By
Madeleine Kando
As I waited for the red light to turn, I grabbed a dollar bill out of my wallet, opened my car window, and gave it to the woman standing on the divider. It was freezing cold. She had a scarf wrapped around her face. I gave her the bill, and she nodded. She was holding a sign, but the letters were too small, so I couldn’t read it. It didn’t matter really. I give dollar bills (or quarters) to every person standing on the side of the road. My husband says it’s a waste of money, but it’s a reflex. Her time spent standing in the freezing cold is enough of a reason.
Had I lived in pre-revolutionary France, I would have been the one standing on the side of the road. I would have been part of ‘the Third Estate’. Social hierarchy comprised of three ‘estates’: the First Estate was the clergy, the Second Estate was the nobility, and the Third Estate was everybody else, 90% of the population.
The First Estate was wealthy and exempt from paying taxes (as it still is).
The Second Estate, the equally untaxed nobility, enjoyed sweeping financial and social privileges on the basis of their wealth.
This is similar to today’s class of untaxed elites in America. It signals something broken and alarming about our economy. How could a country founded on principles of equality—and with a special aversion to aristocracy—end up with such a system?
How can 1% of the population own 40% of the wealth of the country? As you will see, it is mostly due to our tax code that allows the super-wealthy to get away with murder (and more). For the average American, the word ‘taxes’ means ‘income tax’. You earn X amount gross and take home Y amount, after you pay your ‘taxes’ (Federal and State). Most people are confused about the Payroll Tax, a.k.a. FICA, which pays for Social Security, Medicare, and Disability. They are the second-largest source of federal taxes (after income taxes), and account for more than a third of all federal revenue.
When Mitt Romney was running for President, he was caught saying, “There are 47 percent [of voters] who are with him (Obama), who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them. These are people who pay no income tax.”
That is true, since the minimum taxable income is $15,000. But payroll taxes get levied on the first dollar earned, so the number of people who truly pay no taxes falls to 16.5 percent—slightly less than the number of taxpayers who are older than seventy.
Here is the breakdown of what the government has to rely on for revenue:
How can 1% of the population own 40% of the wealth of the country? As you will see, it is mostly due to our tax code that allows the super-wealthy to get away with murder (and more). For the average American, the word ‘taxes’ means ‘income tax’. You earn X amount gross and take home Y amount, after you pay your ‘taxes’ (Federal and State). Most people are confused about the Payroll Tax, a.k.a. FICA, which pays for Social Security, Medicare, and Disability. They are the second-largest source of federal taxes (after income taxes), and account for more than a third of all federal revenue.
When Mitt Romney was running for President, he was caught saying, “There are 47 percent [of voters] who are with him (Obama), who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them. These are people who pay no income tax.”
That is true, since the minimum taxable income is $15,000. But payroll taxes get levied on the first dollar earned, so the number of people who truly pay no taxes falls to 16.5 percent—slightly less than the number of taxpayers who are older than seventy.
Here is the breakdown of what the government has to rely on for revenue:
Most of the government’s federal income tax revenue comes from the nation’s top income earners— people with incomes of $261,591 and above.
But that does not include the super-wealthy, the people who are part of ‘the Second Estate’. Those people don’t draw salaries, or a minimal amount compared to their net worth. Mark Zuckerberg is known to have earned $1 in 2024. They live by different rules, one of which is known as ‘buy, borrow and die’.
There was a time when the richest Americans paid their fair share to run the government. The income tax was adopted in 1913, and the estate tax was adopted three years later, in 1916. These two taxes originally applied to only the wealthiest Americans, leaving more than 95 percent of Americans unaffected.
The system was expanded to apply more broadly to fund World War II, but the focus on the rich was maintained through a rate structure that imposed higher tax rates on higher-income individuals.
Though far from perfect, these rules generally worked, at least through the 1970s. People assumed that the estate and capital gains tax took care of taxing the rich.
That is, until somebody decided to call the estate tax the ‘death tax’. Not only were the rich against it, but the majority of Americans were under the illusion that, having accumulated money after a lifetime of hard work, the government came along and taxed the dying, so that nothing would be left to their heirs. Nobody mentioned the fact that the exemption of the estate tax was so high that it didn’t apply for most people, except the super-rich.
The result is that the amount of money raised by the estate and gift tax is minuscule, accounting for less than 1/2 of 1 percent of total federal revenue.
The few times when tax reforms were implemented were moments when the economic system was under threat.
Special taxes were applied to the very wealthy during and after the Great Depression, when socialism and communism became appealing alternatives to the starving working class. The people in charge realized that capitalism itself was under threat.
But after the USSR collapsed, such threats against capitalism have largely disappeared, which makes special taxes on the rich appear less urgent.
Buy, Borrow, Die
Step 1: Buy
The "buy” part is what it sounds like. You use some of your wealth to purchase assets, such as stocks, real estate or artwork. Ideally, if following this strategy, an investor would buy assets that could potentially grow in value on a tax-deferred basis and yield passive income – money you don't have to actively work to earn.
Part 2: Borrow
Use those assets as collateral for loans. In this scenario, there could potentially be a double tax benefit since you wouldn't be on the hook for capital gains tax, and the loan proceeds are not counted as taxable income.
Part 3: Die
Wealthy people understand the importance of estate planning and what happens to assets when you pass away. Minimizing estate tax is often a top priority for many, as doing so could potentially help you leave behind more of your wealth to your loved ones.
Additionally, heirs could benefit from a step-up in the cost basis, which changes the taxable value of inherited property by resetting it to the asset's fair market value at the time the previous owner dies.
Charity
There are two types of charities in the US: public charities (the soup kitchen down the road) and private charity funds. The private funds are controlled by the benefactor. There are no rules that say that the money has to be distributed within a certain time frame. In other words, the donor gets the tax benefit without paying out a cent until he decides when (and where).
Together, the charitable tax benefits that reduce income, capital gains, and estate and gift taxes can cut a wealthy donor’s tax bill by up to 74 percent of the value of the donation. This means that a donation of $100 million could generate up to $74 million in tax savings for the donor.
Tax benefits for donors translate to forgone revenue for the federal government—revenue that would otherwise be available to be spent for the public benefit, or to pay down the national debt, or even to reduce tax burdens for others. Without tax benefits, the wealthy are giving away their own money; with tax benefits, they are giving away the American taxpayers’ money as well.
Often, the motivation of the superwealthy to donate money to charity is what Madoff calls ‘hyperagency’- The idea that everything in life is subject to one’s control and manipulation. Just because someone has money—and maybe even created a successful business—does not mean that person knows how to solve the problems of the world.
A good example of this is Galton’s theories of a super-race. This led to the atrocities committed under the banner of Eugenics, the sterilization of women, and worse.
While the government has its own limitations—it can be slow, bureaucratic, and hampered by the need to account for lots of stakeholders—these traits also make it less likely to go one hundred miles an hour down perilous pathways. And while the government can no doubt make its own mistakes in backing the wrong horse, it is at least grounded in principles of democracy. We accept the mistakes of the system because it is a system of our own making.
Warren Buffett may believe that he can do better for the world by committing his extraordinary wealth to philanthropy rather than contributing to paying down the national debt, but that doesn’t mean we have to agree with him.
There is no reason we should promote the creation of dynastic wealth by giving a free pass on taxes as multibillion-dollar businesses—like Walmart, Koch Industries, and Mars—get passed from generation to generation, particularly because the way that wealth is passed this way magnifies political power.
Unlike pre revolutionary France, the United States was founded on principles of equality. These principles, though incomplete at conception, have served as a continuing guide for the ongoing process of building “a more perfect union.”
Bringing the rich back into the tax system is an essential step in this ongoing endeavor.
Madoff recommends three steps to improve things. The first is to repeal the estate and gift tax, which are broken and unfixable. Next is to repeal the income tax exclusion for inheritance and gifts and tax unrealized gains at death. She also calls for meaningful payout requirements on donor advised funds.
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