This is an edited transcript of “The Ezra Klein Show.” You can listen to the episode wherever you get your podcasts.
As you may know, April 15 was Tax Day here in the U.S. If you’re a regular American, you make money through wages, and it’s probably not your favorite day of the year. If you make a median income or above, you’re handing a lot of that money back to the government.
But that is a price we pay for living in a society, right?
Well, not for everyone. You may remember that in 2021, ProPublica published an investigation built on a bunch of leaked tax documents revealing what the richest Americans really pay — or don’t. Warren Buffett had a true tax rate of 0.1 percent; Jeff Bezos had 0.98 percent; Michael Bloomberg had 1.3 percent.
We know what they paid. So what is it they’re doing? How does it work? And what can we actually do about it?
Ray Madoff is a professor at Boston College Law School who specializes in tax law and estate planning. She’s the author of “The Second Estate: How the Tax Code Made an American Aristocracy.” She knows how broken the tax system is — partially because she has helped the rich navigate it — and she has some ideas for how to fix it.
Ezra Klein: Ray Madoff, welcome to the show.
Ray Madoff: Thanks so much, Ezra. Wonderful to be here.
So Tax Day just passed. A lot of us were doing our taxes in the final days leading up to it — not naming any names. But let’s start here: If you’re a normal person, what kind of taxes do you pay?
You pay a lot of taxes. Here’s the thing: Americans — anyone who has a job or anyone who works for a living, either for themselves or for others — pay significant taxes.
They pay federal income taxes at rates up to 37 percent. In addition, they pay payroll taxes that are as high as 15.3 percent, and together, it’s a pretty significant liability. So what this means is that high-earning Americans pay lots and lots of taxes, but all earning Americans pay something in taxes.
How does this fit with the statistic people might have heard, which is that, in this telling, our tax code is very, very progressive — almost ridiculously so. Forty percent of people pay no federal income taxes, and then the top 1 percent pay 40 percent of the income taxes.
When you hear that, that sounds like a very soak-the-rich kind of code.
Absolutely. And the problem with that statistic is it’s misleading on both ends.
Let’s start with the 40 percent of nonpayers. You might have heard this in terms of Mitt Romney’s talking about the 47 percent — which is what it was when he was running for office.
He was caught on a hot mic saying: Forty-seven percent of Americans are nonpayers. And therefore, they’ll never vote for me because they’re just takers, not makers.
The thing that he didn’t account for is the tremendous burden imposed by payroll taxes. And even though 40 percent of Americans don’t pay any federal income taxes, they still pay significant payroll taxes.
Indeed, today I just read a statistic that 80 percent of Americans pay more in payroll taxes than they pay in income taxes. And these can be quite burdensome. Because unlike income taxes, they start at $1.
So it was wrong and misleading in terms of the nonpayers.
But where it’s particularly misleading is when it comes to this top 1 percent. We see this all the time, whenever there are movements to impose more taxes on the wealthy.
The stories start popping up in The Wall Street Journal, The Washington Post, The Economist — those are just in the past couple of months. They all say: What are you talking about? The top 1 percent are already paying 40 percent of the income taxes.
And what this isn’t capturing is that statistic is referring to the top 1 percent of income earners. Those with the most income. High-income lawyers, doctors, finance people — they indeed are paying a significant chunk of the income taxes.
However, when it comes to the wealthiest Americans — Zuckerberg, Bezos, Musk, Larry Ellison, all the people we hear about so often — they are just as likely to be in the 40 percent of nonpayers as they are in the top 1 percent of payers.
That’s because under our current tax system, they are able to avoid taxes altogether by avoiding taxable income.
Walk me through this. You’re Elon Musk or Jeff Bezos. Congratulations.
Thank you.
What kind of taxes do you pay? What don’t you pay? How do you end up not paying income taxes when you’re Jeff Bezos, Elon Musk? What are you talking about?
Let’s focus on Jeff Bezos because he’s much more of a classic case. Jeff Bezos started his own business. He owns a dominant amount of the stock.
And over the course of the years, he has taken a salary that is no higher than $82,000. It’s been more than 20 years now, and his salary is always capped at $82,000.
You might say: Well, why would it be? He started the company — he’s the man. Why isn’t he taking a huge salary to reflect all that he put into the company?
The reason is: Salaries are for suckers. When people take a salary, they’re subject to high income taxes and payroll taxes, and Jeff Bezos and a lot of our other multibillionaires have no interest in paying those taxes.
So instead, they take their benefits through the growing value of their stock — and their stock has grown enormously. And that massive growth of stock happens entirely tax free — with no time frame under our current system in which that stock will ever be subject to tax.
That is because we only impose a tax if the stock is sold, and Bezos never has to sell the stock because he can simply borrow against the stock and use that money to support his lifestyle and to pay any interest that’s due on the loan.
I want to slow this down, because there’s a lot in that answer.
Let me start with: “Salaries are for suckers.” One thing that you know you’ll hear is: No, no, no, they’re not avoiding a salary. What they’re doing is making sure their interests are aligned with the company’s. You get a salary no matter what happens in the company, but Bezos only makes money if a stock goes up.
So this is public spirited.
Elon Musk was sometimes making, like, a dollar a year.
These are public-spirited C.E.O.s who have yoked themselves to actual success. And we should applaud them for it. Paying themselves in stock rather than taking a salary is just better for everybody, incentives-wise.
Why don’t you buy that?
Because it’s not true. What is true is that they are profiting through their stock. Arguably, it aligns with the interest, but they could be taking a salary, too. It would be deductible to the company.
There’s nothing that really supports that’s the actual reason for doing so. So yes, it’s a nice cover story, but I don’t think anybody presents it with a straight face.
I think it can sound like we’re just picking rich people at random: Jeff Bezos, Elon Musk.
But there’s this 2021 investigation published by ProPublica that came from actual leaked tax documents that gave us a real window into them. We actually know what they paid.
Can you tell me about that investigation? What we actually saw and learned from that?
Yes. There is a fellow by the name of Charles Littlejohn — that was his actual name.
Named by Dickens. [Laughs.]
[Laughs.] The Robin Hood character.
He was a contractor at the IRS. He saw all of these tax returns, and he leaked them to ProPublica.
He’s actually in prison now. He was hit with a very significant prison term when they found him, because there were a lot of very rich, powerful people who were quite angry about this.
Is it illegal to leak tax returns?
It was absolutely illegal. But the actual penalty was much smaller than what he actually got.
The reason this information was so important is because, while tax scholars long knew that there were ways for wealthy people to avoid taxes by avoiding taxable income — taking low salaries and not selling their stock — it was always met with: Well, that’s just theoretical. That’s not real.
But here, when these tax returns were leaked, it was no longer theoretical. It was the tax returns of many of our richest Americans paying zero in taxes.
Now it’s no longer possible for people to say: It’s just theoretical. We know that it’s not.
That investigation found that year that Warren Buffett had what they call a true tax rate of 0.1 percent; Jeff Bezos had 0.98 percent; Michael Bloomberg had 1.3 percent.
I mean, I pay much higher taxes than that. [Laughs.]
Yes. Of course, what they’re capturing there is their unrealized gains on their stock.
Then the next part of the story you’re telling is the difference between selling stock to fund your lifestyle. Jeff Bezos and Elon Musk presumably have private planes and multiple homes and fancy vacations.
What is the difference between funding that by selling stock and funding it by what you just described — which is borrowing against stock?
If they were to sell the stock, then they would have to do two things. First, they would have to pay capital gains taxes, which would be — when you take into account all the taxes associated with it — over 23 percent.
That’s still lower than if it were a high income.
Absolutely. Selling the stock is definitely a better play than having to take a salary.
Because, again, salaries are for suckers.
Because salaries are for suckers.
And it turns out, selling stock is for suckers, too — but just slightly less of a sucker. You get to pay lower tax rates than you would if you were to take a salary. You don’t have payroll taxes. You just have this net investment tax, which is less, and you have a 20 percent capital gains rate.
So that’s better than salaries, but not as good as borrowing against the stock. You go to a private lender, probably — you could go to a bank — and their biggest risk is that they’re going to lend it to somebody who is going to default on the loan.
But if you’re lending it to Jeff Bezos, and he’s giving you Amazon stock and other assets to hold as collateral against the loan, the risk of that loan going unpaid is nil.
They are essentially making a risk-free loan for which they offer very favorable rates. And they still profit from it because the business is to lend money.
But the thing is, when we turn to Bezos’ side, the tremendous advantage is that loan is entirely tax free. When he gets that money and buys his yacht, he has not had a taxable event.
He continues to own his Amazon stock. He continues to be able to live the lavish lifestyle, and all he has to do is pay a little bit in interest every year.
I want to stop you again on this. They don’t need to pay back the loans. This really doesn’t feel intuitive.
How is it possible to fund a lavish lifestyle on these loans, and no one ever has to pay them back? At some point, in theory, the loan comes due.
You’re assuming that Bezos lives in the world of Americans who have, like, 20-year loans on their homes, and the bank is lending the money, counting on getting the money back.
These are people lending money in the business of lending money, and they’re happy to keep lending money. Because if you’re in the business of lending money, and you get the money back, then you have to find somebody else to lend it to. So why not just keep lending it to Bezos?
So in this way of funding a lifestyle, you’re just taking out one loan after another, sometimes paying one loan back with another, and you’re just doing this again and again.
I think what’s hard to internalize is how much wealth it really is when somebody has $100 billion, $200 billion — almost $800 billion.
When it comes to somebody like Bezos and our other centibillionaires, they are not bumping up against the value of their entire assets. A few billion really supports quite a lovely lifestyle, and they don’t have to get anywhere near where there’s some risk that they can’t provide sufficient collateral.
It would be as if you, in order to support your lifestyle, needed to have $100 relative to the amount of wealth that you have. Do you think it would be hard for you to maintain a loan on that $100 based on the amount of assets that you have and borrow enough to pay the ongoing interest?
I don’t think it would be hard.
But something I think you’re getting at here is that consumption doesn’t scale. We’re talking about how they fund their lavish lifestyles.
I don’t know what Elon Musk’s carrying costs are year on year. I don’t know how many homes he’s got, or whatever.
But say it’s between $25 million and $100 million.
Yes.
It’s penny change.
Yes, that’s exactly it.
And the other thing is that if they sell the stock, they run the risk of giving up control over their companies. They also run the risk of not being able to enjoy the future growth of their stock.
These are companies all heading into the stratosphere, and they don’t want to give up any ownership. They want to keep going with this ride. Their stocks have proved to be a very good choice because the growth and value have far outpaced anything they have to pay in interest.
So they get to retain control of their companies. They get to ride up the value of these tremendously profitable companies. And they get to do it all entirely tax free, while all the rest of us are left holding the bag.
So the story you’re telling here is a situation where, if you have enough money, and that money is not seen by the U.S. government as income, you can borrow against that wealth.
That creates a tax-free form of money that you can use. And you just keep rolling it over and rolling it over and rolling it over.
I have a couple of questions about this, but before we get into those, I want to compare this to somebody in the 99th percentile.
Let’s say you’re a Beverly Hills surgeon making $2 million a year. And then let’s say you’re a tech founder who has $180 million in company stock and only takes $1 a year in compensation.
Yes.
Both of those people are rich. What is the difference in the way they’re taxed?
That’s a perfect example.
The Beverly Hills surgeon is going to pay a lot of taxes, probably in excess of 50 percent on all of their earnings. When they have however much they’ve accumulated over their lives, they’ve already paid significant taxes on that acquisition of revenue.
However, our tech person who has a mere $180 million — not a billionaire, a piker — still has achieved this $180 million entirely tax free.
There is no tax unless he or she sells the stock. And because they don’t have to sell the stock, because they don’t want to sell the stock, they often don’t sell the stock.
Here in the United States, they never have to pay taxes on that gain.
Then what happens when they pass that stock down?
None of us live forever, even though some of us are definitely trying — particularly with the levels of wealth we’re talking about here. But assuming they don’t figure that out, the wealthy pass away.
When the very rich today pass away, this stock, or these other forms of assets we might be thinking about, get passed down. What happens from the perspective of the tax system?
Theoretically, what’s supposed to happen is that the estate tax is supposed to kick in. Its purpose was to address these transfers by gift and at death by imposing a tax at a pretty significant rate in excess of an exemption amount. Today that rate is 40 percent in excess of $15 million.
So theoretically, both of our taxpayers are going to be subject to some pretty significant tax liability if they have to pay a 40 percent tax on the transfer of property that’s over $15 million.
That’s how we imagine the system working. The problem is that the estate tax has become so riddled with loopholes that it is really more of a tax in name only than it is an actual burden.
I will give you what I think of as the ultimate evidence of this, which is that killing the death tax was the No. 1 issue for the Republicans ——
Which is what they called the estate tax.
Which is what they called the estate tax. Getting rid of the estate tax, or killing the death tax, was a big issue for the Republicans, for at least the last 30 years.
However, in 2025, when they had the chance to do it — we had President Trump, we had an entirely Republican tax bill, and he could include anything he wanted — all of a sudden, estate tax repeal wasn’t there.
And why is that? I think it’s because the estate tax has become so riddled with loopholes that it serves the wealthy more to keep the estate tax on the books — giving the appearance that the wealthy are paying taxes — than to actually repeal the estate tax, which would shine a light on all of the ways the income tax system benefits inherited wealth.
Your specialty is estates.
Yes.
Tell me about some of the loopholes.
If I had chosen a more lucrative profession and had done well in it, and I came to you and said: Hey, I’ve got $50 million, and I want to pass that on to my kids, and I don’t want the government getting a dime of it. They didn’t earn it, and they don’t deserve it.
What would a more cynical and mercenary version of you — like the richer, more mercenary version of me here [laughs] ——
Getting together —
What would you tell me to do?
Well, first of all, it would matter here whether you were the surgeon or the tech entrepreneur with the stock.
The surgeon has a much harder time because the surgeon has cash. They were paid in cash; they have cash. And it’s a lot ——
I’d assume they bought stocks or hold index funds, or whatever it might be.
Yes, but most of their wealth was achieved in cash rather than in untaxed appreciation.
So here is where people who own stuff — typically stock — really are able to take advantage of the system in a way that others can’t quite as well.
If you have a business that’s worth, let’s say, a $100 million, and you pass it at death at $100 million, it’s valued at $100 million.
However, if you cut it up into three minority pieces — 35 percent, 35 percent and 30 percent — each of those pieces is entitled to a discount of up to 30 or 40 percent.
Now, all of a sudden, your $100 million has been shrunk to $50 million, $60 million — and then it appears on the other side, with your kids, blowing back up to a $100 million.
That’s one way. We call those minority discounts.
But even better are devices where somebody creates a dynasty trust. These are really ——
Sounds good. I want a dynasty trust.
[Both laugh.]
Yes, exactly. Dynasty trusts are fascinating. The purpose of the estate tax was to avoid dynastic wealth. It’s a sign of how flagrant the estate planning can be that they actually just call these dynasty trusts.
We know they’re supposed to not have dynasties, but we’ve got dynasties for you. And what they do is they create a vehicle for your children, grandchildren, great-grandchildren, great-great-grandchildren — forever in perpetuity — to benefit from this trust and the growing value of this trust.
They get funded through a lot of complex arrangements. Oftentimes through sales, you will sell your stock early on to this company in exchange for a low-interest note. For estate tax purposes, you’ve gotten it out of your estate. But for income tax purposes, you’re treated just as if you’re dealing with yourself, so you pay no taxes on that transfer.
And these dynasty trusts, through devices like that, are being stuffed with billions and billions and billions of dollars. This is happening all around the country. Around the country, estate planners are helping their clients fund these dynasty trusts.
There are also charitable vehicles that are used, where basically you give a charity an interest up front, and then at the end, it goes to a private person. But you price it such that all of the gain is somehow written out of the picture — until it magically appears at the end of the story.
It’s the same thing with GRATs — rolling GRATs.
A GRAT is a grantor-retained annuity trust. It is a device by which people are able to transfer enormous amounts of wealth tax free by doing something called rolling GRATs.
The money comes in, the profits get siphoned off, the money comes in, the profits get siphoned off, and all the profits get siphoned off entirely tax free.
These are just some of the many devices that are used and that estate planners have — and had for too long now.
Why do they have all these devices? Were they created to be used this way? Were they created for another purpose, and people just figured this out?
Is the tax code designed to do this? Or has it been chopped up through brilliant tax machinations?
So let me step back for a second. In order for a tax system to work, there has to be a dance between taxpayers and Congress or the I.R.S. — whoever is the regulating authority.
Basically, Congress sets out some rules. The I.R.S. sets out some regulations. Taxpayers and their estate planners or other advisers find ways around the rules.
Congress or the I.R.S. is supposed to come back in here and close the loopholes, respond to that. Taxpayers go out, they try to find other loopholes. And together there’s this dance that makes sure that the tax system is doing a pretty good job of collecting the revenue we need to run the country.
For much of the 20th century, this worked pretty well with the estate tax. The estate tax was seen as a very innocuous tax, well-accepted in the country.
It serves as a backstop to the income tax system, which had all these ways for wealth to grow tax free. The estate tax was there as a sweep-up tax to make sure that it was going to be subject to tax.
The problem was, in 1990, they stopped. That was the last time we had any reform done to the estate tax.
But, of course, the estate planners haven’t stopped.
Did it stop? Because my understanding is we’ve had cuts to it since then. George W. Bush — you could call it reform or not reform — but it has been chopped up and sliced up and made weaker quite a bit since then.
Well, what has happened is that there have been two changes: The exemption amount has increased, and the rates have decreased.
There was a big discourse around this. I remember this a bit. It was like: Oh, these people are passing down family farms, and their family farms are getting taxed away.
So they cut it up then. How does it change?
Right. That double tax that hurts family farms and businesses, the death tax — that campaign was funded by 18 of the country’s wealthiest families in the 1990s.
So the Mars, the Kochs, the Waltons — they all got together, and they were like: OK, we’ve got the income tax handled. We can borrow, we can avoid salaries. But this estate tax — Congress keeps fixing it. They keep doing the generation-skipping transfer tax, they do the special-valuation rules. We have to stop them.
They funded this campaign to turn the public against the estate tax, and they did so by telling the public that the estate tax was an immoral death tax — making it seem like it came for everyone. Rather than an estate tax that definitely had a rich people air to it.
They said: No, this is a death tax. It comes for all, and it particularly harms family farms and businesses.
Now, what they didn’t say was that there are actually a lot of provisions in the tax code specifically designed to protect family farms and businesses. And indeed, Congress had a very hard time finding actual examples of people who actually lost their farms.
Their favorite person they used was this fellow by the name of Chester Thigpen, who had a tree farm.
He was the grandchild of slaves. He testified in Congress that he was afraid he was going to lose his farm due to the death taxes that were going to be imposed when he died.
He was so effective that Republicans wanted to call it the Chester Thigpen Estate Tax Repeal Act, because he was such a compelling figure.
Well, a few years later, Chester Thigpen dies, and it turns out he wasn’t subject to the estate tax at all because, in fact, his farm fell well within the exemption, and there were other taxation areas to protect it.
Congress could have easily addressed the family farms and business problem — if one sees that as a problem — by basically expanding the protections that were already there. But instead, they were using it as a cover for all of the people — the Mars, the Waltons, all of those people — who had massive amounts of inherited wealth, and they wanted to be able to pass it tax free.
I found these numbers in your book kind of shocking. In 2000, before the Bush tax cuts, Americans filed 122,000 estate tax returns. In 2010, it was 47,000.
In 2013, after Obama’s tax plan went into effect, it was 32,300. Then after Trump, there were 6,158 in 2021, of which only 2,584 were actually taxable.
So either between 2000 and 2021, rich people stopped dying or there stopped being rich people, or we really gutted this thing within an inch of its life.
Yes, I’m going with No. 3. In 2024, the richest 1 percent of Americans controlled massive amounts of the country’s wealth: $50 trillion.
Yet the estate tax that was designed to apply to all transfers at death and by gift — and there’s a lot of gifting that goes on, because as I mentioned, those techniques all involve gifting, so lots and lots of gifting is going on by these people — the 40 percent estate tax only raised $30 billion in 2024 out of $50 trillion of wealth owned by the richest 1 percent of Americans.
It is practically nothing. It is an amount that Elon Musk has both earned and lost in just a single day — and probably hardly even noticed.
Clearly, the estate tax is not doing what we think it’s doing.
I think it’s worth talking about: Why are there different rates for different kinds of income?
Why do we treat income — income earned at our job, income earned by selling stock, income earned when somebody dies and leaves everything to us, income given to us as a gift — differently?
What are we trying, in theory, to achieve?
It’s interesting. Andrew Mellon, who was known as a tremendous anti-tax crusader —
Famed robber baron.
Yes, and also secretary of the Treasury for a number of administrations.
He felt the rules should be that income is taxed at the lowest rates, and investments are taxed at the highest rates. Because people earning income are in the most precarious situation, and they are likely to need the lower rates. As opposed to people who are just sitting back and relying on their investments.
Let me read the quote here. I took this down — it’s in your book. This is from Andrew Mellon’s 1924 book “Taxation: The People’s Business.” He writes:
The fairness of taxing more lightly incomes from wages, salaries and professional services than the incomes from business or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it, and old age diminishes it.
Here Mellon is talking about wages:
In the other, the source of income continues; the income may be disposed of during a man’s life, and it descends to his heirs.
That Andrew Mellon was saying that it was beyond question that you should tax wage income more lightly than investment income speaks to a very different time.
What is the thinking that leads us into the current world, where no matter how you think about the code, it is the reverse? If I sell stock, the income from that gets taxed more lightly than the income I make from The New York Times.
Yes, and what’s interesting is when you actually dive into it, there are 50 arguments that are given for why investment gains should be taxed at a lower rate. Things like: Sometimes there might be a lot of inflation if a lot of time has passed, so maybe it’s not actual gains.
And some say it’s good to encourage investments. Others say — and I find this just the ultimate in distorted reasoning: Look, right now people are encouraged not to sell their stock because they can avoid tax by not selling. We have to lower the rates in order to lure them into selling.
So that is another justification — even though they should just tax the gains — and then people would sell.
The word Mellon uses here is interesting: “fairness.”
I’ve been around this debate a long time: I’ve covered a lot of tax debates. I’ve covered debates on the capital-gains tax rate. I get into a lot of arguments about efficiency and exactly the right macroeconomic level to turn the dial to.
And yet, as a human being, just experiencing the way income works: I work so hard for the income I make for my work. If you’re a delivery driver, a doctor doing primary-care work or a pediatrician — you’re working so hard.
The idea that is taxed so much higher than somebody making money by just letting money sit in an index fund or just occasionally clicking a button and moving it between different investments — there is a fairness question here.
It’s cruel. I always think it’s actually quite cruel.
It is so easy to let your money make money for you. The fact that we reward that — over work — is crazy to me.
I totally agree. And you know who else agreed? Ronald Reagan, in the Tax Reform Act of 1986.
They actually succeeded in equalizing, for a very brief period, capital gains rates and ordinary income rates. They got rid of the preference for capital gains, which we should definitely do today.
Now, one of the arguments that someone is going to make is: Yes, but everybody is better off when rich people take their money and they invest in the economy. That’s what makes the whole country grow.
But the thing is, much of this money is not seed capital to start local businesses. This is money trading on a secondary stock market. It is not going to a business. It’s going to other owners of stocks, driving up the shares.
So I don’t buy that argument that this is growing the economy when people are putting their money in stocks.
Well, let me ask you about a related dimension of this, which is the rise of stock buybacks and both how that has changed the way stocks work and how that has changed the way taxable income presents or does not present itself.
We’ve been telling a story about wealthy people not paying taxes on their stock because their stock goes up in value. They don’t have to pay tax on that gain.
Before 1982, because companies could only share their profits through dividends, it meant to own a lot of stock was to get a lot of dividends. For much of the 20th century, dividends were taxed at the highest rates, just like salaries. What that meant was that somebody who was sitting on a lot of stocks got a lot of dividends and paid a lot of taxes.
However, in 1982, after this rule change, companies switched from issuing dividends. It used to be more than 70 percent of profits were distributed through dividends. Now it has never been as high as 20 percent since this change went into being.
The effect of this is that companies began to do lots and lots of buybacks of their stock. And this had a tremendous impact on multiple levels.
If you look at the Dow Jones, there’s a chart in my book that shows that in 1982, the Dow Jones was at about 3,000. It was also that in the ’70s, the ’60s, the ’50s, the ’40s, the ’30s and the ’20s — it was around 3,000. That’s the inflation adjusted amount.
Now, it’s something like 45,000 today.
Part of this story is stock buybacks. Stock buybacks boost the value of stock.
But another important part of the story is that it meant that for somebody who owned stock, they no longer had to get taxable income. They could enjoy their profits through the increased value of the stock.
Some shareholders would sell their stock, because that’s the nature of the stock buyback. However, a lot of these shareholders are tax exempt organizations, so they’re not worrying about paying taxes on their proceeds.
So in terms of revenue to the federal government, profitable companies used to provide a lot of revenue to the federal government in the form of taxation of dividends. Now, with the rise of stock buybacks, that is much less likely to be the case.
I want to go back to the question: What happens to these great fortunes when they get passed down?
How is that treated by you, from a taxation perspective? When does that get taxed?
If you receive it at death, then there is an extra benefit for people who receive appreciated property at death. Not only are those gains not taxed to the person who held the stock, but when somebody receives the stock from inheritance, all the gains are wiped away. We call this step-up in basis.
A nice inscrutable name.
Yes. Or the angel of death loophole.
That’s better. [Laughs.]
And the angel of death loophole says that we’re going to wash away the gains, and the recipient is going to be treated as if they had purchased the property.
OK. I want to slow this down for a minute, because I think step-up basis here is really quite important.
Let’s say somebody made a great investment. They bought Nvidia when it was cheap, and now some years later, they have $30 million worth of it.
In one world, they sell that stock because they want to buy a mansion or whatever it might be. In another world, they never sell the stock. They pass away and give it all to their kids.
What is the difference in tax treatment for that stock? It is the same tranche of stock.
In the first scenario, they would pay income taxes on the capital gains. The capital gains are imposed at a 20 percent rate, plus an additional 3.8 percent extra tax on it.
So almost a quarter of those gains — and it’s almost all gains — would be subject to income tax.
And the gains are the difference between what you bought it at and what you sold it at?
Absolutely.
However, if instead you hold on to that stock, and you don’t sell it, and you pass it on at death to your kids, there is an extra bonus. Not only did you not pay taxes on that gain, but when they get the property, they are treated as if they had purchased it for its fair market value.
Now they’re treated as if they had bought it for $30 million, and so they can turn around and sell it for $30 million and pay no gains at all.
And that is this thing that we call step-up in basis — or the angel of death loophole.
So the gains are just wiped away.
Wiped away, not for you to worry about.
That’s pretty sweet.
Yes, that’s a very nice deal.
What do you expect will happen with a Jeff Bezos then? Can he pass down $150 billion or whatever it is without too much tax implication?
It seems like a lot of money. Chances are, these people are going to use charitable vehicles as an important part of their tax-free transfers. The problem is that these charitable vehicles afford these donors and their families enormous tax benefits while continuing to give them enormous power in the world.
Some of these tax avoidance vehicles, if they set them up during life, are not just for charity, but are to influence politics.
That’s because you can put money into a 501(c)(4). That’s a particular type of organization that is allowed to engage in political activity.
Under our current rules, when you give to your appreciated stock — let’s say somebody decides to give $50 billion to their 501(c)(4) — they get to have continued control over the assets and a tax-free path to avoid both gift taxes and capital gains taxes.
Let’s talk about what you might do about some of this.
I think something people are hearing a lot about right now is a wealth tax. One reason they’re hearing about it is that there is a wealth tax on the ballot in California this year, a one-time 5 percent wealth tax on the state’s billionaires.
These operate a little bit differently for states and for the federal government. So let’s begin with the one in the news, which is the California one.
How would it work? What do you think of it? What are the considerations for a state thinking about doing this?
The wealth tax is an obvious answer to this problem. It says: All right, we have a lot of ways that people are avoiding taxable income, and they have massive amounts of wealth. Let’s tax their wealth, and we’ll impose a flat tax of 5 percent.
The problem for states is that people can easily leave states. California is trying to get around this problem of people leaving the state by making it this retroactive one-time tax.
It already applies retroactively to people who previously were living in the state, I think as of Jan. 1, 2026.
A retroactive one-time tax is not going to be a permanent solution to the problem, obviously. Nor do I think it’s going to prevent people from leaving the state. Because once it’s done once, there’s every reason to expect it will be done again.
So I do think there is a problem for states in their ability to raise revenue, because other states are trying to compete on these low taxes.
In that case, you have something like Ron DeSantis in Florida?
Absolutely.
I met a rich person not long ago who showed me an app they have that counts the number of days they spend in Florida.
They really want to live in New York — but they actually live in Florida. They have to put in enough days a year to not pay New York taxes.
I found this crazy. I figured the whole point of being rich was not to have to worry about things like this. But people really do it, I guess.
Yes. I find it insane to be rich and to have to live somewhere that you don’t want to live.
But, of course, this is why you’re a podcaster, and I’m a law professor, right?
[Klein laughs.]
If we really cared about money, maybe we’d really care about taxes. To me, it seems insane. But people do that all the time.
Do you think the wealth tax proposal would be good for California? Or is it something that would just create a benefit for Texas, because it will pull in these rich people?
Well, it’s hard to say that it’s going to make a huge difference when it’s just a one-time tax. It would have to be a more permanent tax.
I think it has a number of problems. One of them is the problem of people leaving. But I think another really significant problem is how you’re going to gather the information of how much wealth a person has.
It’s very easy to think about somebody who owns publicly traded stock. We know how much stock they own, and we know how much they have.
But there are lots and lots of wealthy people who own their wealth in other forms that are very difficult to value.
Now you’re talking about a state department of revenue having to build up the resources to have everybody tell them everything they own and keep up with the valuation of it.
How much is your art collection worth?
Exactly.
How much are your crypto NFTs worth?
Absolutely. Also when you start to look at things like partnership interests, these are highly complex structures, and it’s impossible for somebody to be able to monitor that for all of the different taxpayers.
So it’s a very, very difficult practical task to get around. Again, California has some solution where you can defer paying taxes and all of these things, but it’s just very difficult to do. It’s not as easy as it sounds.
I think that it’s also a problem in terms of winning the support of the American public. Because we pay taxes on the value of our homes.
Generally, when we think of the value of all of our assets, we know that there’s an estate tax at death. But that’s very different than requiring people to disclose every single thing they own during their lives every year.
That, I think, is going to feel invasive to the public — not just to the people who are subject to the rules, but to the other people who are thinking about the fairness of these rules.
But that question also applies to a federal wealth tax.
If these proposals are associated with anybody, it’s probably Elizabeth Warren, who has had a number of them over the years.
But there are proposals for different forms of national wealth tax. It might be something like 2 percentage points of your wealth every year, year on year.
How do you think about this?
At the federal level, you get to avoid the problem of people moving. Sometimes people say: Oh no, people are going to leave the United States. It’s very hard to leave the tax clutches of the United States.
Also this is not an age in which a lot of people want to regularly give up their U.S. citizenship and become a citizen in some other country.
Dubai or whatever ——
Exactly.
Particularly, I think, looks bad at the moment.
Yes, exactly.
The Dubai move, which the rich in the U.K. sometimes do, I think has been called into question by the recent war.
Yes, exactly. I think that’s something that people threaten will happen. I don’t think that would happen here.
But the bigger problem here is the constitutional issue. Our federal constitution basically has these special rules about direct taxes and indirect taxes — and wealth taxes raise constitutional issues.
It’s hard because we have a limitation in our constitution on direct taxes. The problem is that, given our current Supreme Court, we have every reason to think that this Supreme Court might find a wealth tax unconstitutional.
It could very easily not survive. So all of that political effort will have been spent for nothing.
It just seems like not a smart way to go — particularly in today’s world, where the wealthy are able to avoid taxes so easily through the highway of alternative tax avoidance because of our failure to tax their investment gains and their inheritances.
I think there are a lot more easier paths to follow. It’s not going to be as immediately effective as a wealth tax — but it’s more likely to be permanently effective.
Then what would you do?
What I think should happen is, first of all, we have to look at investment gains. The problem with our investment gains is that they are never taxed to the person who owns it unless they sell the property.
However, in Canada, they have a much broader rule: Whenever the person transfers the property, not just by sale but also by gift or at death, the gains at that time will be tallied, and the person will have to pay tax on that gain. That way, gains are taxed to the person who earned them, rather than kicking it down the road to some time in the future that may never come.
If I could write the rules, I would say that we should eliminate the distinction between capital gains and ordinary income and give them an inflation adjustment to reflect that inflation holding. Other than that, impose ordinary income rates on that gain.
In addition, we need to address inheritances. People are receiving massive amounts of wealth entirely tax-free.
If you were to walk down the street and find $100, you would be expected to report that to the federal government.
However, if someone were to give you $100 billion, you literally don’t have to tell anyone. There’s not even a line on your tax return to let anyone know, because that is seen as entirely your business.
That should not be the case. We should get rid of the estate tax, which isn’t doing anything.
That’s really true? You could just hand somebody $100 billion, and you don’t have to report it to anybody?
The person who hands it is supposed to report a gift tax return. But if it’s been put into a trust, the trust has grown, it’s distributed from the trust. The person receiving the property may have some flow-through gains through complicated tax rules.
But the receipt of property by gift, inheritance or life insurance — and by the way, life insurance is the favorite vehicle of the superwealthy to pass on their wealth. When they convert it into a life insurance policy, it all of a sudden becomes nontaxable everywhere. Those are subject to exclusions, meaning you don’t have to even report them.
One thing that the way you just described that makes clear is that there’s a level of tax design — and then there’s the will to enforce tax design.
If you imagine the kind of reform you’re talking about, you could make it. But then you would have to want it to work such that you began shutting down all this other stuff and keeping it shut down — like these life insurance loopholes you’re talking about.
But how do you think about these two levels?
There’s a level of tax design. Then the level of the tax code is complex, and people don’t know what’s happening in it. But the people who do know what’s happening in it have a very, very, very strong incentive to support politicians who will allow them to keep using these loopholes or to punish politicians who try to close them.
Let me start by confessing: I am an optimist by nature, so you may need to take everything I say with a grain of salt. However, I think that this system of nonpayment by wealthy Americans came about because of our particular history and particular vulnerabilities of the estate tax.
We had a system where the income tax was incomplete; the estate tax was supposed to be a backup. The assault on the estate tax in the early 1990s was so effective that even Democrats were afraid to do anything to close the loopholes, because so many Americans saw it as an unfair double death tax.
I think if we had a cleaner system, we could easily get rid of the estate tax — we have an income tax system — and it would get a lot harder to pull the wool over the eyes of the public.
I don’t think it’s the case that rich people can always control, always get what they want. I think that we’re living in a moment now where there’s more pressure than ever for this to happen.
This California wealth tax is happening because the public has become broadly aware that we’ve got a lot of superrich people who control massive amounts of the country’s wealth — more than they’ve held, I think, since the 1920s. Significant amounts — I think currently 32 percent of the country’s wealth is held by the richest 1 percent of Americans.
At the same time, none of them seems to be wrapping themselves in glory these days. If we go back 20 years, we had all sorts of amazing things being done by our rich people.
There was a book that came out in the early 2000s called “Philanthrocapitalism: How the Rich Can Save the World.” This was not seen as insane. Can you imagine a book today called, I mean ——
Ray, I’m in the professional opinion business. I can imagine anything.
[Both laugh.]
But the idea that someone would think that this would land with the public — which it did in that era: The superrich can do so many things. We should hand over all of society’s problems to them.
I think a lot of people would find that laughable today.
I think something that comment is getting at is that sometimes people want to tax the rich because they want to punish them. They just don’t like the rich.
They definitely don’t like the rich right now. I’m very sympathetic to the argument you’re making.
On the other hand, then a lot of things wind up in moral judgment. My view is that Sergey Brin should have to pay taxes on that wealth — no matter if he’s in the don’t be evil era or in the slightly more evil era.
I completely agree. I think it is a big mistake to focus on the idea that rich people are bad, and therefore, we should be imposing taxes.
The reason I think it’s bad is because when we move the conversation to whether rich people are good or bad, we are not focusing on the fact that the richest Americans have been written out of our tax system.
It’s as if we had a system that said: People who live in Pennsylvania don’t have to pay tax. We shouldn’t have a discussion that says: Well, some of the people in Pennsylvania are good. Maybe it’s OK they don’t pay tax.
It’s wrong as a matter of principle. It’s wrong because we need their money. It’s wrong as a matter of fairness. It is wrong for so many reasons.
I think the big problem goes back to your earlier question, which is that the public is misled into thinking the wealthy are paying more taxes than they are.
That is why, with this 1 percent paying 40 percent — most of the public doesn’t know that the wealthiest Americans are able to avoid taxes by paying taxable income. If they knew, they wouldn’t want that system.
I find what you’re telling me here to track with what people I know who have worked on crafting wealth taxes tell me. What I find very frustrating is that it seems like it should be possible.
But the more you get into it, the harder it becomes — both constitutionally, which is one dimension of it, but in the valuing and the continuous valuing and the worrying about people moving things into harder-to-value assets.
I have wanted there to be a wealth tax as long as I’ve been aware of taxation, and the thing that I feel we’re losing if we can’t do something like it, which I just think is worth naming, is that wealth creates power.
It creates a tremendous amount of power, and we’re operating in this era when the superrich were not necessarily shy about using their wealth to wield power.
I mean, you mentioned the anti-estate tax campaign that was heavily funded by 18 of the richest families. But the level of direct engagement that you’re seeing now from people like Elon Musk — they are really creating the long-running fear that if you have concentrations of wealth, you’ll have unmanageable concentrations of political power manifest.
You can design a tax code that taxes this money eventually. But it doesn’t solve the political power question in a way that a lot of people want to use a tax code to do so.
I’m curious how you think about that.
I think it’s a real problem, and it’s a real concern. People controlling massive amounts of wealth have tremendous power in our society.
I understand that in some fantasy world, a powerful enough wealth tax will be enacted to make a sufficient enough dent in the wealth of the wealthiest people, where it is brought down to a level where they no longer have this power.
However, from where I sit, that just looks like a fantasy world. That’s not going to happen. It’s not going to be significant enough. The public isn’t going to buy it.
I think one of the reasons the public isn’t going to buy it, generally, is because — something we talked about earlier — to the extent it is a special tax focused on the richest people, like we have to punish the richest people, I don’t think everybody in the country agrees with that.
A lot of people in the country think that people who have acquired their wealth have done so because they’ve done great things. They’ve started great companies, and sometimes they have done great things. So it paints too broad a brush.
The problem with it is that we have to live in the world that we actually live in. And in the world we actually live in, I don’t see that as being a solution that’s going to deliver that result.
I think there’s also another dimension to why you should want to make sure the richest people are paying taxes, and that is that people do what other people do.
Yes.
I was thinking about this while reading your book and preparing for this.
I pay taxes. I don’t mind paying taxes. I think that is part of living in a society, living in America has been good to me.
It does piss me off that people above me are not paying taxes. What I hear sometimes with them talking about their weird strategies — and I’m not talking about billionaires here, just people who spend more time on tax avoidance — you think: Oh, am I being a sucker?
The fact that, at these very high levels, the very richest are making the rich people right underneath them feel like suckers — people don’t want to be suckers. They don’t want to feel that other people are getting a deal they’re not getting.
On one hand, you might think it would be good if this made more rich people advocate for a better tax system — which it doesn’t seem to have done — to shut down the ability of people above them to do this. But I do think that it’s very corrosive to social solidarity to have this sense that there are people out there getting a way better deal than you are.
I completely agree. I couldn’t agree more. That’s why I think a lot of that has to do with the fact that people feel like the regular people are always going to lose out. The rich are always going to have their way — it’s always going to be to their advantage.
But that is not always the case. I think it’s important to think back in history to different times.
One of the times I think is particularly interesting is the Tax Reform Act of 1986. That is the last time that we actually had any really meaningful reform in the tax system. It was under President Reagan, which was kind of surprising, but it adopted principles that had been around under both parties.
When we talk about high-income earners and the inability of high-income earners to avoid taxes, that is because of changes that occurred in 1986. Before 1986, we had a flourishing tax shelter business. Your high-paid surgeon would not have paid taxes on their income because they would have been able to invest in tax shelters and offset all of their income by losses.
People always talk about the very high midcentury, post-World War II income-tax rates. But I think this is important because some of these were not actually as real by 1986, if you look on a chart.
Exactly. So you had these high rates, but you had massive avoidance by high-income earners.
The 1986 act did something very interesting, something I think that we should be doing today: It broadened the base by getting rid of those tax shelters. They so effectively got rid of those tax shelters that we don’t have them today.
Our high-income people, people with lots of salaries, are paying lots of taxes. There’s really very little reason or ways for them to avoid taxes, and they were a politically powerful group.
So it can happen if you have people who really care about making it happen. It’s not like it’s impossible to make it happen.
I think that is the only way to go. Our only way forward as a country is if we figure out how to have a fair tax system.
I think that moral imperative is also a financial imperative. Right now, our national debt is so great that interest payments on the national debt are the third-highest expense after Social Security and Medicare. We are spending a trillion dollars just to carry the debt this year — more than we’re spending on the military.
That is not sustainable. So we’re going to have to find a way to bring everybody into the tax system.
Always our final question: What are three books you’d recommend to the audience?
The first book is “The Age of Extraction” by Tim Wu. This is a fantastic book that talks about how many of our companies that used to do a lot of good for the world are now, rather than producing wealth, doing wealth extraction.
That’s not good for any of us. It’s relevant for these issues of taxing individuals and taxing companies.
The other is the book “The Rise and Fall of the Neoliberal Order” by Gary Gerstle.
I like this — all past guests of the show: Tim Wu, Gary Gerstle.
Really?
Yes. These are great books.
That is a fantastic book. I will say that the title is a bit daunting, but the book itself is so readable. And it makes this incredibly important point that the country used to have one vision of the role of government versus markets.
Now, through the rise of neoliberalism, it’s all about letting the market run free. It is a fantastic illustration of the swings that can occur — and pendulums swing both ways, as we have seen loud and clear in recent years. I think it’s a really good reminder that when people despair of all of the problems of the day, there is an opportunity for pendulums to swing back and for better systems to take hold.
The last book is a book of fiction, “Crossroads” by Jonathan Franzen. Fiction, at any time — and particularly in these times — is just a fantastic place to live, to explore things other than the world that we’re living in. I’d say Jonathan Franzen, better than almost anyone I know, presents people’s internal psychological dramas.
You feel like you’re watching a documentary. His writing is so real. My only disappointment is that I am waiting desperately for his next book to come out. “Crossroads” is supposed to be the first book in a trilogy, and I’m sure I’m not alone in constantly checking for that second book to come up.
Ray Madoff, thank you very much.
Thank you so much for having me.
All right, that was great.
Thank you so much.
We have fixed the tax code.
[Laughs.] Yes.
You can listen to this conversation by following “The Ezra Klein Show” on the NYTimes app, Apple, Spotify, Amazon Music, YouTube, iHeartRadio or wherever you get your podcasts. View a list of book recommendations from our guests here.
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