay no income taxes at all.

That talks about the high-income earners, not the high-wealth owners, because, as we talked about, the high-wealth owners can have no income. They're just as likely to be in the 40% that pay no income tax as they are in the top 1% that pay all the taxes. The people who really do pay all the income taxes are high-income earners. They're paying the vast majority of the income taxes, and they also pay payroll taxes on top of that. I think the public needs to be educated. I think Democrats have harmed things by conflating high-earners and high-wealth owners and saying all of those people are the rich.

The other thing that I really think has been a mistake is to say that, "Billionaires are a problem. We have to get rid of billionaires," because that suggests that what we need to do is impose more and more taxes on the rich, rather than the more accurate statement that our billionaires are able to avoid taxes altogether. I think if the public knew that we had created a second estate that rich people don't have to pay taxes. It's like salad or French fries. It's their choice: taxes or no taxes. I don't think the public would accept that because people-- and I know it from the reaction that people have had to my book.

So many people are like, "Wow, this made me enraged. I'm a sucker." I think one of the big problems is that the high-income earners have thought that they were aligned with the high-wealth owners. They thought that they were rich, maybe because they have a couple of million dollars and a house and things like that. High-income earners have nothing to do, from a tax perspective, with high-wealth owners. They are Mars and Venus, totally different from each other, and I think recognizing the alignments would make a difference.

Luigi: I find your strategy of breaking the coalition between the high earners and the high-wealth individuals very clever. However, I'm concerned because you say, "Oh, if the people just knew," but you just said that the people are confused, not because they're ignorant. It's because a lot of people pay very heavily to confuse them. We are moving into a world where more and more media are owned by billionaires.

First of all, I ask as a favor that at the end of your tour, you send me the list of where you got interview and what podcast you, and I want to do a comparison between podcasts that have you and podcasts that have The Abundance Book, for example. I'm sure that you can do an interesting analysis on that. Even, unfortunately, that we live in a world of the media that is fairly captured, how can you break it through?

Ray: Let me just confess in case it hasn't come out. I'm an incorrigible optimist, so you'll have to take everything I say with a grain of salt, but I feel like, otherwise, it's just despair. There are so many ways that one can turn to despair, but I just refuse to do it. Everybody's talking about taxing the rich, but then the proposals that are made are not actually going to address the problem of taxing the rich, for the most part. Some of them, maybe a wealth tax would, but it's the real problems with the constitutionality of it.

I believe that there is a hankering for this information. I think that young people have a hankering. I just have to hope that breaking through is possible. Although I agree, I had a piece in The Wall Street Journal that the editor wanted to publish as a front-page story. The senior editor said, "You know what? We think we want to do Beauty Queens of MAGA instead." There've been other things that we think, "Well, this can never change," and it changes. I do think that pendulums do swing. It's possible for them to swing back because we're certainly way over on the other side right now.

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[music]

Bethany: It's interesting. I have found myself on the other side of the tax equation. I have often thought about the numbers that she cited with a sneer about the huge amount of taxes paid by those at the upper end of the income stream. I've actually never thought about that being a misleading number. I found this fairly revelatory. I'm not sure how realistic her solutions are. Back to our previous discussion about the fact that we might be becoming a plutocracy, but [chuckles] I like that this is something that has the potential to galvanize people.

Luigi: Yes, I feel that she was pretty clever, also from a political economy point of view, because her suggestion was not trying to reintroduce the estate tax. It was to kill the estate tax so to kill any pretension. What I gather from her book, I don't think she would be unfair to put in her mouth. I think that there is a lot of misinformation, even from people that pretend to be nice, like Warren Buffett. Realizing that the famous Warren Buffett Rule, so touted by President Obama, would not have changed anything for Warren Buffett or Bill Gates is pretty enraging.

Bethany: I found that absolutely stunning. I completely believed in the benevolence of Warren Buffett and had no idea that that rule would actually change nothing. It does help to square these two things that have long felt incompatible to me, which is the sheer amount of rage that people in the upper-middle class feel about the amount of taxes that they're paying.

Then, when you look at it, if you look at it purely on an income tax basis, you think, "Well, that's fair. That's the way it should be." Of course, it isn't fair. This squares the circle as to why it's not fair. I thought that was or reveals the hidden mechanism by which this situation really isn't fair at all. I think people do know that. They just haven't been able to analyze precisely why it feels so wrong. This answers that.

Luigi: It's funny because in the previous episode, we were talking about, you shouldn't believe in the benevolence of the butcher and the baker, but you do believe in the benevolence of Warren Buffett.

[laughter]

Bethany: Our episode with Sven Beckert also did make me think about Ray Madoff in an interesting kind of way, because if you do believe his analysis, and I do, that the state makes the market, taxing wealth is only fair because the state set the rules that enable that wealth to grow. In other words, I think the unspoken philosophical justification for people not paying tax on the enormous gains in their wealth is that, "Well, this is mine, and I built it, and I created this, and therefore, I don't owe any money to the government out of these increases in my wealth."

Of course, not to pick on Jeff Bezos here, but per Beckert's point that Amazon wouldn't exist without the rules laid down by the United States, so then why does this vehicle that is the cause of the massive gains in Bezos's wealth get to sit outside of any obligations to America itself? I thought there's actually an interesting link between the two books.

Luigi: In addition to that, I do believe that it's good to have some form of taxation of inheritance. Now, she wants to abolish the estate tax because she wants to tax inheritance at the receiving end, which I think is a clever solution. Especially when you exceed some small normal amount, this transfer of massive amount of wealth into generational wealth is negative from a lot of points of view, and I think is a good way to finance all the expenses we have.

Bethany: Yes, it's hugely negative in so many ways. There's almost a crisis of cynicism that you see in young people applying to college now because they all have a story about the person who was nowhere near as qualified who got in because their parents donated the building. Everybody knows who those kids are, and everybody knows that it doesn't matter what grades they get, and everybody knows that they're going to get into whatever school they want to go to because their parents will donate something. I think it breeds an extraordinary amount of cynicism at exactly an age group that you don't want to see becoming cynical about the way our system works.

Luigi: Yes, absolutely. I thought the other point that was clever is that if you start to fracture today's elite, because at the moment, there are a lot of people defending the rich and saying we shouldn't tax them, and so on and so forth. At the end of the day, if you tax the rich, you tax also yourself. There is this solidarity, if you want, between the intellectual elite and the billionaires. She creates a wedge between the two and say, "Actually, we don't want to tax the intellectual elite more. We only want to tax the billionaires." I think that if you make that a rallying cry of a campaign, it's very difficult to resist people voting for that.

Bethany: I probably would have been. Without having thought too much about taxation, admittedly, I probably would have been on that side before her book of, "Look at how much people, the wealthy, already pay in taxes as a share of the money collected." I just wouldn't have seen that it was a fake leaf of sorts. If I hadn't read Beckert's book, I might still have had a hard time with that idea of taxing wealth because I would have thought it belongs to somebody.

I think when you start to realize how much of wealth creation is enabled by the state and by the rules set by the state, that also does start to change things. I think it provides, overall, a philosophical framework for thinking about this differently. Maybe it would be a smarter spin than Mamdani's line about billionaires shouldn't exist. Billionaires should exist. Sure, fine. Create your billions, but pay your fair share.

Luigi: What we say is that the inheritors of billionaires should not exist.

[laughter]

Bethany: Right. Since when did we lose sight of that? I guess maybe that is part of us becoming a more feudal society or plutocracy because there used to be, I think, this pretty ingrained sense that the way you destroyed your kids was by having them inherit wealth, and that that was a really bad idea. That second and third generations became increasingly degenerate. That seems to have gone by the wayside in today's America, where people want their kids to inherit fortunes. I wonder why that social change has come about, why that cultural change has come about.

Luigi: I think there is a lot of social norms, and the social norms have changed dramatically. She associates the taxation of wealthy people with a conscription army. Whenever there is a war, that makes it easier. Also, whenever you actually call on everybody to fight, you find it very disturbing that the wealthy are not paying their fair share. As you probably know, one of the first movement of the, if you want, at the time, New Republicans, was to abolish the draft. Milton Friedman was a big opponent of the draft.

Bethany: Remind me. I just don't remember from his book. Why was Friedman opposed to the draft?

Luigi: I think as a libertarian, he didn't want to force people. Then, if you think in purely economic efficiency terms, why do you have everybody taxed in the most inefficient way that you spend a year of your life like this? When I was a young kid in Italy, and I had to go through the military service, I was very much in favor of a volunteer army. [laughs]

Bethany: You see, economic efficiency isn't everything. There's something to be said for societal solidarity, right?

Luigi: Absolutely, absolutely, but then as this issue of conscription disappear, also taxes of the wealthy disappear.

Bethany: That is a really interesting linkage. I would love to see somebody explore that. It's obviously correlated. Is it causal? Fascinating. Fascinating. Anyway.

Luigi: Bethany, let's take a bet. Do you think that anybody in the 2028 election, any candidate, I'm not saying presidential candidate, but even at the beginning of the campaign, the primary, et cetera, anybody will run on a platform of taxation?

Bethany: I can't separate wishful thinking from an honest answer here, so I decline to answer. I plead the fifth, or whatever our podcast opinion of the fifth is. What about you, Luigi? [chuckles]

Luigi: I think that somebody will. I'm not so sure that maybe the winner of the primary, but somebody will pick it up. I think it's such a good idea that it's hard to resist.

Bethany: I think so, too. I love what she said about the amount of uptake that her ideas have gotten already. We'll see what happens with this podcast. It'll be an interesting barometer of how much people care, I think. That's one of the things that I like so much about her argument is it isn't just, "Tax the rich." In which case, it's really easy for people to just point to the income tax numbers and say, "Look at how much of their fair share of the rich are already paying."

This is a much more substantive argument that gets underneath all the fig leaves that are all used to paper over this situation. I think it is different because, for me, I have a little bit for some reason, but of an automatic rejection of Bernie's position, perhaps because people tend to run away then from those income tax numbers or come up with ways of fudging them. This, to me, feels like the first time that I've seen something that is solidly intellectually justified.

Luigi: Yes. Also, I think Elizabeth Warren ran on a wealth tax idea. Ray makes it pretty clear that it's probably unconstitutional. Also, it's a bit of a slippery slope. Once you start to introduce a wealth tax, what is the right amount is going to pretty quickly escalate. It's funny that Elizabeth Warren escalated herself, the tax, during her campaign, proving the point. This is much cleaner. To your point, Bethany, it's not the tax the rich, which is un-American. It's actually tax everybody the same, which is very American.

Bethany: Yes, and thank you. That's very well-said. It's an intellectual justification and an explanation of fairness. That's what I like about it, and that's what resonated for me.

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Matt Hodapp: Capitalisn't is a podcast from the University of Chicago Podcast Network and the Stigler Center in collaboration with the Chicago Booth Review. The show is produced by me, Matt Hodapp, and Lea Ceasrine, with production assistants from Utsav Gandhi, Matt Lucky, Sebastian Burka, Andy Shi, and Brooke Fox. Don't forget to subscribe and leave a review wherever you get your podcasts. If you'd like to take our conversation further, also check out promarket.org, a publication of the Stigler Center, and subscribe to our newsletter. Sign up at chicagobooth.edu/stigler to discover exciting new content, events, and interviews.