Next to the Constitution, the U.S. tax code may well be our nation’s most consequential document. At 70,000 pages, it’s also one of the most misunderstood.
To help make sense of who pays what and why to the federal government, Robert Price, son of the USC Sol Price School of Public Policy’s namesake, sat down recently with Ray Madoff to discuss her recently published book, The Second Estate, How the Tax Code Made an American Aristocracy. Madoff is a professor at the Boston College Law School.
The crux of her argument is that the ultra-rich avoid paying taxes because they do not earn a traditional income, which is taxed at up to 37%, but instead fund their lifestyles by borrowing against their investments, which is not taxed. This means wealthier people who do have traditional incomes end up paying a disproportionate share of federal taxes. It’s also helped fuel our national debt and made it difficult to fund a wide range of government functions.
“If you read The Wall Street Journal opinion pages, anytime there’s a discussion about taxes, you will see this quote trotted out … which is the top 1% pay 40% of the income taxes and 40% of Americans pay no income taxes at all,” Madoff said. “What they’re referring to is not the top 1% of the wealthiest Americans. They’re talking about those with high income. Those with high income pay the most taxes, but those with the most wealth avoid taxes by avoiding income, which means they can just as easily be in the 40% of nonpayers as they are in the top 1% of payers.”
Price opened the dialogue with a passage from a book he wrote about his father that set the tone for the discussion.
“In Sol’s view, people who had been fortunate enough to accumulate wealth were obligated to share their good fortune, both by being generous and by paying their fair share in taxes,” Price said. “Sol said that progressive taxes, public policies that promote fairness and philanthropy directed to support vital not-for-profit organizations in the community are all part of recognizing the fact that financial success is a shared activity.”
The following is a sample of the questions and answers from the discussion. The questions and answers have been edited for length and clarity. Click here hear a complete audio recording of the discussion.
Price: “You mentioned in your book a distinction between the rich and the ultra-rich. Can you elaborate on how you define each of those?”
Madoff: “People like Jeff Bezos, he had such a small salary that he could take the childcare tax credit, which he did. … the way that people with this type of wealth avoid taxes is … they simply borrow against their assets. And then if they pass that property through their estate, all the gains get washed away at death … because our current rules never call for gains to be recognized unless the property is actually sold. So that’s how people avoid taxes on their investments: buy, borrow, die, or buy, borrow and don’t die.”
Price: How do you feel this disparity in wealth … is impacting what’s happening in our society?
Madoff: One … is this enormous inequality, which is fueling inequality of power. But I’d say an even more tangible problem is … a lack of sufficient resources for the country to provide the types of benefits that you’d expect from the most robust economic country in the world and also the high tax burden. If we had more money coming in, then we could reduce the tax burden for other Americans.
You’ll sometimes hear people say, it doesn’t matter if we tax the very rich because they don’t have enough. In 2024, the government took in from all sources … about $5 trillion. But we spent … 6.8 trillion. So we had to borrow an additional 1.8 trillion, and that was added to our national debt.
Guess how much wealth the wealthiest 1% had in 2024? 50 trillion.
This is a serious amount of money, and it matters whether this group pays taxes or not. It matters for our national debt. It matters for the programs we can provide. It matters for the amount of taxes that other people have to pay.
Price: You have a variety of suggestions for reforms for donor-advised funds. Maybe you could describe them.
Madoff: So, philanthropy is of central importance in this country … there’s a lot of wonderful things about it. It means that people can come up with creative solutions to solve society’s problems.
One concern I have is this ability to entirely eliminate (one’s federal tax liability) so that our richest Americans can avoid taxes altogether when other Americans can’t. But my bigger concern is that our current rules no longer require that money (donations) get to charity, and that’s because they allow people to put it in their private foundations (or their) donor-advised funds.
Donor-advised funds are kind of like private foundations set up for regular people. The problem with them is that you get all the tax benefits when the money comes in, but there’s no timeframe in which the money has to come out. … people are given all the tax benefits, but they don’t have to give to charity. So I have been involved in advocating for reform to require donor advised funds to have a payout requirement.
