Taxes make civilization possible. When the ancient Greeks introduced democracy roughly 2,500 years ago, they implemented a progressive taxation prototype so that those who benefited most bore the heaviest burden of maintaining the civilized society that enabled and protected their wealth. Athenians also honored the rich for paying their taxes. The U.S. Constitution itself was born of a tax crisis—a story hardly anyone knows. In 1787 we scrapped the Articles of Confederation, which had reduced the United States to begging for alms from 13 parsimonious states, and created a new republic that could tax its citizens. As I have long told my law students, a government is its taxes.
Every American schoolchild is taught, in the official version of the reasons we declared independence from the mad tyrant in London, that taxes can oppress and even destroy. But they can also enrich the politically connected and their enterprises. In a democracy, the design of tax systems is central, and America today suffers a monstrosity that burdens most workers more than billionaires.
Enter Ray D. Madoff’s Second Estate, a book about the role of federal taxes in worsening inequality. Madoff, a professor at Boston College Law School, argues that income and wealth have become dangerously disconnected, that the rich can live tax-free by borrowing against assets, and that charitable vehicles like private foundations and so-called donor-advised funds worsen inequality rather than serve the public. Her title evokes the French nobility whom the crown exempted from taxes, a favor that helped sustain their lavish lifestyles while impoverishing everyone else.
To understand Madoff’s book, imagine that you are an economist from another solar system, sent to stealthily observe earthly conditions. Your report would note that in wealthy countries taxes are more than a third of economic activity, poor ones half that much, and that contentment is highest in high-tax countries.
Since high taxes align with prosperity, you might expect taxes to be something people love and embrace. Instead, you find that tax is a vile three-letter word, especially in the largest wealthy nation in the world. A society that cannot function without taxation has taught itself to see taxes as illegitimate.
It is this paradox that gives Second Estate its energy. Madoff contends that taxes in the United States do not simply raise revenue—they allocate privilege, as well. Workers face immediate withholding, wage reporting, and payroll levies, while owners of capital enjoy loopholes and leniency. A telling detail: Amazon founder Jeff Bezos used the child tax credit that Bill Clinton signed into law in 1997. Bezos got this benefit because the way Congress wrote the tax law, he is a pauper.
How do gazillionaires pose as paupers? Congress lets them borrow against their assets, spending freely while showing no earnings. For years, Elon Musk paid himself a one-dollar salary while borrowing against Tesla stock to finance a lifestyle of palaces and private jets. On their tax forms, these men look poor.
Anyone can borrow, of course, but unless your wealth grows faster than your debts and interest, you will be crushed. For billionaires, whose fortunes compound faster than they can spend, borrowing is a tax-free fountain of cash. This “buy, borrow, die” strategy—buy appreciating assets, borrow against them during life, and die with the gains untaxed thanks to the step-up in basis—has become the template for dynastic wealth in America.
Allowing the super-rich to borrow and spend their untaxed wealth without bearing any of the burden of supporting the government that protects their lives and fortunes is just the start of a cornucopia of tax favors for the richest of the rich.
How do gazillionaires pose as paupers? Congress lets them borrow against their assets, spending freely while showing no earnings. For years, Elon Musk paid himself a one-dollar salary while borrowing against Tesla stock to finance a lifestyle of palaces and private jets.
Consider income taxes. Workers pay higher tax rates than owners of capital. Earn a million dollars in wages, and your marginal tax rate is 37 percent. Realize a million in capital gains, and you pay 23.8 percent. That means a well-paid worker forks over more than half as much to Uncle Sam than the investor who cashes in. On top of that, workers pay payroll taxes. Social Security applies only up to a wage cap, but Medicare applies to every dollar earned, with a surtax on high earners. The few hundred Americans whose salaries exceed $50 million pay Medicare tax on every dollar. No investor pays anything comparable on their gains.
On this point, which was central to my 2003 tax book Perfectly Legal, Madoff is persuasive. America really does operate two tax systems: one for wage earners, whose income is independently verified and taxed at the source; and another for private business and real estate owners, who decide how and when to report, or whether to report at all. This asymmetry explains why workers cannot cheat and investors often can.
But the strength of Second Estate is also where its weaknesses appear. Nowhere does Madoff write that inequality would be reduced if the Social Security tax applied to all wages. Removing the cap would generate a torrent of revenue, shoring up its coming shortfalls and enabling increased benefits, particularly for the poorest among the elderly and disabled, thereby reducing inequality. Madoff calls payroll taxes “hidden,” even though they appear on every pay stub. She repeatedly cites the capital gains tax as 20 percent, omitting the 3.8 percent surtax imposed to fund the Affordable Care Act. She writes that income, capital gains, gift, and estate tax rates stack to produce levies as high as 74 percent, a mathematical fiction. These mistakes are not trivial. From a tax law professor, readers expect precision.
Equally troubling is what Madoff leaves out. In addition to Social Security tax reform, the word audit never appears in her book. Yet enforcement is the fulcrum of taxation. Congress requires employers to report wages and withhold taxes, but trusts business owners to self-report income, deductions, and estate transfers.
Unsurprisingly, cheating is rampant. Donald Trump, for example, claimed fictitious companies and phony tax losses for at least seven years. Unless audited, such returns stand. And audits have collapsed. IRS auditors of large corporations cost taxpayers about $200,000 annually in salary and benefits, yet uncover nearly $20 million each in unpaid taxes. Any rational business would expand that workforce. Congressional Republicans instead decimated it. The IRS reported that in 2022 it completed just five audits of individual international tax returns, down from almost 8,300 in 2014. The IRS completed only 38 audits of America’s 26,500 ultra-high-income individuals in 2018. In some years, low-income Americans have been more likely to be audited than those making more than $100,000. The collapse of enforcement is not a footnote: It is one of the chief reasons inequality has widened. By ignoring it, Madoff misses the engine that makes her strongest anecdotes possible.
Where she does train her fire, at length, is on philanthropy. Madoff devotes much of her book to what she characterizes as abuses by private foundations and by an equivalent used by many merely prosperous Americans (including my wife and me) called donor-advised funds.
She is right that some donor-advised accounts sit idle, and that wealthy families sometimes use foundations to maintain influence under the cover of charity. But her treatment makes them seem like the beating heart of inequality when in fact they are a small piece of the picture. The combined $1.7 trillion in endowments and donor-advised funds may sound vast, but it represents about 1 percent of national wealth. By comparison, capital gains preferences, gutted audits, and payroll tax caps shield sums that dwarf the charitable sector.
What is most frustrating is how little credit she gives to the practical safeguards that exist. Private foundations are required by law to pay out 5 percent of assets annually. In practice they exceed that. In 2022, the total figure was $103 billion—6.4 percent of assets. Donor-advised funds also pay out generously, though individual accounts can stagnate. To deal with this, many community foundations already enforce a rule that after three years of inactivity, the donor loses advisory privileges and the sponsoring foundation makes the grants. It is a sensible fix Congress could easily adopt. Madoff prefers to tar the entire vehicle with insinuations of a “wink-and-nod” culture.
That insinuation is not only unfair, it is demonstrably false. My wife, who ran a community foundation for three decades, oversaw thousands of grants each year. To test Madoff’s charge, I tried to recommend a grant from our family’s donor-advised fund to an organization that was authorized by Congress but not a 501(c)(3) charity. The software instantly blocked it. No wink, no nod. Her blanket suspicion of impropriety is less an argument than a smear, and it distracts from the real issues: how to make permanent charitable capital more accountable without destroying its usefulness.
Surprisingly, Madoff never questions why giving away appreciated stock subject to a 23.8 percent tax can produce a 37 percent tax savings instead of being limited to the value of the tax avoided.
Madoff also misses the history of reform proposals that could have helped her case. More than half a century ago, the charity reformers Pablo Eisenberg and Norton Kiritz urged Congress to require private foundations to evolve so that boards would eventually be controlled by outsiders rather than heirs. The Filer Commission, a national study of philanthropy in the 1970s, endorsed the idea on the grounds that “citizen empowerment” groups needed a chance to compete with the older, larger institutions that then enjoyed a near monopoly. By ignoring this history, Madoff forfeits the chance to show how her critique fits into a longer tradition of efforts to democratize philanthropy.
Still, the book has value. She reminds readers that taxation is not an afterthought but the core act of democratic life.
