Why the Rich Don’t Pay Taxes

In 2024, um the the government raised a total of $5 trillion from all of its sources. From income taxes, payroll taxes, corporate taxes, estate and gift taxes, they took in $5 trillion. And uh but the country had expenses of about $6.8 trillion. So, there was a shortfall of $1.8 trillion. Okay? And of course, that $1.8 trillion was added to this enormous national debt that we have. At the same time, the amount of wealth So, the country took in 5 trillion, spent 6.8 trillion, deficit of 1.8 trillion. At the same time, the amount of wealth owned by the wealthiest Americans was $46 trillion. An absolutely staggering amount when you think about how we're going to cover that $1.8 trillion shortfall. My name's Ray Madoff, and I'm a professor at Boston College Law School, and the founder and uh director of the Boston College Law School Forum on Philanthropy and the Public Good. So, the second estate was the term that was used for the aristocracy in pre-revolutionary France. And the thing that was notable and important about them for purposes of our work is that they were completely exempt from taxes. The situation that we have in the United States today, we've created our very own second estate, which is the wealthiest Americans who are also exempt from paying federal taxes. And it's interesting how this has come about because of course, historically, the whole purpose of our tax system is to impose its greatest burdens on those who have the greatest capacity to pay. And it's effectuated through having higher tax rates in our income tax system for those who have greater income, and also for imposing an additional wealth tax on the wealthiest 1 to 2% of Americans. And you look at these two things, and you think, "Oh, that's great. Our American tax system is highly progressive, getting those people who have the greatest capacity to pay." But two things have happened in recent years that has shifted this dynamic. One of them, and the most important thing, is that the wealthiest Americans have been able to avoid having taxable income. And so, they have enormous They've acquired enormous amounts of wealth, but not through ways that the tax system imposes taxes on. And part of the reason for that is because it assumes that the estate tax is doing its job. It's acting as an effective backup or sweep-up tax to capture anything that wasn't taxed under the income tax system. Our estate tax system is supposed to impose a tax of 40% on all transfers that occur during life by gift or at death uh once it's over a certain exemption amount. But the problem is that there has not been a single amendment to the estate tax since 1990. And as a result, the loopholes have flourished. And today, the estate tax produces hardly any revenue at all, even as our wealthiest Americans have become more and more wealthy. The wealthy are able to avoid income taxes because their greatest sources of wealth are their investments and their inheritances. And both of those are largely excluded from the income tax system. The way that investments are excluded is that as property grows in value, right? As Mark Zuckerberg goes from being somebody who has a startup from his dorm room to something that's worth, you know, over a hundred billion dollars, all of that growth in value is not subject to tax unless he actually sells the stock. And of course, he has no interest in selling the stock because he wants to maintain control over the assets. Now, you might wonder, how is it possible for somebody to live well if they don't sell their assets? But there's another tool available to them, which is that people with wealth can borrow against those assets. They can pledge those assets for loans and get tax-free wealth that is never subject to tax. And uh this is a very common technique amongst the wealthiest Americans. A lot of them have a lot of accumulated debt because it enables them to live off of their wealth without having to recognize any taxable income. On the inheritance side, our income tax system totally excludes all money received by gifts, by inheritances, or by insurance distributions. And so, what that means is that wealthy people who inherit 10 million, 20 million, a hundred million, or even a billion dollars never pay any income taxes on that at all. The only tax system that we have that applies to those types of transfers are the estate tax. And the estate tax has become absolutely riddled with loopholes. Part of the reason for that is this campaign that took effect in the early 1990s, which was uh a campaign that was designed to transform how the public viewed the estate tax as a you know, a a tax that affected a small number of people and served as a backstop to the income tax, to instead being an immoral double tax that hurt family farms and businesses. And this campaign was so effective that it resulted in a one-year uh there was a one year that there was no estate taxes collected at all. Its greater impact was that it made Congress reluctant to tackle the estate tax because there was so much public antipathy towards it. Of course, uh Republicans tend to be very much opposed to the estate tax as a matter of policy, but even Democrats are reluctant to support the estate tax because they know how unpopular it's become in general with the public at large. However, it is this maintenance of the estate tax, the continued existence of the estate tax, that is serving to benefit the richest Americans. Because what it does is it provides a cover that makes people think that the wealthy are subject to taxes when in fact, they aren't. If you actually got rid of the estate tax, you would see how our income tax system is so unfairly biased towards the type of wealth that the wealthy acquire. And it would give us an opportunity to promote a greater and more fairer tax system. It's very confusing to Americans when you suggest or when the people say that the rich aren't paying any taxes because after all, most Americans have a very heavy tax liability, and they know that the more income they earn, the more taxes they're going to have to pay. And so, it doesn't And that these taxes are very difficult to avoid. So, how is it that the wealthy avoid taxes? It seems like they would be subject to taxes, too. One thing that's happening here is that the high-income Americans are covering for high-wealth owners. People assume that people with a lot of wealth have a lot of taxable income, but that's not necessarily the case. The people with the most taxable income um do in fact pay the most taxes. But the wealthy aren't necessarily people with high taxable income. And this was something that tax scholars and others have long known was a matter uh was always a possibility. But the reality of it was brought to the public when uh ProPublica did uh this exposé based on actual tax returns of the wealthy. So, they received a huge cash of uh real tax returns of the wealthiest Americans. And those showed that many of our wealthiest Americans, people like Bezos and Musk and Zuckerberg and Bloomberg and Warren Buffett, often had very low income tax liabilities. And that's because of their ability to avoid taxes by doing things like borrowing against their assets instead of selling their assets, and because of course, inherited wealth is not subject to income taxes. Um So, the uh high-wealth owners are hiding behind high-income earners. High-income earners do in fact pay a significant amount of the taxes. The The those who have the greatest income, the 1% top income earners, do in fact pay 40% of the country's income taxes, but there's no reason to think that those high-income earners are the high-wealth owners. And in fact, studies have shown that there's not about a 50% correlation. So, 50% of our high-income earners are high-wealth owners, but the other 50% of high-wealth owners might just as easily be non-payers of taxes as they are high-payers of taxes. Income earners are the ones that are really carrying the expenses of government. And that's something else that the public is not generally aware of, right? Because certain taxes have been made very um prominent in the public mind. The estate tax, for example, has is discussed all the time, and one might think that it raises some significant amount of money. In fact, it raises less than 1/2 of 1% of the total federal revenue. Meanwhile, another tax, the payroll tax, one that is almost entirely ignored when one talks about taxes, actually raises about uh 35% of our country's revenue. It pays for our most expensive programs, Social Security and Medicare are paid for out of these payroll taxes. And yet when people talk about who pays the cost of federal government, they often ignore payroll taxes completely. And we saw this when several years ago when Mitt Romney made a statement about the 47% of Americans who who were non-payers. And he was referring to people who didn't pay income taxes, but failed to recognize that the vast majority of those taxpayers paid significant payroll taxes. Indeed, our payroll taxes are the most regressive taxes that we have. They're imposed at a rate of 15.3% when for a self-employed person it's paid entirely by the person who's self-employed. For people who are employed by others, half is paid by the employee and half is paid by the employer, but economists agree that even the half that's paid by the employer is economically borne by the employee in the form of reduced wages. And so employees are paying 15.3% of their income right from dollar one. Unlike income taxes, right, which only kick in after a certain amount and they start in at a low rate, it's 15.3% Somebody who earns $10,000 pays 15.3% of income on that. So somebody who earns $60,000 pays more than $9,000 in payroll taxes alone. That's a significant amount of of that $60,000 of revenue and could very well make the difference between whether or not that person can afford a car or maybe even their monthly rent. And so we have to recognize that um working Americans are carrying the lion's share of the of the burdens of the running the country. When we look about where the country gets its money from the the biggest source of revenue for the country is income taxes. Income taxes are about half of the country's revenue. But right after that comes payroll taxes. Those are about 35% of the country's revenue. And then corporate taxes are only about 11% of the country's revenue. And estate taxes, as I say, that tiny less than 1/2 of 1%. When company owned when when an individual owns a lot of stock they would receive dividends. Companies could only issue dividends as a way of sharing profits. That was their only way that they could share their profits with shareholders. And dividends for much of the 20th century were taxed at the highest rate, the same rate that applied to wages and other ordinary income. And so what this meant was that somebody who was heavily invested in the stock market and they received a lot of dividends. And in the 1970s about 70% of the returns from the stock market were paid out in the form of dividends. These were all subject to tax at the highest rate. So that meant that investors were subject to tax on their returns at quite a significant rate. 1982 marked a significant change that transformed how people were compensated how that transformed how investors received the benefits of their investments. And that was because prior to 1982 companies were not allowed to purchase their own stock because it was seen as a form of market manipulation. If a company buys its own stock, of course the value of the company goes up because you're bringing in more buyers and you're reducing the number of owners and all of that serves to increase the value of stock. In 1982 the SEC changed its rule to for the first time allow companies to buy back their own shares of stock. And stock buybacks has had a transformative effect about how investors profit from their stock ownership. Prior to this rule from 1915 to 1982, if you look at the Dow Jones, it looks like this. It goes up and down between about 2,000 and 8,000. And in 1982 it's at 3,000. It was also 3,000 in 1954. It was 3,000 in 1940 something. It was 1930 something. Right? Up and down it was roughly the same. So somebody who wanted to invest for growth would have a hard time doing it because the market largely went up and down. And as I said, profits were shared with dividends. In 1982 after this rule change went into effect, after the SEC allowed companies to buy back their stock something remarkable happened, which is that the stock market went from 3,000 in 1982 to 43,000 in 2024. It's continued to go up and down, but it's gone up and down like this on a tremendous trajectory up. And of course the effect of that has been to change the returns from taxable dividends to non-taxable growth in value. And this has been a huge benefit for owners who don't want to pay taxes and a huge cost for the federal government that no longer has a way of capturing that growth in value. Now some people suggest that the way to address this is that we should have a wealth tax either on the total amount of wealth owned by the wealthiest Americans or on the growth of wealth. I personally think that would be a problem because the effect of a wealth tax would be that the wealthiest Americans would be incentivized to move their assets away from easily valued things like a public stock market and into things that were harder to value like private business interests or real estate or any non-partnership interests, any number of things that are difficult to value and track. And that would have a negative effect on the stock market as a whole and would therefore bring down the assets of all sorts of regular working Americans who count on the stock market to grow their retirement assets and other savings. So I think a wealth tax, while it's very well-intentioned, would be highly problematic. A better way to address this problem would be to say that these gains, we're not going to tax them during life because it's complicated to do and there might be liquidity problems, but instead we'll tax them when the person dies. At when they if they die holding the property or if they gift the property, then we will tax the gains. What's interesting is that this rule was proposed not just by President Obama, but also by President Nixon. And it was adopted in Canada. So Canada has this rule that gains are taxed at death death or when the property is transferred. And there's no reason that we shouldn't have that rule here in the United States. The other thing that we should do is we should repeal the estate tax. we have to recognize that the estate tax for all of the good that it intended to accomplish, it's no longer able to do that. And so we should scrap it, but that doesn't mean that inheritances and gifts should be received tax-free. The only reason they're received tax-free is because of the assumption that we have an estate tax taking care of these transfers. If somebody finds money on the street or they win the lottery, they're supposed to pay income taxes on it because you're supposed to pay income taxes on all accretions of wealth. We exclude gifts and inheritances for that reason of well, maybe we're taking care of them under another system, but we should uh get rid of that other system and get rid of the exclusion. And that would produce a much fairer system because under our current system somebody who two people who earn $50,000 and one person also receives $10 million under an inheritance, they look identical under the income tax world. And yet they're clearly not identical in terms of their capacity to pay. When it comes to charitable giving, we again have two sets of rules. One set of rule that applies to working Americans and one that applies to the wealthiest Americans. For working Americans, there are very few tax benefits for charitable giving. In fact, 90% of Americans get no tax benefits for their charitable giving. And that's because they claim the standard deduction. And the only way that you get charitable tax benefits is if you itemize your deductions. These are all complicated terms, but are basically that for unless you have a lot of deductions, unless you have a lot of deductible expenses you're going to take the standard deduction and that is true for 90% of Americans. What that means is that your charitable giving might be good for charities, but it doesn't produce any tax benefit for the donor, for that 90% of Americans that don't itemize their deductions. When we're talking about the wealthiest Americans, we're talking about entirely different tax systems. Oh, one other thing. Even for Americans, working Americans, who give very generously they can never eliminate their tax liability. So if we had an architect, Anna the architect, who earns $100,000, and she's like, "I want to give $100,000 to the homeless." She will not be able to eliminate her tax liability. The first reason is that payroll taxes cannot be offset by charitable giving. So, she will still have to pay the 15.3% of payroll taxes. In addition, we have a cap for the amount which somebody can deduct their income taxes. It's limited to between 20 and 60% of their total income. And the purpose of it, the reason we have this rule, is because Congress felt that we want to encourage charitable giving, but it's also important that people support the expenses of government. When it comes to the world of the wealthy, however, a different set of rules apply. And that's because the tax benefits that the wealthy need is not necessarily income tax benefits, because as we mentioned, they don't often have a lot of taxable income. But what they need is an ability to avoid capital gains on their assets, right? Our Mark Zuckerberg's stock that's gone up from zero to $150 billion. They need to avoid the capital gains, and they need to avoid the estate and gift tax. And here we have, under current law, unlimited benefits. So, somebody who is a wealthy a wealthy person who owns appreciated assets can entirely eliminate their capital gains and estate tax estate and gift tax liability through their philanthropy. Where regular Americans can't. So, this is very, very costly to to all the rest of us that are giving up this foregone revenue, suffering the costs of the loss of this foregone revenue. The tax benefits for the wealthiest Americans, where where working Americans often receive no tax benefits for their charitable giving, the wealthiest Americans receive tax benefits that can be worth as much as 74% of the value of their donation. So, what that means is that when somebody gives $100 million of appreciated assets to their charitable giving, that is that costs the rest of us as much as $74 million in foregone income taxes, capital gains taxes, and estate and gift taxes. And yet, most Americans are completely unaware of this, because uh we think of tax benefits just in terms of the income tax benefits, and not the tax benefits that apply to the wealthiest Americans. The problem also is made worse because the way the wealthiest give their money is different than the way most working Americans give their money, right? Many Americans, they support food banks or their local churches or other other causes that are designed to kind of benefit the public as a whole, whereas the wealthy are much more likely to give their money to their own private foundation or donor-advised fund. These are charitable entities that provide all of the tax benefits of charitable giving, but um do not get any money to charity until the donor makes a distribution from these accounts. And the problem is, under current law, there is no real obligation for any of these funds to be distributed. That's because donor-advised funds have no payout requirement at all, and private foundations have a 5% payout requirement, but that payout requirement can be met by making donations to donor-advised funds. So, what we have is we have this system that create tremendous financial incentives for the wealthiest Americans to donate to charitable causes, but provides no assurance that this money will ever be made available to the public. To reform these rules, we should do two things. One is that we should reform the rules involving private foundations and donor-advised funds to assure that there is some time period during which the money should have to come out and benefit the public. In addition, we should impose an overall cap on the amount of tax benefits that the wealthy get for their charitable giving, just the same as working Americans are subject to a cap. It's good to support charity, but it's important to support the costs of the of public services as well. I mean, I think the greatest risk to the country right now is this tremendous concentrations of wealth amongst the wealthiest Americans. It can be hard to get a sense of how much wealth the wealthiest Americans have, because these numbers, millionaires, billionaires, trillionaires, it's they're almost impossible to fathom. But the way to think about it is to think about the costs of running the federal government, right? So, the in 2024, um the cover the government raised a total of $5 trillion from all of its sources, from income taxes, payroll taxes, corporate taxes, estate and gift taxes. They took in $5 trillion, and uh but the country had expenses of about $6.8 trillion. So, there was a shortfall of $1.8 trillion. Okay? And of course, that $1.8 trillion was added to this enormous national debt that we have. At the same time, the amount of wealth, so the country took in $5 trillion, spent $6.8 trillion, deficit of $1.8 trillion. At the same time, the amount of wealth owned by the wealthiest Americans was $46 trillion. An absolutely staggering amount when you think about how we're going to cover that $1.8 trillion shortfall.