Boston Law Professor Discusses Tax Code and Wealth Inequality

A Boston University law professor has released a new book titled The Second Estate: How the Tax Code Created America’s Aristocracy. In a recent talk with podcast host Kara Miller on “It Turns Out,” she examined how the American tax system has evolved over the past four decades, contributing to rising inequality. Below is a summarized version of their discussion.

Miller: Low Salaries of Top CEOs

Miller pointed out that Mark Zuckerberg was listed as Meta’s lowest-paid employee in 2024, earning just a dollar. He isn’t alone; several millionaires reportedly take home $1 for their work each year. It raises the question: why do they earn so little?

Madoff: The Tax Implications

Madoff explained that taxation is the key factor. Labor income faces higher taxes, encompassing both income tax and payroll tax. A self-employed individual making about $60,000 might see over $13,000 go to taxes. Meanwhile, someone with a $400,000 salary could face roughly 30% taxed from their income. Thus, one way wealthy individuals sidestep taxes is by avoiding paychecks altogether.

Tax Strategies of Billionaires

She noted that billionaires like Elon Musk reported zero salary from Tesla in 2024, while Jeff Bezos’s annual income fell below the threshold for child tax credit eligibility. Even Warren Buffett’s earnings hovered around $100,000. While these wealthy figures keep their salaries low to minimize tax liabilities, they still see significant gains through stock appreciation. For instance, Bezos’s wealth surged by $80 billion in 2024 alone, allowing them to accumulate wealth without facing income taxes.

Shifts in the Tax System

Madoff argues that the tax system has historically moderated wealth concentration. Yet, changes over the last 40 years have enabled wealthy individuals to evade taxes on investments and inheritance. For example, prior to 1982, companies primarily distributed profits via dividends, which were taxed heavily. However, adjustments to SEC regulations allowed firms to buy back their own stocks, essentially altering how profits can be realized without triggering tax liabilities.

Accessing Wealth Without Selling

Many ultra-rich individuals, rather than selling their profitable stocks for cash, simply borrow against their assets. This is a common strategy for billionaires, using loans to support their lifestyles without incurring taxes. For example, figures like Larry Ellison are known to owe significant sums but do so by pledging their company shares as collateral, making this borrowing tax-free.

Inheritance Taxes and Public Perception

One would assume inheritance taxes would help, especially since transfers over about $15 million are subject to a 40% tax. However, the public narrative has shifted drastically, particularly during the George W. Bush era when some wealthy families campaigned to eliminate such taxes, branding them as unfair double taxation. Misconceptions have led many to believe that these taxes harm family businesses, but, in fact, there are regulations to protect them.

Current Tax Burden Distribution

So, if the wealthiest aren’t paying their fair share, who is? According to Madoff, it’s high-income earners who are often left to shoulder the tax burden. Those making significant salaries can pay nearly 50% in taxes. Despite statistics indicating that the top 1% contribute around 40% of income taxes, these figures can be misleading, as many of the ultra-rich do not rely on taxable income streams.

The Concentration of Wealth

Ultimately, the top 1% holds a staggering 30% of U.S. wealth, and current tax regulations do little to ensure they pay taxes on their growing fortunes. The implications of this ongoing inequality are clear, yet the system remains largely unchanged.