Tax System and Wealth Inequality

A Boston University law professor, Ray Madoff, recently published a book titled The Second Estate: How the Tax Code Created America’s Aristocracy. In a conversation with Kara Miller, host of the podcast “It Turns Out,” Madoff discussed the evolution of the American tax system and its impact on rising inequality over the last 40 years. Here’s a brief overview of their exchange.

Miller: Interestingly, Mark Zuckerberg’s salary at Meta was just a dollar in 2024. He’s not alone in this—many millionaires opt for a $1 salary. Why do wealthy CEOs choose this path? When can regular folks hope to pay themselves millions?

Madoff: The driving factor is taxes. Labor income faces significant taxation, including both income tax and payroll tax. For instance, a self-employed individual with an income of $60,000 would see over $13,000 go to taxes, whereas someone earning $400,000 could end up paying around 30% of their income in taxes.

So, many of the richest Americans sidestep taxes by avoiding traditional paychecks.

For example, Elon Musk drew a salary of $0 from Tesla in 2024, while Jeff Bezos made $81,840, which is low enough for him to qualify for the child tax credit. Warren Buffett, one of the highest-paid billionaires, earned $100,000 when bonuses are included. These individuals manage to keep their taxes down by keeping their reported salaries low. However, they still benefit immensely from the appreciation of their stock values. In 2024, Bezos’s wealth increased by $80 billion, Zuckerberg’s by $113 billion, and Musk’s reached $213 billion, all while sidestepping income tax responsibilities.

You argue that the tax system facilitates this rapid wealth accumulation. How does that work?

Traditionally, tax systems helped counteract wealth concentration, showing how they could draw significant contributions from the wealthy for public welfare. Yet, significant changes over the last four decades have enabled wealthy individuals to evade taxes on investments and inheritances, particularly in stock investments.

Before 1982, companies were limited to sharing profits with shareholders only through taxable dividends. Changes implemented that year allowed firms to buy back their stock in the open market, a move that has had far-reaching implications.

This shift enabled companies to increase stock value instead of distributing dividends. Hence, shareholders can benefit from rising stock prices without incurring taxes—an entirely legal yet impactful loophole.

But what happens when the ultra-rich need to cash in their investments? Won’t selling trigger capital gains tax?

For most, appreciating assets only translate to real wealth when sold. The ultra-wealthy, however, can leverage their assets and borrow against them, thus accessing their wealth without incurring taxes. Billionaires like Larry Ellison and Musk often use their company’s stock as collateral to secure loans—debt that comes without tax implications.

Does this mean that the wealthiest don’t contribute their fair share to societal costs? What about inheritance taxes?

One might think inheritance tax would play a crucial role here. It could effectively tax gifts or wealth transfers exceeding around $15 million at 40%. However, this tax has lost its previous strength. During George W. Bush’s presidency, a campaign led by wealthy families aimed to abolish the federal inheritance tax, labeling it a “death tax” and arguing against its fairness.

The narrative surrounding this tax was distorted, with proponents claiming it harmed family-owned businesses and farms. Yet many of those advocating were not even liable to the tax based on the size of their estates. Currently, while an inheritance tax exists, loopholes remain untouched by Congress for decades, allowing the rich to preserve their wealth from taxation.

Although the tax did collect around $30 billion in 2024, this amount pales in comparison to the wealth amassed by the richest Americans—where the top 1% controls $50 trillion. To put it in perspective, the mere tax revenue from inheritances appears negligible against the fortunes these individuals can amass.

If the wealthiest aren’t shouldering the tax burden, who is?

When it comes to annual income tax, high-income earners—those making hundreds of thousands a year—often carry the bulk of that load. They can face a staggering tax rate, where up to 50% of their income may be siphoned off via taxes. It’s surprisingly common for them to feel they align more with the ultra-wealthy than with average workers, even though it’s the high earners, along with lower-wage workers, who bear the biggest burden.

Interestingly, while it might seem that the wealthiest individuals contribute significantly to tax revenues—like the statistic claiming the top 1% pays around 40% of income taxes—it’s important to note that many in that group accumulate wealth through means that aren’t captured by taxable income. A notable portion of the bottom 40% pays no income taxes at all.

Ultimately, around 30% of total U.S. wealth is held by the top 1%, and under present rules, there’s little assurance they’ll ever be taxed on this ever-expanding fortune.