The Second Estate: Where Billionaires Don’t Pay. You Do. (with Ray D. Madoff)

Summary

Podcast Summary: "The Second Estate: Where Billionaires Don’t Pay. You Do."

Pitchfork Economics with Nick Hanauer
Guest: Ray D. Madoff
Release Date: April 14, 2026

---

Episode Overview

In this Tax Day-themed episode, Nick Hanauer and his co-host are joined by Ray D. Madoff, professor at Boston College Law School and director of the Forum on Philanthropy and the Public Good. Madoff, author of The Second: How the Tax Code Made an American Aristocracy, lays out how the U.S. tax code, originally designed to counteract the formation of aristocracies, has been gamed over the past century to give the ultra-wealthy a "free pass" on taxes while the burden shifts to working Americans. The conversation explores the income and estate tax systems, loopholes, historical context, and Madoff’s vision for a fairer approach to taxation.

---

Key Discussion Points & Insights

1. Origins and Purpose of the U.S. Tax Code

• Progressive Roots: The modern tax code, created in response to the Gilded Age (1913–16), included progressive income taxes and an estate tax to curb dynastic wealth.

  "The purpose of the estate tax was to prevent dynastic wealth." — Ray Madoff (04:53)

• Tariff Comparison: Before income taxes, tariffs were the main source of revenue, which placed undue burden on consumers and farmers.

2. Taxing Wealth vs. Taxing Work

• Two-Tier System: The wealthy have all but removed themselves from the tax system through legal mechanisms, while working Americans shoulder most federal revenue through income and payroll taxes.

  "Rather than it being one that particularly burdens the wealthy, it's one that gives the richest Americans a free pass." — Ray Madoff (04:47)

• Income vs. Investment Gains:
  • Wage earners pay higher tax rates, while investment gains (capital gains) are taxed at lower rates.
  • Unrealized gains (appreciation in stock/property not yet sold) aren’t taxed, yet the wealthy can borrow against them without tax liability.

  "Income that comes from wealth appreciation is taxed at half the rate of income from salaries, which is completely nuts." — Nick Hanauer (07:01)

3. Loopholes and ‘Angel of Death’

• Step Up Basis: When assets are inherited, their basis is “stepped up” to current market value—erasing capital gains tax liability.
• Lifetime Gifts and Trusts: Wealthy individuals use trusts, discounting assets and gifting strategies (like GRATs, dynasty trusts) to minimize or entirely avoid the estate tax.

  "Dynasty trusts are really the worst of the worst. ... Vehicles that are designed to be tax free and creditor-proof from generation to generation." — Ray Madoff (25:32)

• Policy Stagnation: Congress has not updated rules to respond to new avoidance schemes in over 30 years.

  "The last time Congress closed a single loophole to the estate tax...was 1990. 36 years ago." — Ray Madoff (25:42)

4. The ‘Death Tax’ Campaign and Public Perception

• Changing the Narrative: PR expert Frank Luntz popularized the term “death tax,” emotionally shifting public opinion and allowing wealthy families to push for repeal or weakening of the estate tax.

5. Stark Numbers: Who Pays, Who Escapes

• Tax Burden Distribution: Top 1% of earners pay 40% of income taxes—but ultra-wealthy can avoid most of these taxes by not earning salary income.

  "They are just as likely to be in the 40% of Americans that pay no taxes as they are in the top 1% of payers." — Ray Madoff (19:51)

• Estate Tax Revenue: In 2024, estate tax raised only $30 billion from the top 1% who collectively own $50 trillion—that’s less than .06%.

  "Musk on his own earned and lost $30 billion in a single day." — Ray Madoff (29:34)

6. The Game of Cat and Mouse: Tax Lawyers vs. Congress

• “Quiet-Quitting” by Lawmakers: While estate planning grows ever more sophisticated, lawmakers have stopped closing loopholes, allowing the avoidance industry to dominate.

  "It's like antibiotic resistant bacteria in an era where we're no longer developing new antibiotics." — Co-host (30:19)

7. Rethinking Solutions: Beyond Rates and Cuts

• Rates Aren’t the Issue: Raising income or estate tax rates won’t work without plugging base loopholes. Broadening the tax base is essential.

  "Nobody wants to pay 50, 60, 70%. ... We don’t need to raise rates, we need to broaden the base." — Ray Madoff (35:25)

8. What Should Be Done? Ray’s Policy Proposal

• Tax All Acquisitions of Wealth: Replace the estate tax with a rule that treats all gifts and inheritances as income, taxed as such.

  "You eliminate the estate tax, which you think is just not workable. And in place of it, people just have to pay a 40%—what, plus or minus 40%—income tax on anything they get, whether it's a gift, an inheritance, anything else?" — Nick Hanauer (39:10) "Yeah, we could have exceptions...but generally speaking, when somebody has an asset that increases by $100 million or $100 billion, we should tally the gains at some point when they give it away or when they die holding it, and impose the tax on the gains then." — Ray Madoff (38:49)

---

Memorable Quotes & Moments

• On the Absurdity of Step-Up Basis

  "The biggest distortion in the market is step up in basis, because that's why people don't sell their houses...or their stock." — Ray Madoff (13:33)

• On Congress’s Abdication

  "We have had complete quiet quitting by Congress, but we have not had quiet quitting by the estate planning bar." — Ray Madoff (25:59)

• On Who Really Pays Taxes

  "The system is a mess. It lets the worst and most able people off the hook in a way that is just deeply unfair and impractical." — Nick Hanauer (48:45)

• On Public Understanding and Democratic Accountability

  "If your audience takes away nothing...our system is unfair because they're constantly being told...top 1% are paying 40% of the taxes...but wealthy people avoid taxes by avoiding taxable income." — Ray Madoff (19:51)

• Ray’s Motivation

  "I am passionate for the public to understand these rules that have a significant impact on people's lives." — Ray Madoff (41:22)

---

Important Timestamps

• [02:44] – Ray Madoff introduces her thesis on the historical intent of the tax code.
• [07:01] – Discussion on wealth appreciation vs. earned income.
• [13:26] – The mechanics and distortion of step up in basis (“angel of death loophole”).
• [21:14] – How the estate tax has failed, campaign against it, and the emergence of tax avoidance schemes.
• [25:42] – Congress’s long neglect in closing estate tax loopholes.
• [29:28] – Estate tax revenue compared to total billionaire wealth.
• [34:35] – The real problem isn’t rates, but the tax base and loopholes.
• [39:00] – Ray advocates replacing the estate tax with an income tax on all gifts/inheritances.
• [41:22] – Ray discusses her passion and motivations for tax reform.

---

Takeaways for Listeners

• The U.S. tax code was explicitly intended to prevent the rise of a permanent aristocracy, but has been successfully gamed by the ultra-wealthy.
• Ordinary Americans pay high income and payroll taxes, but vast fortunes escape taxation via legal loopholes.
• Much of the public debate is misled by focusing on high-income earners (doctors, lawyers) instead of wealth holders.
• Major reforms should focus on taxing all forms of wealth acquisition—including gifts and inheritance—as regular income, not raising rates.
• Fixing these loopholes would enhance not just federal, but state revenues, and could make the system less distortive and more fair.

---

Further Reading

• The Second: How the Tax Code Made an American Aristocracy by Ray D. Madoff.
  [Available at independent bookstores and major retailers.]

---

For more: Visit Pitchfork Economics website for transcripts, links, and resources.

Transcript

[A]

The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.

[B]

The last five decades of trickle down economics haven't worked. But what's the alternative?

[A]

Middle out economics is the answer because

[B]

the middle class is the source of growth, not its consequence.

[A]

That's right.

[C]

This is Pitchfork Economics with Nick Hanauer,

[B]

a podcast about how to build the

[C]

economy from the middle out. Welcome to the show.

[B]

You know what tomorrow is, Nick? Very special day. Do you know what tomorrow is?

[A]

I think it's tax day.

[B]

Well, I was going to say it's my birthday, but yeah, it's also tax day make makes a lot of sense considering how much I talk about taxes and over the years how I focused on that and I'm a tax day baby.

[A]

I did not realize that, but all of a sudden it makes perfect sense.

[B]

And so we have a tax day. Not really my birthday themed podcast today, but a tax day themed podcast. We're going to be talking about taxes with a tax lawyer, a professor of tax law.

[A]

And why wouldn't we.

[B]

So much better than the way I normally celebrate my birthday, which is as a kid, which was with a pasadic birthday cake, if you ever had one of those.

[A]

And you know the person we're talking to obviously is a big tax expert. Ray Madoff is a professor at Boston College Law School and director of the Forum on Philanthropy and the Public Good. She's also a leading expert on tax policy, wealth and philanthropy and is the author of the Second how the Tax Code Made an American Aristocracy. She has a lot to say on the subject. It'll be very, very interesting.

[B]

And as a member of the aristocracy that the tax code made, you should. Maybe you'll be looking for some tips, so.

[A]

I most definitely will be looking for some tips.

[B]

So let's talk to Ra.

[C]

Ray. I'm Ray Madoff. I'm a professor of law at Boston College Law School, and I have a new book called the Second how the Tax Code Made an American Aristocracy.

[B]

We have one of them here, one of the aristocrats right here. Nick, you want to start off?

[A]

Why don't you start by just sort of laying out your thesis?

[C]

So we think of the tax code as something that is designed to counter aristocracy. And in fact, that's the purpose with which it was written. Right. If you think about it, our modern tax code came of age in the 1913, 1916, in the wake of the Gilded Age. And there was a lot of concern about concentrations of wealth. The only taxes that we had at the time were tariffs because the income tax had been found unconstitutional. And these tariffs imposed great burdens on consumers and farmers, much like today. And so, in response, Congress enacted two different tax provisions. First, the income tax. After getting an amendment to the Constitution that allowed a new income tax to come into being, an income tax that soon had progressive rates, meaning those that earned more, paid more, and then for the richest Americans, an additional estate tax. And the purpose of the estate tax was to prevent dynastic wealth. Together, these were designed to impose greater burdens on those who had the greatest capacity to pay. A lot of Americans live under a system where they believe this is still the case because the rules are still in place. We still have a progressive income tax and a estate tax. And even if it's not as progressive as it once was, it's still pretty progressive. However, what has happened over the past 40 years is that with this same tax code, the wealthy have been able to entirely remove themselves from the system. So the system we have today is that the Americans that work for a living, that have jobs at all income levels, low income, mid income, high income, are paying the vast majority of all the taxes. And the wealthiest Americans are able to avoid taxes, first because they avoid taxable income, and then because they're able to avoid the estate tax. So we have now created a system that does just the opposite. Rather. Rather than it being one that particularly burdens the wealthy, it's one that gives the richest Americans a free pass.

[B]

So I want to be absolutely clear on something. You stated at the top, that the purpose of the tax code was to rein in this aristocracy, was to make the economy more equal. That was the intent. We talk about that like the intent of the framers. The intent of Congress, when they write legislation, was that actually a stated intent at the time?

[A]

Yeah, that's a really interesting.

[C]

Yeah, it's very hard to know even with legislation that's enacted today. Right. But what is the intent? The intent obviously comes from lots and lots of different people who have lots of interests. A big concern at the time was the fact of these concentrations of wealth. Right. We had Teddy Roosevelt saying it was a problem. We also had the Wall Street Journal saying it was a problem. And the reason it was a problem for people across the political spectrum was because capitalism itself was at risk. This was a time when socialism was really pretty powerful. Right. We had the Russian revolution. We had McKinley was assassinated. We had a lot of concern about socialism. And there was a belief that capitalism had to prove its worth and it had to prove that People who profited under the systems like the. Those robber barons and their heirs would also be supporting the public at large.

[A]

Interesting. You know, I think most of our listeners may understand this, but I think it's important to elaborate about the difference between earning income from a job and earning income from investments. Whether that income turns into actual income that you report in your taxes. Right. Or whether it's just the appreciation of assets that don't trigger taxable income. Right, right.

[B]

Because you haven't realized the gain.

[A]

That's right.

[B]

But you can borrow against it.

[A]

I think one of the points you're making is it's a double whammy. Income that comes from wealth appreciation is taxed at half the rate.

[C]

Yes.

[A]

If an income from salaries is taxed at. Which is completely nuts.

[C]

Yeah.

[A]

And income, I mean, we're using words that don't really describe acquisitions of wealth appreciation.

[C]

Yeah.

[A]

The value of the stock you hold doubling. Right. There's no taxable event. And Right. Until you. Until you sell it. And obviously, this is the problem we face at the extremes. Right. People like Musk and Zuckerberg and bezos are worth $100 billion in pay.

[C]

They wish they were worth a hundred billion dollars.

[A]

I mean, yeah, whatever it is. Right.

[C]

Musk is probably worth $800 billion today. It's very hard to keep up with it. It's like, you know, the number keeps

[A]

growing faster and faster, but yet effectively pays zero taxes.

[C]

So I teach tax law at law school. And when you teach tax, if you teach income tax, you start with the definition of gross income. What's subject to the income tax? And it's this very comprehensive term. Gross income is all income from whatever source derived. That's section 61. And then it lists all sorts of things. And so it includes things like you find money on the street, you're supposed to report it, you're given a prize, you win the lottery, you win a small amount in the lottery. All of those things you are supposed to report to the federal government and pay taxes on. In addition, even if you do a barter exchange. Right. If you shovel your neighbor's walk and they build a website for you, then each of you have taxable income based on that barter exchange, and you're supposed to report it to the federal government. So we have this very broad definition, but then we have things that we do not treat as taxable income, even though they are very much acquisitions of wealth. The biggest ones is any money received by gift, inheritance, or life insurance. No matter how much you receive from those ways you don't even have to tell anybody. It is excluded from the definition of income, even though it clearly is income. Right. If I give you $100 million. Yes.

[A]

You have to pay gift tax.

[C]

I'm talking about income tax. Right. So the only system we have is the estate and gift tax. We're going to talk about that problematic system under our income tax system, and I'm so glad you said it that way because there is a common misperception that gifts in excess of a certain amount, maybe $19,000, are subject to income tax. You hear? I get this question all the time. No income tax, no matter how big. So whether Somebody gives you 20,000 or 20 million or 20 billion, no reporting of that, that's just your business.

[A]

No, no, that's.

[B]

It's.

[C]

I promise.

[A]

Okay then, Ray, I need to talk to my attorneys.

[C]

Yes, because what you're talking about is the estate and gift tax. You're talking about a tax on donors who transfer more than $15 million. That's the estate and gift tax. And we're going to get to that in a minute. We're starting on the income tax. Okay?

[A]

Right, okay.

[B]

When I give my daughter. When I give my daughter, I just paid off a student loan of hers. When I give her money, she doesn't pay income tax on that. Now if over the course of my life, including her inheritance, I give her more than, what is it, 15 million. Now, what is the. Yeah, then there's a tax on the amount above that. But because I'm not going to leave her that much money, Nick, unless you give me a very generous bonus when I retire.

[A]

Yeah, yeah, yeah. No, she will.

[C]

That's coming your way.

[B]

She will never. She will not have to pay any tax on those gifts whatsoever because it's the same thing as an inheritance.

[C]

And now here's the thing. You're probably thinking we, and this is why we have this exclusion. It's because we have this well functioning estate and gift tax that's going to take care of those transfers. That's why we've taken them out. Right. That's why they were excluded. Because the idea is that we have this other system that will presumably catch it and more. So, but we're going to start with the income tax system, right? No income taxes. We're going to then see how our estate tax is failing us, by the way, in case you're wondering where we're heading with that. And then on top of that money, as you pointed out, when you have property that grows in value when you buy Apple stock or Facebook stock or any investment, and it grows in value from $10,000 to $10,000,000. As you pointed out, that's not subject to tax either. Even though you can access those funds by borrowing against them. Yeah, because it's not realized. And our system doesn't ever require realization. You have to sell the property in order to realize the gain.

[A]

Right.

[C]

And if you simply pass the property onto your kids, either when you're alive or at death, that doesn't trigger gain for you either. You have to sell it. And this is unlike the rule in Canada, where whenever somebody disposes of property, whether by sale or gift or inheritance, it's going to be subject to tax. All of that gain will be subject to tax to the donor. But we don't have that system.

[B]

I know that there's the Step up because I live in a different economy than Nick. There's the Step up basis on my house. The extent of my estate planning, I have an only child. Is to die in my house, which I've owned in Seattle since 1997. That way there's no capital gains tax. Is that true on other assets or

[C]

is that particular to that? The catch is you have to pass it through your estate at death in order to get the step up in basis. So step up in basis means that for, for your listeners, what it means is that your house, let's say you bought it for $50,000 and it's now worth $50 million because of where you're located. That.

[B]

Not quite. Not quite that good.

[C]

But let's say it's worth 15 million. So we don't get any estate taxes involved.

[A]

Yeah.

[C]

Okay. Then if you pass that property on at death, your children are treated as if they had bought it for $15 million. And so when they sell it, they pay no taxes on it, whereas if you sell it, you have to pay a lot of capital gains taxes. Or if you gift it to them during life, they would have your, what we call carryover basis. So if you gift it, it would be. Then you would pay. Then they would pay tax on the gain if they sold it. The effect of this is that this thing that we call step up in basis, also called the angel of death loophole, is a. The estate planners are very clever. Is a. It's a tremendous distortion in the market, which is interesting because, you know, conservatives are always saying we don't want to distort the market. But the biggest distortion in the market is step up in basis, because that's why people don't sell their Houses because they don't want to have to pay that extra gain. In addition, people don't sell their stock even if they have a stock that they think is no longer doing very well. Right. The market, they are not going to sell their stock because they're going to have to pay tax on that gain. So it's a big distortionary effect on the market. Our current rules.

[A]

Yeah.

[C]

Nick, I feel like you're giving a look like I am definitely not convincing you.

[A]

No, no, no, no, no. I mean, we're generally aligned, but you know, I watched some of the videos that you made and I think we're talking about the same thing. So for sure, the estate tax $15 million exemption is a significant loophole in the system. I mean, people pay zero estate tax on assets less than $15 million.

[C]

I mean, it's the rule in the system whether to say that. I don't think that's the source of the problem.

[A]

Okay. If you have a billion dollars and you want that to flow to your heirs.

[B]

Are you asking for tax advice here, Nick?

[C]

Why isn't that, you're saying, why isn't the estate tax doing its job?

[A]

Definitely going to pay 40% at least of that above the 15 million you're definitely going to spend. Pay 40%?

[C]

You would think.

[B]

Yeah. Dude, if that's not true, you need

[A]

to hear about it now. Yeah.

[B]

Because you need some new advisors, Nick.

[C]

Yeah, yeah, yeah.

[B]

I thought that was the whole point of your foundation.

[A]

Unless you give it all the charity. So you take Gates, you take Bill Gates and Steve Ballmer. Right. These guys are worth whatever it is. More than $100 million.

[C]

Yeah, billion.

[A]

They are going to play zero estate tax because their kids are already billionaires and everything else is going to go to their foundations.

[C]

So there's a lot of issues that

[A]

we're raising here, but there's no way around that 40%.

[C]

Okay, let's, let's, let's hear.

[A]

You can set up trusts for your kids and stuff like that, but you know, there's limits to all that.

[C]

Yeah, but there is a tremendous capacity for tax avoidance. Like, and so I'm like, how are you going to tell you?

[B]

Yeah, let's hear it.

[A]

No, me, I'm going to take a note down.

[B]

You're taking notes here?

[A]

Yeah, I am.

[C]

I feel a little bit balded though, because I feel like I've gotten us to this subject without finishing that two tier system that you had wanted me to talk about.

[A]

Yeah, we can go back to that

[C]

and then we'll come back Here.

[A]

Yeah.

[B]

Yes. Then you'll tell Nick how to avoid paying taxes when he's dead.

[C]

When Americans think about the tax system, they typically think of the income tax system, because that's the system that most people live with. The estate tax is a very large exemption. It's not relevant for them. And, and so the income tax system looms large in the visions of most Americans, as it should, because the combination of the income tax and payroll taxes means that anybody who has a lot of income pays a lot of taxes. And somebody who even has modest income, let's say $60,000, which is the median income in this country, still will pay $13,000. If they're a self employed person, they will pay 13, $13,000 in income taxes and payroll taxes. And this is a significant burden for working Americans. If you think about it, if you're trying to live on $60,000 and $13,000 of it has to go to taxes, that really takes a bite out of what you have.

[B]

And that's federal taxes, because they also have states.

[C]

There's states on top of it. Exactly.

[B]

Which is going to be like another 11, 12, depending on where. Depending on where you are.

[C]

Yeah, yeah. And so the thing that I want to mention also is that high income earners pay the vast majority of the taxes. And the reason I want to mention this, so in 2024, the top 1% of earners paid 40% of all income taxes. And the reason I want to highlight that is because that's a statistic that is often distorted to tell the public that rich people are already paying all the taxes. We don't need to worry about rich people paying taxes because then they'll just say the top 1% are paying 40% of the taxes and 40% of Americans pay no income taxes. This is something that misleads the public into thinking our system is very progressive. And the problem is, first of all, for a lot of working Americans, they're paying significant payroll taxes on that 40%. But the other issue is that when we're talking about the top 1% being 40% of the income taxes, these are people with high incomes. Lawyers, doctors, bankers, finance people. They have high incomes, they pay most of the taxes. This is not people like Bezos, Musk, Zuckerberg, all of our billionaires, and even frankly, our centimillionaires who also don't have to pay taxes because they avoid taxes by avoiding taxable income. And they do so because they avoid salaries, they avoid selling their property. And when they inherit property, none of it is Subject to income taxes. So they are not subject to the income tax world at all. And indeed, they are just as likely to be in the 40% of Americans that pay no taxes as they are in the top 1% of payers. And this is. If your audience takes away nothing from this call, I hope they take away this point about how it is that our system is unfair because they're constantly being told that, oh no, the system is fair. Top 1% are paying 40% of the taxes. What are you complaining about? But it is the top 1% of earners. And wealthy people avoid taxes by avoiding taxable income.

[A]

Okay, but to be clear, if you inherit money, we're going to come to the get estate.

[B]

You can see the different worlds we live in, how focused he is on the inheritance side of it and how much I'm focused on the income and payroll tax side of it, because that's what I pay.

[C]

Yes, exactly. So I want to just get our income tax world clear. Because, for example, when we had this campaign against the estate tax, which is going to be relevant for our story, Right. It was like, we have to get rid of the estate tax. It's so unfair. It's a death tax that hurts family farms. Right. But nobody was noting that none of this money will ever be subject to tax if it's not subject to estate taxes under our current system.

[A]

Yeah.

[C]

Okay, so now let's talk about what happened to the estate tax. The estate tax is essentially a 40% flat tax on transfers of wealth by gift or at death in excess of $15 million.

[A]

Correct.

[C]

Writ large. There's some exclusions, but that's basically the rule. It looks like it should do a really great job because that's a pretty significant tax. And if you've got some people that are like multi billionaires, that's going to be a lot of money. The problem is that in order for a tax to work. So I'm a tax. Tax is my field. I've been a tax lawyer a long time. I teach tax. I live in the tax world. But there is a dance that happens in the tax world, which is that Congress makes rules, then people hire lawyers. Your lawyers. My students. Right. And they learn their ways around the rules. And then Congress is supposed to come back in, they patch up those loopholes, then people find new loopholes. Right. It's a dance between Congress and taxpayers. And for much of the history of the estate tax, Congress participated in the dance. I'll just give two quick examples. In 1976, and then they reissued in 1986, Congress enacted a whole backup set of rules to address long term trusts that were called the generation skipping transfer tax. It was an additional tax that was designed to make sure that the taxes were imposed at each generation. And if a grandparent gave a gift to a grandchild, that would be subject to two levels of tax to make sure the tax was exacted at each generation. That was enacted in 1986, 1990, Congress enacted four new sections of the tax code that were all designed to address valuation gaming. Because people were doing all of these gaming techniques and Congress said we got to put a stop to them. And they adopted these special valuation rules. Both of these rules were enacted under Republican presidents and they were designed to like shore up the estate tax. So you had a lot of work shoring up the estate tax. However, in 1990 began a campaign funded by 18 of the country's richest families. The Mellons, the Kochs, the Mars family. The Mars family is very big into this area of fighting estate taxes. And they decided that they wanted to push, push for repeal of the estate tax. And no, they were not arguing that we should bring inheritances into the income tax. They just wanted there to be entirely tax free wealth that passed from generation to generation, compounding. Compounding where all the rest of us have to pay taxes whenever we find money on the street. But they wanted their heirs forevermore to never pay any taxes. And they hired this guy, Frank Luntz, who was a great communications expert. Frank Lentz was famous for. If you ever use the phrase global warming and remember how scary it was, like the world is getting hotter and this is a problem and melting ice caps, but now it's climate change. Not necessarily worse, just different. Right. That was brought to us by Frank Luntz. Frank Lutz's biggest thing though was he introduced the term the death tax. And this was hugely successful. Today I'm sure you stop a person on the street and you say what do people call the estate tax? They will say the death tax and they will say it hurts family farms and businesses and they will say it's an unfair double tax. Right. This was an extraordinarily successful campaign. The goal of the campaign was to get Congress to repeal these estate tax. George W. Bush was the big champion and he enacted a 10 year tax bill that resulted in there being no estate tax in the year 2010.

[A]

Yeah.

[B]

Good year for rich people to die.

[A]

Yeah, sadly I missed it.

[C]

Exactly. Sadly for your kids, the estate planners ever a jolly group called it the throw mama from the train year. Right. Because it was the year that you'd want somebody to die. George Steinbrenner died as well as eight other multi billionaires died that year and their estates passed entirely free of taxes. Okay.

[A]

I tried to knock off my mom in 2010, but it didn't work.

[C]

I understand. Well, it's worth the. That was the other thing that the estate planners would say. Gifts for your parents in 2010. Hang gliding lessons.

[A]

Yeah.

[C]

And warm chicken salad. So anyway, that was week old mayonnaise. Yes. So this campaign won with think just looking at that history, that it like it failed. Right. Because the estate tax went away in 2010, but it came back in 2011. So what did it really do it so effectively? It was so effective in shifting how the public thought of the estate tax that the last time Congress closed a single loophole to the estate tax, you want to guess when it was 1990, 36 years ago. So basically what we have had is we've had complete quiet quitting by Congress, but we have not had quiet quitting by the estate planning bar. Right. My students, others, I teach them how to do it. There are so many devices for the wealthy to avoid taxes. They are dynasty trusts, GRAT grant, rolling grats, Cuperts, Q Tips, Kratz, Crutch, Klats, Klutz. You have to go see your estate planner. And basically, typically they are done through lifetime transfers. They are often done through sales. Basically you sort of shrink the property way down low, then you sell it for a very low interest loan and then you swap property in and out. And dynasty trusts are really the worst of the worst. And these are vehicles that are designed to be tax free and creditor proof from generation to generation. And even here in Boston, which is not New York, not Seattle, not la, just old folksy Boston lawyers have multiple clients who have multibillion dollar dynasty trusts. And these dynasty trusts weren't supposed to be funded with more than $15 million. They were only exempt with $15 million. But people can leverage primarily through these sales is the most effective way. And they are shoving assets into these tax free creditor proof trusts. I want to just offer up a few more numbers because I think these numbers are useful for people to have. Okay, so 2024, 2025, the numbers were largely the same, which is that the government took in, in rough numbers about $5 trillion from all sources and spent about 7 trillion. And therefore we had to borrow 2 trillion. Okay, yeah, guess how much. So we added that 2 trillion to our national debt. Guess how much wealth was owned by the richest 1% at the end of 2024.

[A]

It's gotta be like $50 trillion or something like that.

[C]

$50 trillion?

[A]

Is it really 50?

[C]

It's literally $50 trillion. We had a $2 trillion shortfall. The top 1% owned $50 trillion. And I think it matters whether this group pays taxes. So remember, this group, arguably, a lot of the people in this group, not necessarily everyone, some of those. Some of those top 1% are also high income earners. Right. They've paid taxes, but a lot of them aren't. And a lot of the wealth is owned by people who aren't. And so the estate tax, 40% tax, it applies to all transfers during life and at death. Guess how much taxes was raised from this group in estate taxes in 2024? 30 billion.

[B]

30 billion out of 50 trillion.

[C]

Yes. That's 0.06%. Okay. Musk on his own, earned and lost $30 billion in a single day.

[A]

But what I'd be really interested knowing, not to put you on the spot,

[C]

is put me on the spot.

[A]

The richest people in the country have an aggregate net worth of 50 trillion. What percentage of those people died in 2025?

[C]

They don't. But what I'm saying is they didn't have to die. Most of them were gifting their property. Because anybody who has an estate planner is gifting. You need to see an estate planner who's selling.

[B]

You obviously are too honest, Nick.

[C]

No, you can. No, it's honest. It's all allowed. That's the thing. You should be. Somebody with significant wealth should be doing significant gifting, discounting, grants, all sorts of stuff to be getting that money out of their estate. So they're doing a lot of gifting.

[B]

So what you're telling us is because we haven't. We haven't used the tax law to address these innovations. There's been an evolutionary battle between the tax code writers and the tax attorneys over. And then that stopped. It's like antibiotic resistant bacteria in an era where we're no longer developing new antibiotics.

[C]

Right, Exactly. That's a good one. That's a good comparison. Yeah. It's basically right. So Congress stopped closing loopholes. So we have the grantor trust rules are the number one example. They are the big source of abuse. This is a set of rules that were designed to close a loophole. Am I getting too much in detail here?

[A]

No.

[C]

Okay. This was a set of.

[B]

He needs it. He's taking notes to send off to his tax attorney.

[C]

All right, so the big. The biggest reason that the biggest friend of estate planners is these grantor trust rules. This is a set of rules that were adopted at a time when trusts were subject to tax, income tax at lower rates than individuals. So individuals would take their money, they would put it into a trust, and it would be subject to tax at a lower rate. Congress, to close that loophole, adopted these rules called the grantor trust rules, that said we're going to treat that trust as if it's still owned by the grantor to close the loophole of people avoiding taxes by putting money into these trusts that were subject to tax at a lower rate. Starting many, many years ago, trusts were no longer subject to tax at a lower rate. Individuals are subject to a lower rate than trusts. So the grantor trust rules are no longer serving any tax avoidance purpose. They're not closing any loophole, but instead they are being used by estate planners and to transfer money into trusts. And the trusts are treated as if you're transferring it to yourself, so it's tax free. So donors are taking their appreciated property, they're putting them into their trusts, getting it out of their estate for estate tax purposes, but paying no taxes on it for income tax purposes because the trust is treated as themselves. These rules are just as an estate planner's friend, Congress still hasn't done anything to get rid of them. You know, this is not rocket science. This is not something that like, oh, these problems are way too complicated. We can't fix them. They're not doing anything and they could easily do it. Everyone thinks the estate tax is unfair. And the estate tax has an Achilles heel that makes it vulnerable to this claim that for some people, it really is a double tax. For people who earned their money through salary, right, they might have paid income taxes up to 50% and then they die and they are going to be subject to another 40% tax. And that feels unfair to people. It feels unfair to me. Of course, for most of our rich people, they've never paid taxes on that gain. Right, because it's gone up in value. They never realize the gains. But we have the same rule that applies to people who paid taxes as to people who didn't pay taxes. Taxes are complicated and people have limited patience and attention span and so it's easy to.

[A]

Yeah, that's an interesting point.

[C]

It's vulnerable.

[B]

You know, you've opened my eyes a bit because we focused a lot on how we have slashed tax rates on individuals and corporations. I don't know if this is true or not. I've seen this statistic a number of times that apart from the extraordinary expenses of the responding to the financial collapse in 2008, and to Covid that all of the accumulated debt over the past 25 years could be attributed to the Bush and Trump tax cuts. But we're not talking about tax cuts. We're just talking about not responding to the innovations of tax attorneys. Nobody cut taxes. They just didn't close these loopholes.

[C]

Yes, and I think that the rate, honestly, I do not agree that the problem is the rates. I think we need to have a broad base and we need to have a reasonable rate. Because back in the day when we had 70, 80 and 90% rates, these types of confiscatory rates, people weren't paying them. There was widespread tax avoidance, and interestingly, it was actually Ronald Reagan, the Tax Reform act of 1986, that put an end to those tax shelters, which were very big in allowing rich people to avoid taxes. And the solution was to cut rates and to expand the base. Now, you know, there were a lot of problems with that bill, but I think that idea was the appropriate idea because nobody wants to pay 50, 60, 70%. I mean, all across the world, top rates have come down. I think that we no longer live in a society, I don't think, where people feel good about those types of rates, but we don't, we don't have

[A]

the kind of social cohesion that makes something like that viable.

[C]

Well, also, a lot of those countries that have the social cohesion, they also are very homogeneous. Right. We're a very diverse country, and we just, we have a different culture. So I don't think, I think when people advocate for, for we have to raise income taxes on top earners, I think that's a big mistake. Our top earners are already paying all the taxes. And this is where I feel that Democrats have made a lot of mistakes in their messaging because they just anger people who are already paying a lot of taxes when they say the problem is people who make $400,000. I think that you, you take a whole group of people and you're like, well, you know, these are not people who are living high off the hog. I have a lot of former students. They make, you know, they make four or five hundred thousand dollars. They are barely making ends meet when it comes to owning houses in Massachusetts and putting your kids through, you know, childcare and schools and all of that. So I think that we have to be realistic about things. And there's plenty of room, there's plenty of things to tax. There's Plenty of things that are passing tax free that shouldn't be tax free.

[B]

So how about if we tax, in addition to that, we tax as income the proceeds from loans on unre realized gains.

[C]

Yeah. So that seems like that's one. That's another one. It seems like this will be a good solution, Right. Because people are borrowing against their money. The problem is it barely gets at any of the problem. Right. So if we have our billionaires with like $200 billion now, as I say, it's constantly keeping up with these numbers are crazy. They're not borrowing $200 billion. Right. It's, it's a lot that it feel Maybe they borrowed $2 billion. I mean, this is a lot of money, these billions. And because of it, that would be a solution that I think would be a bad one because it would not get at the nature of the problem. The nature of the problem, so I'm not hiding the ball as I see it, is that we are not taxing the sources of income for wealthy Americans, which is their investment gains and their inheritances. And by inheritances, I mean that writ large too, inheritances, gifts and life insurance, those two things are not subject to tax because we count on the estate tax to do it and the estate tax isn't doing it. So what I think we need to do is bring them into the income tax system. And we could do that by taxing gains whenever property is transferred, whether by gift or at death or during life. That would avoid the lock in effect. Right. People would get a step up in basis because somebody had actually paid taxes on the gains. We could exclude things like people's primary residents if we wanted to do that. You know, we don't have to treat everybody the same. We could have a certain amount excluded. But generally speaking, when somebody has an asset that, you know, increases by 100 million or 100 billion, we should tally the gains at some point when they give it away or when they die holding it, and, and impose the tax on the gains then.

[B]

And you're saying an income tax, not an estate tax.

[C]

Forget the estate tax. Forget the estate tax. Because the estate tax is providing cover for the rich.

[A]

Right.

[C]

Making the public think that they're paying a 40% tax and it is not exacting any revenue and it is not working.

[A]

Okay, so Ray, just playing this back to you. You eliminate the estate tax, which you think is just not workable. And in place of it, people just have to pay a 40%. What, plus or minus 40% income tax on anything they get, whether it's A gift, an inheritance. Anything else?

[C]

Yeah, we could have exception.

[A]

Well, and there are already exemptions. There's a $15 million exemption, for God's sakes.

[B]

That's a lifetime exemption.

[C]

Yeah. What I would say is that each person, I think that we need to recognize that we have a preference for inherited wealth. So if we talk about, if we go back to your. This is a world, what do you call it? Middle out? What do you call it?

[B]

Middle out?

[A]

Yeah, A lot economics.

[C]

If you think middle out. Right. You have two people, you have one person who, you know they're earning whatever a hundred thousand dollars, they've got a good job, they earn $100,000. Right. They're paying $30,000 in taxes. Somebody who is given $100,000 every single year pays no taxes on that. Because we have a preference for that type of wealth. We have a preference for this inherited wealth and we need to recognize that's what we have.

[B]

And is it fair to say that an income tax is harder to evade than.

[C]

Yes, because it's. And I'll tell you another advantage of an income tax is that if you bring things into the income tax base, you help not just the federal budget, but all the state budgets that have an income tax based on the income tax. Federal income tax base. So we have undermined things and we didn't get a chance to talk about it. But another big source of income used to be dividends. And true, they've gotten rid of the, they've changed the rate. But dividends used to be taxed at the highest rate. It meant that people with a lot of stock paid a lot of dividends. But in 1982, the SEC changed the rules to allow stock buybacks and now we got rid of dividends and now we just have tax free growth. That's another thing that has undermined our tax system. So it's time to bring everybody into the tax system.

[A]

Couldn't agree more. So one final question, Ray. Why do you do this work?

[C]

Yes. Because I am passionate for the public to understand these rules that have a significant impact on people's lives. And I think that when they don't understand the basics of it and they are duped by things like, oh, top 1% are already paying 40% of the taxes. Right. This is fundamentally unfair. It has a significant impact on people's day to day lives and I think we can do better as a country. I'm fundamentally an optimist and I think that if people understand things then we're going to see change.

[B]

So A little tour inside the sauce factory for our listeners. Our producer Freddie, before every episode, provides us with this very detailed sheet of show notes with a bunch of questions. And today, Nick, I think we set the record for not following the outline. I think we got to like question two.

[A]

I know.

[B]

And then went off on a tangent on estate taxes and we never fully came back.

[A]

No, but I mean, look, I think we, we did go off the rails a little bit, but we, I think we had a really interesting conversation about the right stuff and I think Ray raised some really interesting points. I do completely agree with her that the tax system is working exactly as it's designed. Right. That um, it's not an accident that super wealthy people or. No, no, no, no, no, I put that wrong. It's not that super wealthy people are doing something illegal by not paying tax. They are simply following the rules that

[B]

we have put in place and, or have somehow create. I mean, this is what lawyers do. They create law and they create rules. When we had this conversation, I'm trying to remember the name of the guest who talked about this, how so much of the law by lawyers in how they interpret it. And you see that in the tax code, these loopholes, these tax preferences were not imagined by Congress when the tax law was written. They're created by lawyers.

[A]

Yeah, but also we didn't have people worth $800 billion. Right. This craziness was not anticipated by the previous framework or the people that built it. And so we now are in a very different kind of economic regime which requires a different approach and different rules. Right.

[B]

And what's intentional about this has been the way Congress has neglected to go back in and acts of omission.

[A]

Right, yeah.

[B]

Throughout the history of the tax code, this was this ongoing battle between legislators and tax lawyers. And you'd have to come back and forth and, and match what the other was doing. And we have intentionally, over the past few decades, not matched the work of tax lawyers and allowed them to essentially rewrite the, rewrite the code in terms of the norms what the courts allow based on, you know, their, their creativity on behalf of people like you.

[A]

Yeah.

[B]

Though from the conversation, either you don't know what your accountants and tax lawyers are doing, your estate planners, or you need to hire some new ones because

[A]

you seem a little, I think it's a little harder to transfer billions of dollars tax free to your heirs than Ray imagines. Although there are scenarios. I mean, you know, I have friends who put huge amounts of company stock in their kids estates when it was Worth nothing.

[B]

Right.

[A]

Thinking that it wouldn't probably ever actually be worth very much and all of a sudden it was worth like an insane amount. That is a way that you can do that. Right. But you have to get very, very lucky in order for that to pan out.

[B]

But you're in the. But let's be clear, you're in the business as a venture capitalist. If one out of 10 investments pay off, most of them fail.

[A]

Yeah, Correct.

[B]

So if you gave your kids a taste out of all of your investments when they were young and you gave them their shares, y. Most of them wouldn't pay off.

[A]

Yeah.

[B]

And obviously some of them would have and they, they would benefit very greatly from that. Whereas for somebody like me, the thing that we give our kids is your house equity. Yeah. Or you know, when they're young, you know, 527, you know, to invest for, save for college. I'm not giving her shares in Amazon or.

[A]

Yeah, but I also, you know, I think that one of her big points is this idea of making everything income,

[B]

eliminating the estate tax, making all transfers income. And that really simplifies everything because even though, you know, my stepfather is a tax accountant and he once told me that the four rules of tax accountancy are defer. That's number one. Number two is defer, defer. Number three is defer. And then number four is die. So it's defer, defer, defer, die. That's how you avoid paying taxes. But then under what she's proposing, the heirs would pay it and they would pay it as regular income. And something we didn't talk about, which actually is rather appealing, is that a lot of people get small inheritances. Most people are not getting large inheritances, they're getting small inheritances. And it'll be based on your income if you like. You're a family of five, you know, five kids and one of them's a doctor making $200,000 a year and another one is, you know, whatever, making $40,000 a year. And they each inherit $25,000, you know, their share of the parents estate. The child paying, earning $200,000 a year is going to pay more tax on that than the child earning $40,000 a year. And that makes sense because you're paying it based on your own income, not on the income of the parent.

[A]

But I mean, if you write a rule that says you pay income tax on anything you get, and you could do exemptions, you could even do a $15 million exemption.

[B]

Well, you could, you could. But the point being it simplifies everything tremendously. If you just say, you know what? No, estate tax, when you inherit something, when somebody gives you something. Yeah, that's income. In the same way as if you, as she said, find money. What came to mind is, you know, also if you steal money, if you get it illegally, I mean, that's how they got. That's how they got Al Capote. It was a tax charge. They got him on tax evasion from his illegal booze and prostitution business.

[A]

I don't.

[B]

Maybe that's apocryphal. That's how I understand the story. They got him on a tax charge.

[A]

I think it is true. Yeah.

[B]

Yeah.

[A]

So.

[B]

So if we could just get Elon Musk on a. On a tax charge.

[A]

Yeah, it'd be great.

[B]

Anyway.

[A]

Well, it's super interesting discussion and obviously she's more or less right. The system is a mess. It lets the worst and most able people off the hook in a way that is just deeply unfair and impractical. And we need to find a way to stop it.

[B]

Right. And if you want to read more from Ray Madoff, we of course will links in the show notes, including a link to her book, the Second how the Tax Code Made American Aristocracy. Speaking of which, you could buy it online at that big bookstore owned by an aristocrat, or you could buy it at your local independent bookstore.

[D]

Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to follow, rate and review us. Wherever you get your podcasts, find us on other platforms like Twitter, Facebook, Instagram and threads. Itchfork Economics. Nick's on Twitter and Facebook as well. Ickhanhauer. For more content from us, you can subscribe to our weekly newsletter, the Pitch over on Substack. And for links to everything we just mentioned, plus transcripts and more, visit our website, pitchfork economics.com as always, from our team at Civic Ventures, thanks for listening. See you next week.