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Who thinks that they can subdue Leviathan? Strength resides in its neck; dismay goes before it. It is without fear. It looks down on all who are haughty; it is king over all who are proud. These words inspired PJ Wehry to create Chasing Leviathan. Chasing Leviathan was born out of two ideals: that truth is worth pursuing but will never be subjugated, and the discipline of listening is one of the most important habits anyone can develop. Every episode is a dialogue, a journey into the depths of a meaningful question explored through the lens of personal experience or professional expertise.
PJ Wehry (00:03.242)
Hello and welcome to Chasing the Viaduct. I'm your host, PJ Weary, and I'm here today with Dr. Ray Madoff, professor at Boston College Law School. And we're here today to talk about her book, The Second Estate, How the Tax Code Made an American Aristocracy. Dr. Madoff, wonderful to have you on today.
Ray Madoff (00:20.906)
Thanks so much. So let me just do one correction here, which is I'm not a PhD. So I guess I'm I'm more Professor Madoff if you're going to be formal or just Ray, which is also good.
PJ Wehry (00:33.992)
Absolutely. Now, so Ray, tell me why this book.
Ray Madoff (00:38.604)
Yeah, so this book is a result of my 30 plus years teaching in this field of estate and give tax estate planning. And what I've seen over this time is this gradual transformation that has taken place in which the wealthiest Americans have been allowed to remove themselves from the tax system to effectively secede from the tax system.
And the name of the book, The Second Estate, refers to another group of wealthy people who did that, which was the aristocracy of pre-revolutionary France. Under law, they were written out of the tax system. And what I argue in this book is the same thing is happening here with our aristocracy of Bezos, Zuckerberg, Ellison, Gates, Musk, all of them. They have been able to write themselves out of our tax system.
PJ Wehry (01:08.0)
Mm-hmm.
PJ Wehry (01:16.245)
Yes.
Ray Madoff (01:33.346)
But most Americans aren't really aware of this.
PJ Wehry (01:38.79)
And as you've watched this, so is this a relatively recent development?
Ray Madoff (01:43.668)
It's taken place slowly over the past 40 years or so. it's been, I'd say that it's recent like boiling a frog. It happened piece by piece by piece and now we've arrived and they've removed themselves. So it wasn't a one stop change.
PJ Wehry (02:06.0)
And so when you talk about, and I don't want to get too much into the details and I appreciate that you have written a very short book and a very readable book, which is it. So for everyone listening and you, you, you've tuned in and it's about tax code. That's not, we're not going to talk too much about tax code. Okay. We're talking about how it affects and it's history, but what, what are just some of the basic mechanisms they use just so people know what we're talking about?
Ray Madoff (02:31.936)
Right. I think that the thing that one has to realize, I'm going to just step back a minute and say, first of all, the thing about taxes that's interesting is that on the one hand, it's like, taxes, not for me, right? But on the other hand, they're probably the single most important aspect of our society and of any society, right? It is the mechanism through which the government is funded. It provides the revenue for which
PJ Wehry (02:36.81)
Please.
Ray Madoff (03:00.298)
anything that we want government to do to be able to do. And it allocates its cost over its citizenry in a way that can cause significant harm to many and can provide a lot of power to the rest. So one of the things that I feel really strongly about is to try to make people realize that taxes are not only not as scary as they sound.
but also you can understand the big picture. And by understanding the big picture, you can understand what the problems are and even what the fixes are. So what I really wanna urge people to know is that taxes are for them, even though they might think, I hate taxes and they're boring and they're hard and I don't like numbers and all of those things. But in fact, hidden in our tax code is the allocation of all the power in our society.
So I think that people should have as strong opinions about the tax code as they have about any other hot button issue in this country. Gun rights, abortion rights, whatever they might be, taxes are critically important.
PJ Wehry (04:08.692)
Well, and I think, go ahead. Yes. Well, the first thing that comes to mind is when you talk about hot button issues, some of those issues, think, like you're talking gun rights, abortion, these are things that we can speak to. And a lot of times we talk about a president and the house, have a lot of effect on. One of the things that people seem to want to talk about a lot is the economy. And they actually, the president and the houses have less effect on that than they do taxes. But we don't want to talk about taxes.
Ray Madoff (04:08.706)
So now, yeah.
PJ Wehry (04:38.346)
Does that mean?
Ray Madoff (04:40.27)
I don't exactly follow.
PJ Wehry (04:42.26)
Well, so one of the measures that the issues that you can kind of track is if the president, like when you talk about presidential elections, is how's the economy doing, which is he actually doesn't have a lot of control over, but something he does have a lot of control over is our taxes. that's like, instead of focusing on something that's, it's in many ways fluctuates regardless of the president.
Ray Madoff (04:51.902)
Yeah. Yeah.
Absolutely.
Yes, that's right.
Ray Madoff (05:06.046)
Right now, yes. Right.
PJ Wehry (05:08.34)
we should be focusing on taxes, which it actually affects and which very much affects both what the government does for you and what it takes from you. Is that, would that be a good, like to put it, we should be switching those at least, if that makes sense.
Ray Madoff (05:15.372)
Right. Yeah. Yeah.
Absolutely, absolutely. And tax policy is really central. I think one of the problems is that there's a reason that people are intimidated by it, which is because that people often talk about taxes in ways that I think are designed to intentionally tell people, this is too complicated for you. Don't you worry about this. We'll take care of you. And the problem with that is that it allows
all sorts of bad things to happen because people avert their gaze from something that they should not avert their gaze from. And one of the first things that I think it would be good to talk about is this idea about how much, how, what are we talking about in terms of dollars? When we talk about the wealthy, how much money do they have? Does it really make a difference? Because you often hear people say,
It doesn't make any difference if they rich pay because our government is so big. Our annual deficits are so big. so I want to talk a little bit about some numbers, if I may. So and before one, I'm going to put you on the spot. All right. But maybe so. OK. So our in twenty twenty four, the amount, the total revenue.
PJ Wehry (06:37.118)
Great.
Ray Madoff (06:46.03)
that the government took in from all sources. Do you want to take a guess at this or do want me just to tell you?
PJ Wehry (06:52.096)
100 trillion.
Ray Madoff (06:53.826)
Five trillion. Five trillion dollars. Okay? So five trillion dollars was taken in from personal income taxes, payroll taxes, corporate taxes, excise taxes, tariffs and things, and estate and gift taxes. It all equaled five trillion dollars, okay? And we...
PJ Wehry (06:57.406)
did!
PJ Wehry (07:18.0)
Does that include state governments as well? Okay, only federal.
Ray Madoff (07:20.022)
No, no, I'm only talking about the federal government. So yeah, so I'm only gonna be talking about the federal government here. So the federal government took in $5 trillion and we spent $6.8 trillion, because that's what we do, right? So we had to borrow an additional $1.8 trillion. That got added to our national debt, okay? So all the money that we took in and this paid for...
PJ Wehry (07:34.154)
Mm-hmm.
PJ Wehry (07:41.397)
Yes.
Ray Madoff (07:46.186)
everything, the military, the social security, Medicare, courts, all the things the government pays for. All right. So we've got these numbers, 5 trillion, 6.8 trillion, and 1.8 trillion. Okay. Now we have the richest Americans, okay? I'm just going to focus on the 1 % by wealth, okay? Guess how much wealth is owned by the richest 1 %?
PJ Wehry (07:57.311)
Yes, 6.8, 1.8.
PJ Wehry (08:04.064)
Mm-hmm.
PJ Wehry (08:13.856)
I've seen these graphs, but I do not remember them. I'll go, I just guessing a hundred trillion. I'm going to guess, I'm going to guess five trillion.
Ray Madoff (08:22.755)
haha
Ray Madoff (08:26.222)
50 trillion. 50 trillion. Yes, but I mean, but if you think about it, right, you thought, that's absurd. All of the revenue is 5 trillion. We had a 1.8 trillion deficit. Okay, now, obviously that's not all income. We don't really know how much of it is income and how much is an income for reasons we're gonna talk about. But the point is that when we talk about the ability to close that $1.8 trillion gap,
PJ Wehry (08:27.552)
50 trillion. Should have stuck with the original guess.
Ray Madoff (08:56.056)
Do you think it matters what this group of people that own $50 trillion have, whether they pay taxes or not? And so when people say it doesn't matter if this group pays taxes, it just seems ludicrous to me to make that claim.
PJ Wehry (09:14.398)
I mean, that's astonishing to me because I would not have guessed that would have been one of the first objections you faced. To me, that seems obvious, but that's really helpful to know that that is a common response that people are like, it doesn't matter. Like to me that...
Ray Madoff (09:26.156)
Yeah, well because, but I think part of the reason is if you think about it, I mean, you're an extremely educated person, you do a podcast, you talk to people all the time, right? But numbers like how much money the government takes in, people just don't know. I myself didn't know it until I wrote this book, right? I just knew, well, these are just all big numbers. That's hardly a difference.
PJ Wehry (09:47.742)
I was off by a factor of 20, yeah.
Yeah, yeah.
Ray Madoff (09:52.489)
And yet you think that these would be some basic facts, but you rarely see people talk about these very basic facts. These are just the numbers from 2024. And by the way, if you want to track the wealth of the wealthiest Americans, you can find them by going by typing in the word FRED, F-R-E-D, which is for the Federal Reserve. And you can see in top 1 % and you can see...
how their wealth has grown both as a, and the sheer dollar, so over 30 years it's gone from like four trillion to 50 trillion, right? And then also how it has grown as a percentage of the total assets of the country. So now it's about a third of the country's wealth, just under a third of all the revenue is owned by the, of all the wealth is owned by the wealthiest 1%. So, yeah.
PJ Wehry (10:35.38)
Hmm. Yeah.
PJ Wehry (10:42.368)
I was gonna say it's very strange because I think I've seen a lot of graphs about the top 1 % but they always show things like how much, what percentage they have of the wealth. They don't show the actual number. Which I, you know, that's probably a, go ahead.
Ray Madoff (10:52.812)
Yeah, right. And they don't show it also, even if they show the number, if you don't know, for example, if you were right that the government had $100 billion of revenue every year, then maybe their 50, I mean, 100 trillion, then maybe their 50 trillion wouldn't look so great. But when it's the fact that 5 trillion is all of our revenue and they have 50 trillion, I think that's more notable. So one of the issues
And I'd say call this reason number one why people are sometimes confused about this question of the taxes paid by the wealthy is this problem of large numbers. They're hard to keep track of. And so for example, people hear the word a million, a billion, and a trillion. And they think like, well, those are all a bunch of big numbers. And they fail to recognize the difference between
PJ Wehry (11:42.783)
Yes.
Ray Madoff (11:50.688)
a million and a billion and a trillion, and particularly a million and a billion. And the reason it's particularly important is because so many people are millionaires that are not wealthy. And particularly if you live in where I live in the Boston area, right? I mean, we were talking about this, right? Yes, exactly. A million dollars, you know, that could...
PJ Wehry (11:53.407)
Yes.
PJ Wehry (12:03.274)
Yes.
PJ Wehry (12:11.488)
We talked about this before the podcast.
Ray Madoff (12:18.338)
We have parking spaces that go for a million dollars, right? know, housing is very expensive in the Boston area. And so people who bought a house a while ago, know, lots of people have assets worth a million. And I think what happens is because millionaire had been traditionally the number that we associated with the very rich, then people with a million dollars or a couple of million dollars, they think that they're the same as the rich. They identify with the rich and they're paying a lot of taxes. So they assume...
PJ Wehry (12:36.767)
Yes.
Ray Madoff (12:47.362)
that the very rich must be paying a lot of taxes too, because after all, we're just the same with us millionaires and billionaires and all of that. But there's a massive difference. And I want to just give one example of this difference, okay? Way to think about it. So let's say that we live in a time of roughly 4 % interest rate, right? You could get 4 % now, I'd say. So somebody with a million dollars who wanted to live off of that income would have
$40,000 a year to live off of, right? $40,000 a year is not gonna get you far. You are not going to be living high off the hog and really, you know, really loving it when you're getting $40,000 a year. However, if you have, if you have a billion dollars, you now have 40,
million dollars a year. And 40 million dollars a year, 40 million dollars a year, that's pretty good for supporting your lifestyle, right? And so, you know, this is a big difference. so, it's important to recognize
PJ Wehry (13:49.888)
Okay, I did the math wrong.
PJ Wehry (13:55.872)
Not doing anything.
Ray Madoff (14:14.19)
these differences in these numbers and what it means to have this type of wealth. So then, okay, so now we know that rich people have a lot of money. I'm saying we don't know if they pay taxes. And so the question is, well, how could they not pay? Because after all, anybody who earns money pays a lot of taxes. And this is an important point that I think that people need to understand. People who earn money,
are actually double taxed. So we sometimes think about, you know how they, used to say about the estate tax, which we'll talk about later on, it's a double tax that hurts family farms and businesses, all of that, right? We're gonna get to that. But it's really salary that's subject to a double tax. Because you pay income taxes on your entire salary, and on top of it, you pay payroll taxes.
PJ Wehry (14:45.664)
Mm-hmm.
PJ Wehry (15:02.378)
Yes.
PJ Wehry (15:06.74)
Yes. Yep.
Ray Madoff (15:11.694)
on your entire salary. and payroll taxes are very significant, particularly for self-employed people. And so, somebody who earns $100,000, they pay $15,000 in income taxes and $15,000 in payroll taxes, that's $30,000 in taxes. That's a pretty hefty chunk for someone who earns $100,000. And somebody who earns $60,000, which is the median income in this country,
Somebody who earned 60,000 pays $15,000 in taxes. So they earn 60,000 and they have to give $15,000 in taxes. If you think about it, that is quite a hardship for somebody who's trying to get by on $60,000. It could be the difference between a car. It could be the difference between paying their rent. It could be the difference between homelessness and hunger and everything. It's a significant portion of money. But instead,
We call those people who pay a lot of payroll taxes, we call them non-payers. I don't know if you remember the story about Mitt Romney. So, Mitt Romney was running for president and they got him on a hot mic talking about the 47 % of the country that are takers, not makers, because they don't pay income taxes. Well, a significant portion of the country doesn't pay income taxes, but they pay payroll taxes.
Another level of the confusion is a belief that payroll taxes, well, that's okay. That's just like saving for your future. Like that money's being put aside for your future, but it isn't, right? Payroll taxes is money that is used to pay for current retirees. Somebody who is paying payroll taxes today,
is paying money to support the medical and retirement expenses of somebody who is today retired. It is a tax just like any other tax, but it's a tax that's hidden from the public, both in terms of on their paycheck, right? It looks fica, futa, like what the heck do those things mean? And so they're hidden from the people who pay the taxes and they're also hidden from the public because when people talk about
Ray Madoff (17:32.706)
who carries the tax burden. They focus on income taxes and they don't focus on the role of payroll taxes, even though they are quite burdensome.
PJ Wehry (17:42.409)
And the government knows this, and I think this is a misconception I've run into, people like, why do we give tax breaks for having kids? And it's like, it's because the government knows that it needs citizens to pay for future, right? Cause that's like, that's their source of income, right? Anyways.
Ray Madoff (17:55.532)
hahahaha
Ray Madoff (17:59.756)
Well, and of course, the other thing is that on this whole immigrant issue, is these immigrants that are being deported that actually have been paying significant payroll taxes because they all have social security numbers that they have to use to get the jobs and they're paying into a system that they never get paid out. So it's going to be interesting to see what happens when we lose that source of revenue as well.
PJ Wehry (18:28.848)
Okay, I'll just say for the I'm a big optimist so I can't wait for the end because I want to hear how we fix this I believe
Ray Madoff (18:34.798)
Okay, good. We'll get there. Okay, so I just want to just lay the groundwork, right? People who make incomes are paying a lot of taxes. People who pay high incomes are paying a lot of taxes. And I'm only talking about federal. You layer on the state for states that have state income taxes, you pay even more. So people tend to think, well, I make a lot of money, I pay a lot of taxes.
PJ Wehry (18:41.278)
Yes, absolutely.
Ray Madoff (19:03.626)
It must be the same with these other guys too, these super rich people. And that is where people are mistaken because wealthy Americans are able to follow what I call the tax avoidance playbook. And there are basically three steps of the tax avoidance playbook by which wealthy Americans are able to avoid taxes.
PJ Wehry (19:27.732)
Yes. And I mean, and we talked about this beforehand because I think there's two reactions. One is people getting frustrated that the wealthy aren't paying. And then there are people who are like, so how do I do this? That's what's the tax avoidance playbook? Yeah.
Ray Madoff (19:38.187)
Exactly.
Yes, exactly. And the sad news is without wealth, you can't do it. So it's not for... So if you're a wage earner, you're kind of stuck because you get these wages, they get reported and they are subject to two levels of taxes, the highest taxes. And by the way, the only way those taxes start to get reduced is for people in higher levels of income who then stop paying payroll taxes because we have a cap on payroll taxes.
of $170,000, which a lot of people don't realize on the social security. so we're also very high income people are paying fewer taxes than one might expect for somebody who earns less than 170,000. That's a separate point, but worth noting nonetheless. so, but what about our very rich people that we know, right? And so,
PJ Wehry (20:28.436)
Yes. Yeah.
Ray Madoff (20:38.538)
And this isn't limited to this group, okay? But this is just, you know, think about people like Warren Buffett and Jeff Bezos and Mark Zuckerberg, right? And all these guys, Larry Ellison, okay. The very first step in the tax avoidance playbook is avoid salaries, right? Because we know and they know
that salaries are the most burdened tax-wise. They are subject to tax at the absolute highest rate. So Warren Buffett, he's famous for taking a salary of $100,000 a year, no more. And that includes his bonus. He won't take, and he subtracts some for the rent of doing his, that he spends in the office of doing his private, of doing his personal work. And you might think like, that's cause he's so honest and he's such a great guy. But no, it keeps his,
income down, and that is what keeps his taxes down, right? If you're being paid for the actual worth of being the best stock picker in the history of the world, right? You'd think he'd be getting a little bit more than that, but he doesn't. He takes that. Jeff Bezos earned so little that he was eligible for and claimed the child tax credit, okay?
PJ Wehry (21:39.413)
Yes.
Ray Madoff (22:01.206)
because he just was barely squeaking by. So he got the child tax credit because he had like $80,000 of income and kids. And of course that's even higher than people like Larry Ellison and others who are the sort of Mark Zuckerberg who are the dollar a year guys. They're like, they're so great. They're dollar a year guys. No, they're avoiding taxes by stepping out of salaries because salaries are for suckers, right? It's people who get salaries or self-employment income.
PJ Wehry (22:22.325)
Yes.
Ray Madoff (22:31.118)
that are paying heavy taxes. So the answer in a way is like, what can I do? You can have enough money that you don't need to work for a living. And for people who have enough money who don't need to work for a living, they can then take advantage of the tax avoidance playbook. But if you need to get a salary, it's a lot harder to do. All right. So, okay. Avoid salaries. The second step involves
PJ Wehry (22:50.846)
Yes. All right. I'm tracking avoid salaries.
Ray Madoff (22:59.106)
the fact that you have assets that go up in value. And for our very rich people, we tend to see it in their stock. So Warren Buffett's wealth is tied up in his Berkshire Hathaway stock, and Bill Gates in his Microsoft stock, and Jeff Bezos in his Amazon stock, and Elon Musk with his new trillion dollar pay package, right, with Tesla. But...
PJ Wehry (23:12.532)
Yes.
Ray Madoff (23:26.222)
To the extent you own a capital asset, you are no longer in the salary world, you are in the much better world of investments. One of the advantages of investments that people know about is that when you sell property, you get taxed at a lower rate. You get taxed at capital gains rates, which are like 20 % as opposed to 37%. So it's about half the rate and no payroll taxes.
Okay, so if you sell those profits, it's half the rate. Now people tend to say like, okay, capital gains and they give a lot of reasons why you might or might not want to have a lower rate. We're not gonna spend time on that because that's a wonky tax issue because also only the suckers pay that 20 % tax rate. In fact, this group does not pay even that 20 % tax rate and that is because they don't sell.
PJ Wehry (23:57.056)
Yes.
Ray Madoff (24:24.748)
We have something called the realization rule in tax. And that is that when you own stock and it goes up and up and up in value or any asset at all, you don't pay taxes until you sell it. And if you don't sell it, you never pay taxes on it. Okay, and this is unlike the rule in Canada.
Unlike the rule that was proposed both by, and here's an unusual pairing, Richard Nixon and Barack Obama, they both proposed the same rule.
PJ Wehry (25:01.748)
Hahaha
Ray Madoff (25:05.536)
And this rule is that when you sell, when you either give away property during life or at death, you will then be subject to tax on the property. So you're not subject to tax on it as property goes up in value, but if you ever give it away, you are subject to tax on it. It's called a realization event. Either you die and you give it to your kids or somebody else, and then,
gains or taxes are paid on that gains. It is insane that we never tax those gains because wealthy people never need to sell. Now you might say, yeah, but how are they going to support those fantastic houses and yachts and super yachts and all of that stuff? And the answer is everybody is happy to lend them money.
PJ Wehry (25:58.922)
Right.
Ray Madoff (25:59.126)
And so what they do is they borrow enormous amounts of money. These are the biggest borrowers in our country, our richest Americans, and they borrow so that they can avoid taxes. There's a third benefit. Yeah, they borrow against the assets and then to pay back the loan, they just borrow more. Everybody is happy to give them low interest loans because those loans they know will always be paid back. If somebody has billions,
PJ Wehry (26:11.008)
And they borrow against the assets, right? Yes.
Ray Madoff (26:28.866)
hundreds of billions of dollars, they're gonna be good for their debts. And so what we have is massive borrowing by the wealthy and that is massive tax avoidance. There's another really interesting aspect of the story that we might not have time to talk about, but I'm just gonna throw this in there. It used to be the case that people that owned a lot of stock paid a lot of taxes because
PJ Wehry (26:47.872)
Go for it.
Ray Madoff (26:57.166)
The only way that companies could share profits with their shareholders was to issue dividends. Dividends used to be taxed just like salaries at the highest rates. What that meant was you owned a lot of stock, you got a lot of dividends, you paid a lot of taxes. But since 1982,
There was an obscure change to a rule in the SEC, the Securities Exchange Commission, that for the first time said that companies can buy back their own shares of stock. They can go into the market and buy their own shares.
They used to not be able to do this because it was seen as market manipulation, right? The SEC is concerned with preserving the legitimacy of our markets. And if companies can go into the market, right, and juice the value by buying their own shares, now you're going to distort valuation. So up until 1982, they weren't allowed to do that. They said, no, that's market manipulation.
In 1982, when the former executive from EF Hutton, when Reagan made him chair of the SEC, he on his own changed this rule and changed the ability to tax the wealthy.
because now companies could, instead of issuing dividends, they could buy back their own stock. And the effect of buying back their own stock is growth in stock value. And there's some really interesting charts in the book which show how prior to 1982, the stock market went up and down like a sign curve in just a very narrow band and it was 3000 in 1982.
Ray Madoff (29:00.11)
1974, 1963, right, it never really went up much above 3000, maybe up to 7000, but then back down to 3000, right? It hung around that mean, which it was in 1982. And now I'm talking about the Dow Jones and in 1982, it was 3000. And then in 19, in 2025, it is now 45,000. Something it had never, right? The market absolutely took off because
Companies stopped issuing dividends, which were taxable to everybody, and switched to stock buybacks, which are then only taxable if you choose to be taxed on them. And of course, the only ones who choose to be taxed on them are pension funds and other non-taxpaying people, or people who can't afford to hold on to their assets.
PJ Wehry (29:52.383)
Well, that's what I was like. So everyone can get rich in the stock market. They can have their money work for them. But if at some point you need that money back because you're not wealthy, then you're going to sell the stock and pay taxes.
Ray Madoff (30:02.572)
Yes, and yes. And another thing that I want to add to this is a lot of people own stock through their 401k and IRA and things like that, right? And they think these rules apply to me. I get these good rules of capital gains, but no, you don't. If you have money in a 401k, every dollar that you take out is taxed at the highest rate
just like salary income. You don't get deferral, you don't get any, you don't get lower capital gains rates, you don't get any of that. So for regular working people, you're not getting that. And this is what I mean. There's a lot of, I hesitate to use this word, but it's the one that comes to mind. There's a lot of duping of the American public, right? Into thinking that certain rules,
that work really well for everyone else, work well for the country as a whole. And they don't, they work well for the people for whom they work well. For people who don't need salaries, for people who don't need to sell, for people who don't have money in a 401k or any type of traditional retirement money, not a Roth, but traditional retirement money, you are taxed constantly. And it's natural that people feel burdened about taxes and are therefore wary.
when politicians say we have to tax the rich because they think, wait, now you're coming after me. And so it provides this cover for the wealthy.
PJ Wehry (31:34.913)
If you're not, uh, and I think the easiest way to define wealthy and to think about yourself, uh, that you've said, it's not this magic number. It's do you have to make a salary to live? And if you do your, you're going to get, you're going to get taxed. Can I ask a quick question? And this may be way off in left field, but one of the things that's always, and I, it always, it feels like there's shenanigans going on. Why does every other country,
Ray Madoff (31:47.338)
Exactly.
You're going to get text. Yeah.
PJ Wehry (32:05.066)
have a government tax refund system that tells you exactly what you owe. And the United States has this strange system where we have to use other services. Is that part of this problem?
Ray Madoff (32:16.172)
Yeah. So, now what this is a part of that is something that has been driven by the anti-people that want Americans to be opposed to taxes. you could easily have a system in which the government collects the revenue anyway, right? And they send you a refund or they write you a bill at the end of the year and they wouldn't be such a big deal.
And Republicans have fought this because they want Americans to have the hassle of doing tax returns. And actually under Biden, he had put in a plan where the government would do people's tax returns for them and that program was cut by the Republicans. So that is very much a partisan issue. Republicans do not want taxes to look easy for people because they want to...
PJ Wehry (33:03.935)
Okay.
Ray Madoff (33:10.412)
because cutting taxes is such a big part of their platform.
PJ Wehry (33:18.57)
Thank you for that. did that. Sorry. I thought that might connect, but not really. It was a great answer. Thank you.
Ray Madoff (33:23.818)
Okay, so, and believe, yeah, so no, okay, yeah, so then there's a third part of the playbook. Okay, so the second, and then there's something else that you might have heard of, which is step up in basis at death or the angel of death loophole. I'm just gonna mention this thing because, so let's say you're somebody, you just have like $20 million. I'm gonna talk about somebody who has.
PJ Wehry (33:28.416)
So we have the playbook. Yes, go ahead.
PJ Wehry (33:50.312)
A mere 20 million, yeah.
Ray Madoff (33:51.382)
a mere 20 million. So they started with nothing now, have 20 million properties gone up in value, they've passed it on to their kids. Okay? So we've already said that they pay no taxes during their life. Then they pass it on to their kids and as we're going to see, they pay no taxes also. And then when they sell it, they pay no taxes when they sell it either because all of the gain gets washed away at death under the...
what we call in the tax world, the angel of death loophole. And it's sometimes called step up in basis. This is just like absolute frosting on the cake benefit for rich people that one should not have. So I just throw that in there. Okay, but the third step of the tax avoidance playbook is to inherit, inherit loads of money. If somebody finds on the street,
a hundred dollar bill, they are obligated to report it to the federal government, right? Found money, treasure trove. Okay. If I were to give you $10 million for being such a great interview host, right? Right today, nobody's business but yours. You don't have to tell anybody. You not only don't have taxable income,
PJ Wehry (35:08.223)
Awesome.
Ray Madoff (35:19.146)
you don't even have to report it. And as a result, the public has no awareness of how much money people are taking under inheritances. When they think of rich people, they think, Facebook is so great, or Google is so great. All of these people deserve this money. But actually, like 30 % of people on the Forbes 400, the Mars family, the Walton family, all of these people,
They all got there, the Cokes, they just got there through inherited wealth. And that is the absolute biggest giveaway at all. If you can inherit money, you are sitting pretty because you don't even have to tell anybody and you can get it through gifts, inheritances or life insurance. Life insurance is actually the favorite vehicle of the super rich to leverage their wealth, to be able to pass it on entirely tax free and entirely non-reported. This is
The lack of reporting, cannot emphasize enough how detrimental it is to American society to have a lack of reporting because without reporting, nobody knows how much it costs us to have this tax-free passage of wealth. And some people think like, no, it's double tax. I don't know if you were thinking it's double tax if we were to impose tax on these people, but there is no principle of double tax that says like,
When I earn money and then I turn around and pay my mechanic, my mechanic can't say, Madoff's already paid money on this, therefore I don't have to pay taxes. Taxes are what each person pays on the wealth that they are acquiring. That's how we apportion the burden. But for people who acquire the wealth through gifts, inheritances, and life insurance, no, they don't have anything. They're not even counted in the system.
PJ Wehry (37:10.298)
So let me ask you, and I understand how this can becomes problematic. I have five kids. I want to pass things on to them. And so do you have a problem with generational? I want to nevermind. You don't have a problem with generational wealth? Yeah, go ahead. Go ahead.
Ray Madoff (37:21.633)
Yeah, of course you do.
Ray Madoff (37:29.582)
I think, I think, I, okay, I think that, so I want to go on and say that, so the point of this whole section for anyone who maybe felt that they lost the thread or anything, right? Okay, is that when you look at our income tax system, our income tax system has effectively written out the wealthiest Americans because they can avoid salaries and.
PJ Wehry (37:38.1)
Yes. Yes.
PJ Wehry (37:54.389)
Yes.
Ray Madoff (37:57.046)
we let them avoid taxes on their inheritances and investments. Right? So if you think of
PJ Wehry (38:03.04)
And when did that happen? Cause you said this has all been like the last 40 years. Yeah.
Ray Madoff (38:05.934)
Well, so if you think about it, the salaries thing, right, learning not to take salaries, that was something that people just learned, but they learned it because this issue of the stock buybacks was sort of critical because prior to 1982, 75 % of all profits were paid out in the form of dividends. So that transformation where companies no longer had to share profits through, like before, the only way, a company made a lot of money,
It had two ways of distributing profits. They paid high salaries to everybody or just to the top, and they paid dividends. Those were all subject to taxes. Now, companies no longer issue dividends. They're much more likely to do stock buybacks or just invest it within the company, not pay dividends. And everybody's profiting through this tax-free growth, and the people who don't have to sell don't have to pay any taxes.
So that's something that's occurred over the years. It didn't happen in a one and done in 1982, but this year there is going to be, we have another guessing game about how how much stock buybacks are expected to occur in 2025. It's the largest number ever. And I'll just tell you it's over, what? Over a trillion dollars, just in stock buybacks.
PJ Wehry (39:27.776)
Do we have? Go ahead.
Ray Madoff (39:37.302)
Okay, so this is quite extraordinary, right? So, okay, and then there's a third, but so for income tax purposes, that's how people have been able to, right? They weren't taxed, they were never taxed on their inheritance. They gradually learned to not be able to be taxed on their investments or salaries. But the other massive change that occurred was about the estate tax because the estate tax was enacted
PJ Wehry (40:04.084)
Yes.
Ray Madoff (40:07.194)
as a, let me step back more. One of the reasons that the income tax stays away from inheritance and even allows wealth to grow tax free is on the assumption that we have a robust estate tax. The estate tax for listeners who might not know is an additional tax that is imposed currently at a rate of 40%. Historically, it's been as high as 77%.
Right now, it's about 40 percent. It's pretty much a flat 40 percent rate. Okay. And it is imposed over for people who have a certain amount of wealth. And what has happened over the years is that that number of the amount of wealth has grown and grown and grown. So right now, under the most recent tax bill, it's $15 million a person or $30 million per couple. Okay. So one answer to your question is about
what you can pass on tax-free is $30 million. Now, one of the things that's interesting is you could pass on $30 million if you're giving it to five kids or if you were giving it to one kid. And yet when we think about concentrations of wealth, it's kind of weird that it's based on how much you own rather than how much they get. But I leave that aside. Do you know what I'm saying? Okay. So.
PJ Wehry (41:24.608)
Okay. I think so. Yeah. So I can't give out 150 million with five kids. I can only give 30 million.
Ray Madoff (41:31.566)
You personally have an exemption about the amount of money that you can pass by this. So this is the subject that I just state in gift taxes. And I'm going to tell you the principles of a state and gift taxes, okay? You'll get a whole semester's worth of law school in three minutes, okay? Okay, so the tax is imposed at a flat rate and it only applies in excess of a large exemption amount.
PJ Wehry (41:49.376)
I love it.
Ray Madoff (42:00.738)
This year, the exemption amount is about 14 million. It's going up to 15 million next year. It was supposed to be cut back to 7 million. And one of the changes of Trump's tax bill was to continue the ascent. Okay. So anybody with less than that money doesn't have to worry about the tax. For people who are in that group, there's still other ways you can avoid the tax. All transfers to spouses are tax free. All transfers to charities are tax free.
And you can also make annual gifts and pay for education and medical expenses of people tax-free. That's the whole course. You'll be getting the exam in December. Yes. Anyway, so we have this tax system. And you might remember in the 1990s, big campaign against the estate tax. death tax. You're too young. You're way too young for that.
PJ Wehry (42:37.44)
No. Easy. Yeah.
PJ Wehry (42:57.918)
I apologize. Yeah, I don't remember.
Ray Madoff (42:59.538)
Fair enough, fair enough. basically for a long time, the estate tax was just a normal, well-accepted tax. It was enacted at the same time as the income tax. Income tax was in 1913, estate tax was 1916. The two taxes have existed together for a really long time, until 1990. It was pretty much, nobody even complained about it.
or talked about. It was just understood as a basic of our tax system. In 1990, 18 of the country's richest families, the Mars, the Cokes, the Waltons, and their friends, decided that they better do something about this estate tax. And they hired this Frank Luntz, who was a communications expert, to figure out how they could fight the estate tax. And they came up with this campaign.
it's not an estate tax, it's a death tax. And basically they made people think it's a death tax and it's coming for everyone, like death. And it's immoral, it's a double tax, right? Even though, as we talked about, a lot of people pay no tax on those gains. So this is the only tax that would ever be imposed on those gains. They were like, no, it's a double tax. And they got the country whipped up.
in opposition to the estate tax. The most, probably one of the most effective campaigns like in the history of politics. Because 35 years later, right, you probably can say, yeah, no, that's a death tax. That's a double tax that hurts family farms and businesses, right? Everybody just rolls off their tongues, whether it's true or not true, it doesn't matter. Everybody knows that. And I put it in air quotes, knows that.
PJ Wehry (44:56.678)
In clear quotes. Yes. Yes.
Ray Madoff (44:58.144)
Yes, about the estate tax. Okay.
The bigger problem of the estate tax. So, George W. Bush ran on the campaign, he was gonna get rid of the death tax, right? And he actually did get rid of it for one year. It was one year where we had no estate tax at all. Estate planners called it the throw mama from the train year because there was tremendous advantages if you could be the heir of somebody who died that year in 2011. And...
Nine billionaires died that year, George Steinbrenner amongst others, and they all passed their wealth entirely tax free. They paid no taxes during their lives, and they passed it entirely tax free to their heirs. Okay, but then it got put back in place. never got permanent repeal. And so people think, well, the repeal efforts lost, right? But actually, what I think is that the repeal efforts were even more successful because
What happened was is that, when the last time is, so let me just step back another second and talk about taxes. So here's how taxes are like a dance between a taxpayer and the taxing authorities, right? Congress says we're gonna tax X and then.
PJ Wehry (46:09.29)
Sure. Yeah.
Ray Madoff (46:23.522)
People say, no, okay, we're gonna figure out how to avoid that tax on X. We're gonna make our thing X prime. We're gonna do something a little bit different, right? Then Congress says, no, X prime, we're gonna treat that like X, right? And then people say, okay, all right, well, what about Y? about, you know, so. And basically, a well-run tax system is a battle between Congress and taxpayers.
PJ Wehry (46:40.884)
Yes. Yep.
Ray Madoff (46:47.636)
in which taxpayers try to avoid and Congress tries to reform so that it keeps it going and the system works well enough. Okay. What happened is that since 1990,
So Congress put the system in place. In 1986, they enacted the generation skipping transfer tax. 1990, they adopted the special valuation rules. These were all rules designed to close loopholes in the estate tax. Under Republican presidents, these loophole closing things, okay? Since 1990, nothing. Cricket. Congress has done nothing to close a single loophole under the estate tax.
And so as a result, there's a gazillion, these are all the things I teach my students about, Grads and gruts, zeroed out grads, flip cruts, nym cruts, dynasty trusts, intentionally defective grantor trusts, right? All of this gobbledygook that you hear all the time, these are ways that the wealthy are able to avoid taxes. And because they had did such a successful job,
PJ Wehry (47:53.269)
Yeah.
Ray Madoff (48:01.784)
of turning the public against the estate tax. Congress, both parties, has done nothing to close the loopholes.
PJ Wehry (48:11.956)
Well, do they also benefit from lobbying from these families?
Ray Madoff (48:15.948)
Yeah, they benefit from lobbying, but they also normally, you can't just be paid off and do nothing. It's only, the public would be like, well, what the heck are you doing? How come you're not raising any money? And let's just get a sense about how bad the estate tax is at doing its job. Okay, so I said it's a 50 % tax. It's imposed on all transfers, both by gift and at death. Okay, so not everybody's dying every year, but there's a lot of transferring going on from this group, okay?
PJ Wehry (48:42.346)
Yes.
Ray Madoff (48:43.584)
It's meant to apply to the richest 1 % of Americans. We've already talked about that they have $50 trillion of wealth, right? They're a loaded group. Guess how much money was raised by the estate tax in 2024.
PJ Wehry (48:50.922)
Yes.
PJ Wehry (48:59.808)
500 million.
Ray Madoff (49:01.55)
No. $30 billion, okay? $30 billion. $30 billion is an amount that Elon Musk has both gained and lost in a single day, okay? This is nothing in comparison to the amount of wealth that they own. So it's not like you would all have been subject to a 40 % tax, but some of it would, right? It raises nothing.
PJ Wehry (49:03.872)
have no idea, I'm so bad at this.
Okay.
PJ Wehry (49:14.622)
Yes. Right. Yeah.
PJ Wehry (49:27.616)
So we're talking 50 trillion and not all of it is getting moved every year.
Ray Madoff (49:32.046)
Yeah. 30 billion is, it raises less than one half of 1 % of the federal revenue. It is minuscule. By the way, payroll taxes, the thing that nobody ever talks about, that raises over 30 % of the country's revenue. So, I mean, you have this tax that is like everyone, they're like...
PJ Wehry (49:40.05)
Yeah, it's so minuscule.
Ray Madoff (49:56.718)
Shine the light on the estate tax. The estate tax is so unfair, it's so burdensome. So this, so that, and like, pay no attention to the payroll tax, the tax that actual real people are paying. So, okay. So, big picture. How do we fix it? Yes. By the way, one thing that I talk about in the book, but we don't have time to talk about today, but for those who are interested.
PJ Wehry (50:12.874)
do we fix it?
PJ Wehry (50:19.764)
Yes.
Ray Madoff (50:22.984)
is about the role of philanthropy in all of this. And so we don't have time to say this, but I just want to say one thing, okay? Let's say that our person who earns $100,000 decides, you know what? The problems of the world are enormous. I'm gonna give away my $100,000. Okay? We already said they would normally be subject to tax on, of $30,000, right? 15, okay. How much will they save in taxes? How much will they pay in taxes? It turns out...
they will still pay significant taxes because first of all, that $15,000 of payroll taxes cannot be offset. And second of all, there is a cap about how much each person can deduct of their charitable giving. Somebody who chooses to give away all their money can't avoid the income tax because we, any idea why we have that rule? The idea is that people should be paying the federal government, right? You should be, yes.
PJ Wehry (51:14.728)
I guess.
Ray Madoff (51:19.542)
Sure, charity's good, but like you have to also pay for national defense and all these things. We're a Commonwealth here. We're people, at least here we're a Commonwealth of Massachusetts, but you know, even writ large, we're a country. Come on people, we're a society. You gotta throw some money in the kitty. However, when Warren Buffett gives his $150 billion to his kids' family foundation, which he's planning to do, okay,
which would normally be subject to a 40 % estate tax and a 20 % capital gains tax, he has no taxes at all on that. Because for those two taxes, we have an unlimited deduction. Even though we have unlimited exemptions for the wealthy because the capital gains tax and the estate tax are different from the income tax. The income tax is for suckers.
The capital, because it's not where the rich people play. The rich people play in the world of capital gains taxes. mean, capital gains taxes are technically part of the income tax, but you know, they're a separate part of it. And estate and gift taxes, unlimited exemptions. They have unlimited cap. Yeah, they have no cap. And now let's look at what happens when the money goes into a private foundation. You may or may not know about private foundation. Some people know that private foundations since 1969 have been required to
PJ Wehry (52:29.822)
And they have unlimited cap. Yeah, they have no cap. Yes. Yeah.
Ray Madoff (52:45.678)
spend 5 % a year, because we want to make sure that something good is happening with the money. But now you no longer have to spend it. You can actually just take that money. First of all, you can pay salaries and fix up offices with it. That's always been a problem. But for 150, that's going to be hard to spend 5 % of 150 billion on that. But the other thing is you can just take that money and put it into a donor advice fund, which operates like a private foundation, but it has no payout rules.
All of that is to say that when we step back from the whole thing, right, we look at philanthropy, philanthropy is something that when regular people do it, we get very few tax benefits. But when the wealthy do it, they get unlimited benefits and yet the type of giving that they tend to give, we impose so few burdens on that. We have no idea if it's gonna even go to the government, go to benefit society at all. So that's a whole separate chapter we don't have time to talk about, but.
I suggest.
PJ Wehry (53:43.968)
Well, that's the best part about this is that we only have this hour and then they have to read your book, which that's, mean. All right. So yes, beautiful cover. I love it.
Ray Madoff (53:47.872)
Yes. Exactly. Okay. So here is the, so here's what I think we need to do. First step, we have to repeal the estate tax. The estate tax is not doing anything, but it is simply providing cover for the wealthy and not imposing any tax burden on them. And so the public gets confused because they think, wait, there's this big estate tax. Okay.
PJ Wehry (54:00.927)
Yes.
Ray Madoff (54:16.088)
Then we have to bring the wealthy back into the income tax system. So I think that we should adopt the rule that they had in Canada that both Nixon and Obama proposed, which says that fine, don't pay tax while property is going up in value while you own it, but when you transfer it, that is your obligation and you have to pay taxes on that gain then. Okay, so the person who owns the appreciating asset.
PJ Wehry (54:44.34)
Yes.
Ray Madoff (54:45.322)
In addition, when people receive inheritances, that too should be treated like ordinary income. Now, we might want to say that each person can inherit, I don't know, $1 million or $2 million tax-free because we like inheritances, right? But I think if we see what we're actually saying, right, that somebody who earns $100,000 pays taxes and somebody who inherits $2 million pays no taxes, it's certainly, there's nothing that would seem unfair about that.
You know, if anything, we might be being a little excessively generous to the person who got that $2 million. But, you know, you could set it pretty big and win people over to the fairness of the system. I think the Achilles heel of the estate tax is the fact that we impose it on the donor. And so it feels like a like a double tax and it feels like, what are we kicking that person when they're down for? But the idea that heirs can get
as many tens, hundreds, and people are getting, billions of dollars tax free because of the ability to divert revenue and avoid the estate tax through all those devices that I mentioned. And that is just, we are too much in need of revenue for us to be saying, well, we don't care about that. And also there's a real cost when this group,
doesn't pay taxes, right? Everybody else, they make some money and then they're set back by taxes. They make some money and then they're set back by taxes. But this group, we're giving them a glide path to power, to controlling so much of the country's wealth because we don't take anything from them. It's bad for society on so many levels and it's unfair.
PJ Wehry (56:30.986)
Yeah, well, I mean, it's pay your fair share, right? Like if we have to pay, yeah, yeah. Go ahead.
Ray Madoff (56:33.613)
Pay a fair share. Yeah, can I, I wanna just add one thing that people might hear, which, so one of the most powerful arguments that are used to put forth this idea that the rich are paying all the taxes, okay, for people who follow this, you might not have come across this, but like, I read the Wall Street Journal opinion pages and this is where you read this type of thing. So there's a statistic from 2024. In 2024, the top,
1 % of earners paid 40 % of the taxes. Those in the top 1 % of income paid 40 % of the taxes and 40 % of Americans paid no income taxes at all. Okay, so we already discussed the 40 % of Americans who pay no income taxes, right? Like our person earning like $40,000 a year, but they're still paying, you know.
PJ Wehry (57:09.514)
Yes, I've heard this.
Ray Madoff (57:30.574)
three, four, $5,000 in payroll taxes. So there's that aspect of it. Actually, they pay $6,000 in payroll taxes. So those non-payers, right? And when you actually factor in payroll taxes too, the non-payers are like 17%. They're basically the same number that we have of Americans over the age of 70.
I mean, that whole statistic is so distorted about the non-payers. Okay, but what about the 40%, right? That often gets sold to the public as the richest 1 % are paying 1%. But no, the richest 1 % are not in that top 1 % of income. They are just as likely to be in the 40 % of non-payers as they are in the top 1%. And it's this conflation of the high wealth owners and the high...
PJ Wehry (58:17.652)
Right.
PJ Wehry (58:22.206)
right.
Ray Madoff (58:27.638)
earners that allows this, again, a type of duping of the public, making the public think, look, there's nothing to see here. There's no problem. Rich are already paying all the taxes. And you'll see those stories that come out. Do not worry. The rich are paying all the taxes. Yeah, they're not. They don't have high income.
PJ Wehry (58:49.106)
Right, they don't have income. Right, that's the...
Ray Madoff (58:50.966)
Yes, yes, they could be the 40 % of non-payers just as easily.
PJ Wehry (58:58.912)
Thank And this has been really, I mean, this is outside my wheelhouse and it has been such a joy to learn and to listen. As we kind of come to a close, I to be respectful of your time. What is something that you would, for someone who's listened this whole time, besides buying your excellent book, learning more about the philanthropy, learning more about the arguments, you know, they may have thought of something as you're talking, it's like you have the answers and it's short and very readable. So thank you for making it so approachable.
Ray Madoff (59:21.389)
Yeah.
Ray Madoff (59:24.759)
Yes.
PJ Wehry (59:27.668)
Besides buying and reading your excellent book, what would you recommend to someone who's listened for this hour to us talk back and forth? What would you recommend they do or they think about or meditate on over the next week?
Ray Madoff (59:41.016)
would say, do not be afraid of tax conversations. Don't think those aren't for you. They are for you. They are of central importance to you, your kids, society. They really matter in a very, very big way. And I think that people, because there's that intimidation factor and because nobody's making it easy for people to understand, they think, you know, this isn't for me.
It really is. Don't be afraid to see what you need to see. And I'm going to quote a very surprising person for me to quote. I don't think she's been quote. OK. You might remember years ago when Carly Fiorini was running for president. can't remember. She was it was many years ago. I can't remember the exact. OK. She was a Republican candidate for president. And she said something. I've got to get the exact quote, but it was basically like.
PJ Wehry (01:00:21.824)
Please.
PJ Wehry (01:00:30.196)
Yes! Yeah? Okay.
Ray Madoff (01:00:40.652)
Complexity in the tax code rarely works to the advantage of regular Americans, right? Something like that. you know, obviously sometimes some complexity is necessary in the code. If you're going to be doing this loophole closing thing, there is going to be some complexity. But there is a way in which people can use complexity around the code to do smart people.
And don't be fooled because just lean into it. It doesn't take very much to understand it. And so I guess I just urge people to be more informed consumers about taxes.
PJ Wehry (01:01:26.26)
Dr. Madoff, absolute joy having you on today. Thank you so much.
Ray Madoff (01:01:30.082)
Thank you so much. Wonderful talk with you. Bye bye.