How To Fix The American Tax System - ft. Ray Madoff

There's a statistic that's often used to confuse people, right? That the top 1% of earners pay 40% of the taxes, and 40% of Americans pay no income taxes at all. But that talks about the high income earners, not the high wealth owners, because as we talked about the high wealth owners, can have no income. They're just as likely to be in the 40% that have, that pay no income tax as they are in the top 1% that pay all the taxes. So many people are like, wow, this made me enraged. I'm a sucker. I think one of the big problems is that the high income earners have thought that they were aligned with the high wealth owners. They thought that they were rich maybe because they have a couple of million dollars and a house and things like that. They have nothing to do. High income earners have nothing to do from a tax perspective with high wealth owners. I'm Bethany McLean. Did you ever have a moment of doubt about capitalism and whether greed's a good idea? And I'm Lucia Zingales. We have socialism for the very rich, rugged individualism for the poor. And this is capitalism to a podcast about what is working in capitalism. First of all, tell me, is there some society you know that doesn't run on greed? And most importantly, what isn't? We ought to do better by the people that get left behind. I don't think we should kill the capital system in the process. More and more people are throwing around the world feudalism these days, especially when they're talking about capitalism. But a lot of important distinctions are getting lost. In a capitalist system, wealth is accumulated. In a feudalist system, it's inherited. In capitalism, the wealthy aren't supposed to get special tax breaks. But in a feudal society, the nobles often referred to as the second estate are completely exempt from taxes. So, is the United States becoming a feudal society with the second estate exempted from taxes? Unfortunately, we're sorry to report. The answer might be yes. One third of our billionaires have inherited their wealth. More importantly, they pay very little in taxes. In 2011, Jeff Bezos paid zero in taxes. Even got $4,000 in child tax credit. As Ray Maddough, a tax law professor at Boston College, explains in a fascinating new book, The Second Estate, The wealthy avoid taxes by borrowing against their stock. They can spend freely while showing no income. And when they die, their stock passes to their ears and its current market value letting their ears pay off those loans without ever owning capital gain taxes. This isn't just annoying to the rest of us who actually pay taxes. It's dangerous for democracy. As Alexa Stichthoekville warned, what is most important for democracy is not the great fortune should not exist. But the great fortunes should not remain in the same hands. So Bethany, you do pay taxes. I thought that he was smart. President Trump said, if you're smart, you don't pay taxes. I don't know whether it's a compliment or an insult to be considered smart in these times. But I guess Luigi, I am not smart. Neither am I. So a fascinating book about taxes may sound like an oxymoron, but it's not. The book is incredibly well-written and entertaining, but also enraging because she expresses what has happened to the tax code and who did it. To find out who killed the estate tax and what it means for the way our political system works, let's bring in Ray Maidoff. How did you get into studying taxes? And as part of this, is it one of these subjects that is so critically important? You make it interesting, but is it cloaked and boredom as a way of making us all not pay attention to something really pivotably important? And how did you get past that in your own? Yeah. Okay. So two very, very interesting questions. Well, first of all, I was a philosophy major in college. Philosophy has a lot of questions like, you know, what is redness and is ethics just subjective? All of this type of stuff, right? Tax is very much that type of analytic thinking. Like, is it debt or is it equity? What is the nature? Instead of what's the nature of redness, it's like what's the nature of debt? But what I would say has made it unbelievably rewarding to me over the course of my career. If you can get yourself past the intimidation factor, you can see the secrets of society. You can see how money moves and it's all clear to you when you get past that. And I think that's what makes it such a tremendously important thing for people to understand. And I completely agree with you that there's a problem because people think, tax, yuck, it's like either it's too hard, it's too many numbers, it's too boring. What's the point in understanding anyway? Because the rich will always game the system, right? All of those things has been a disservice to the public. It is not actually too hard to understand. And I think that was the whole motivation of this book is to be like, look, there's like three basic rules here that you have to understand that are causing a lot of problems. And it's not because of complex gaming, it's because our system is broken and is intentionally in some ways writing out the rich by not fixing these problems. In your new book, Second to State, you explain why the focus of the political debate on tax rates is misleading. In fact, we'll fully misleading. And why we should focus instead on taxable income. Can you explain this to our listeners? So much of the conversation around taxes has been about the fact that top tax rates have come down significantly since, let's say the 1970s, 1980s, 1990s. Although that is in fact true, raising tax rates would do nothing to actually curb the problem of our wealthiest Americans avoiding taxes. And that's because the way the wealthiest Americans are able to avoid taxes is they avoid taxable income, so they don't have income taxes, and they avoid the estate tax, so they don't pay estate taxes. So proposals to raise tax rates would do nothing to bring them into the system. You had an example that actually shocked me. Warren Buffett's famous op-ed, calling for everyone to pay higher taxes and pointing out that the differential between his tax rate and his secretary's tax rate, and you pointed out that that argument was actually incredibly disingenuous. And I was shocked by this, so can you just back up and explain this? Because I think it really does illuminate your argument. Yes, so Warren Buffett published an op-ed called like, "It's time to soak the rich" or something like that. And he complained about the fact that his secretary paid taxes at a higher tax rate than he did. And so far, that much is true. She paid taxes on her income, so at rates as high as 37% today, and she paid additional payroll taxes at 15.3%. And as Warren Buffett said, he himself had capital gains, capital gains were taxed at like 20%, therefore this system is unfair. However, what he left out of the story is that he himself would have paid hardly any more taxes at all under the Buffett rule, because although he did recognize some capital gains, his biggest tax avoidance was the fact that he didn't have to pay any taxes at all on the enormous growth of his wealth. And that's because, first of all, we don't tax gains, but second of all, the way he operated Berkshire Hathaway is to never distribute dividends. And he actually tells quite a funny story about how there was only one time that Berkshire Hathaway issued dividends. And as he said, he must have been in the bathroom at the time. Dividends for much of the country's history were taxed at the highest ordinary income rates. So by not issuing dividends, they didn't have to pay taxes. Prior to 1982, companies were not allowed to buy back their own stocks because it was seen as market manipulation. I didn't know that. Yeah, so it was it was a rule that was put in place by Reagan Reagan put in place for the very first time the chairman of the Securities Exchange Commission was somebody who had worked for EF Hutton. And he said, let's allow stock buybacks, even though we never have before, because they were seen as a form of market manipulation. So in the 1970s, like 70% of returns were in the form of dividends. And now it's I think since this change of rule in 1982, I don't think it's ever been more than like 17% of returns are in dividends. So we have the case of the disappearing dividends. When we look at being taxed on investments, right, back in the day when investments were shared in dividends, the federal government collected a tax when the dividends were distributed. Now, when these stock buybacks are occurring, and we have the, you know, the pension funds are happy to sell because they don't pay taxes, but the taxable investors, they don't sell and they just have the boosting values of their stock. And so who is one of the main victims of this for my point of view, is the federal government, which no longer is collecting tax revenue on the distribution of corporate profits? What I find fascinating in your book is that there was a time not that long ago, at least for people who are a little bit older, where, what the Americans were paying taxes. So what happened that exempted the reach from paying taxes? Right. So one of them is one we've already discussed, right? If people had a lot of stock and they got a lot of dividends, dividends were taxed as ordinary income, meaning at the same rate as compensation income. So if a company company shared its profits in the form of dividends, holders of stock had a lot of taxable income. But the bigger problem has occurred in connection with inheritances. So we have a system where the income tax backs off of taxing inheritances because we have an assumption that we have this sort of robust estate tax that's doing its job and imposing taxes at what was at one time quite a significant rate. But what has happened is that beginning in the 1990s there was an assault on the estate tax and few people realize that while it stands in form, it has been entirely eviscerated and is no longer serving its function. The estate tax stands in name only and is providing cover for the rich but not actually imposing taxes. Can you go into some more detail about how it's performing cover for the rich and also elucidate perhaps a point that you've made that it's very important that it stands in name only. In fact, that serves as yet another cloak. Let's start by looking back about 40 years, right? When the estate tax was just a normal well-respected part of the tax system. It wasn't a big political issue. And at the time, Congress made regular changes to the code to keep the estate tax working as it was supposed to do. So for example, one of the early programs that we've been working on is the state tax problems was people would set up these long-term trusts that would pass from generation to generation and you wouldn't pay taxes. So in 1976 and then revised and reissued in 1986, Congress enacted something called the Generation Skipping Transfer Tax. It was a whole extra tax designed to ensure that taxes would be imposed at each generation. So if a grandparent made a gift to a grand child, you'd pay two levels of tax. The estate tax or a gift tax and the generation skipping transfer tax to make sure the tax was imposed at each generation, right? They did that in 1986. 1990, they addressed another big problem in the field, which is people engaging in gaming techniques to reduce the value of an asset just long enough for it to pass from the older generation to the younger generation, right? Both of these things happened under Republican presidents. In 1990, 18 of the richest families got together and were like, "We got to get rid of this estate tax. This thing is a big problem for us." And they did something very smart, which is they hired this Frank Luntz. And Frank Luntz was a pole star and a communication expert. And he said to them, "Look, if you call this thing the estate tax, nobody cares. Everybody's happy to keep it in place because it sounds like something that applies to rich people." But let's rebrand it. Let's call it the death tax, right? Something that comes for everyone and something that's really, cruelly time, right? Really kicking people when we're down. And let's not use you rich people, the Walten, the Cokes, the Mars family, right? Famous rich people. Don't use you shouldn't be advocating. Instead, let's use small business owners. And we are going to convince the public that this is a death tax that is an unfair double tax that hurts family farms and businesses. And of course, they were unbelievably successful in this way beyond their wildest dreams, the moment that I realized how much of a losing battle it was. And that is when I was being interviewed by a journalist, some vaguely left-leaning journalist. And we were talking about the estate tax. And he said, "Yes, but isn't that an unfair double tax that hurts family farms and businesses?" And I was like, you know, "at two lefty journalists." But I realized how thoroughly successful that message was, right? George W. Bush ran on this, repealed the death tax, right? Very successfully. And he actually put in this 10-year plan that resulted in one year, the year 2010, there was no estate tax at all. But then Obama came back and we'd think, "Okay, we're going to fix this," right? But no, Obama didn't try to fix it either. Because at that time, it was so politically unpopular that Obama raised the exemption amounts and just tried to get rid of the issue. And then, of course, Trump came and he raised it even further. However, the bigger problem with the estate tax is not the ever larger exemptions, which are currently $15 million. That is the fact that all of these planning techniques, the things I teach my students, right? They go by names of like crats and cruts and grats and gruts and nymph cruts and flim cruts and dynasty trust. There is a very popular, very bad planning technique of dynasty trust when the whole purpose of the estate tax was to eliminate dynastic wealth. But now people are embracing it. Oh no, we're just calling it a dynasty trust because we want to create dynasties. And guess what? The tax lets us do it. Let's us do it. And that is because the last time that Congress adopted a reform to the estate tax was 1990, 35 years ago. So estate planners have been developing one tool after another to avoid taxes and Congress has engaged in complete quiet quitting. They haven't done anything at all in those 35 years. And that's why I think was this very surprising thing that happened this summer with Trump's tax bill. And what was the state tax repeal? I thought that the death tax was like an immoral double tax on family farms and businesses, but all of a sudden no one's advocating for it. And I think it's because they know that they are better off with this situation than they would if the tax was actually repealed. Because right now, by having an estate tax, people, they can say, well, of course, inheritances aren't taxed. Of course, we have this thing called step up in basis. Of course, we don't have to worry about not taxing gains. We don't have to worry about not having a wealth tax because the estate tax is there to serve as a sweep up tax. So everything is fine in the world. So it provides a cover for all of the failures of the income tax. So let me tell you my story with the death tax. The only time I was in an interview at Fox News was 2010. I was in the interview for something else. And then they asked my opinion about the death tax. I answered like an economist that said, look, all the distortion in taxes is because you tried to avoid something because it's tax. You cannot avoid the death. And so is the perfect tax. And that was it. I was never invited at Fox News again. But since we are sort of calling from Illinois, how did the Pritzker family avoid in paying taxes on the estate? Because I think that they completely skip one or two generations of taxes. Well, they're all skipping multiple generations of taxes because of the fact that the generation skipping transfer tax. So it was enacted in a 1976 version. And then it was enacted again in a 1986 version. And the 1986 version created a loophole that people could slip through to create dynasty trust. And originally, it was just a million dollars. It was so small, who would even notice it. And then, as it became bigger, the law morphed in all sorts of ways to enable it to be bigger and bigger and bigger. And now I have talked with lawyers who have told me that they have many clients who have multi billion dollar dynasty trust. And that's because of all of these tools that can be used, the Congress doesn't close. And one of the absolute worst ones, I'll just give you the name, are the Grand Torre Trust rules. And here's what's crazy about these rules. The Grand Torre Trust rules were rules that were enacted to close a particular loophole when trusts were subject to tax at a lower rate than individuals. So it was designed to address a problem to say, in certain cases, we're going to ignore the trust because we don't want you to get these lower tax rates. That's no longer the case. For many, many years now, for decades, individuals are taxed at a lower rate. There is no longer an advantage of putting money into trust. So they should just get rid of the Grand Torre Trust rules. But instead, they provide a valuable opportunity for estate planners to do all sorts of gaming techniques where they sell assets into their trust because the trust is disregarded under the Grand Torre Trust rules. And that's why one of the worst of these devices is called, "I dig it." Intentionally, defective Grand Torre Trust. These are trusts that are Grand Torre Trust. Grand Torre Trust used to be something you didn't want to be because they closed loopholes. But they are intentionally creating Grand Torre Trust because of all of the gaming that's possible. And as I think somebody wrote in a student note, "I dig it, but I shouldn't be allowed to." This is just an example of all of the proliferation of gaming tools and why is Congress leaving them there? Why are they allowing those things to persist? There's no reason for those rules to be there. You point out that this happened in 1990, basically. That's a structural change. This is awfully close to 1989 and they fall of the Berlin Wall. And is that just a coincidence? No. I think that you're absolutely right. If we look at it historically, there have been two things that have played a strong role in when we text the rich. And one of them is when there has been a real threat of socialism and then communism. So our income tax in a state tax system were enacted in 1913 and 1916. And what's interesting is if you look at the newspaper articles and things of the time, you had lots of people advocating for the importance of taxing inherited wealth. Right? We had our new rich people, the gilded age, the robber barren era, and now their kids were had all this money and they were running around acting like royalty and wearing crowns and having lavish parties and conspicuous consumption and massive wealth inequality. Like we have inequality today, but there was an important difference. At the time, there was a real risk of socialism. There were lots of countries since socialism. There were lots of socialist movements. A lot of Americans were socialists. People that wanted to keep capitalism felt that they had to prove that capitalism could work for the public. And so that's why the initial income tax and a state tax were only imposed on the richest 5% of Americans. Nobody else was subject to the tax. It wasn't until World War II where they, there's a big growth of government and that's when they expanded it from a class tax to a mass tax. And then later on, there was of course the threat of communism. Tony Jutton, others have said that the elimination of communism. Right? And as Bronco Molanovic has talked about, I think he was on your show, right? The fact that capitalism reigns supreme and there is no alternative means that there is less pressure on the wealthy to prove that capitalism can work for everyone because what are people going to do? You know? So very often you portrayed all the stories in which there are some rich people assembling a room and deciding as conspiracy theories without any foundations. Okay? But I respectfully disagree. But go on. No, no, no, no, no, I disagree as well. But that's what I want. In your book, you talk about two real world conspiracy of this type that are well documented. Can you remind us of this two conspiracy? Because I think most people don't believe some people claim that the term conspiracy theory has been invented by the CIA to basically legitimize any attempt to attack any real conspiracy. So can you tell us sort of the two conspiracy that are currently two? Well, the one is about the estate tax. Is that the one that you're talking about? Yeah, the one is the second one is about the philanthropy. Yeah, the one about philanthropy. Yes. The larger view of philanthropy is that it's a great deal for society. And people will often economists in particular love to use the example of well, somebody gives a dollar and it saves them 30 cents in taxes, right? You're luring in charitable dollars. The problem with that description is all sorts of falsehoods behind it. One of it is that 90% of Americans get no tax benefits for their charitable giving. So charitable giving is often supported on this idea that it promotes pluralism, right? Let a thousand flowers bloom and if different people they all get to have their interest supported because we all get this 30% matching grant, right? But for 90% of Americans they get no tax benefit for their charitable giving because they itemize their deductions and their income tax benefits are severely limited by a number of means. And also by the way, for working Americans, they can never eliminate their tax liability through charitable giving, right? Because even somebody who gives their entire salary to charity does not get to pay no taxes. They still have to pay payroll taxes and their income tax deduction is limited to about half of their income because it matters to us that people pay taxes at least when it comes to working Americans. When it comes to the richest Americans, however, they get some income tax benefits and if they don't have any taxable income then, you know, then they don't get that many income tax benefits. But in addition, they give appreciated property. So they get capital gains benefits which are worth 20% of the gift and a state and gift tax benefits which are worth 40% of the gift. Their tax benefits are between 60 and 74% of the value of their donation, right? Somebody who gives a well planned gift of a billion dollars is being supported by $740 million of foregone taxes from the rest of us. Then we look at what it is that the wealthy do with their giving and increasingly more and more money is going into their own donor-controlled entities, either private foundations or donor advice funds. And those are basically, they're basically bank accounts that hold the money of the rich, give upfront tax benefits and the way the rules have developed, they no longer impose any requirement at all for that money to ever be spent to charitable ends. And instead, it can just be, you know, available for use by future generations to throw their way to round, you know, get legacy admissions and special floors and hospitals and all of the elite connections that one gets when one has the capacity to give big dollars. And so our current system is really in need of fixing because we are losing massive amounts of tax dollars for very uncertain benefits. But sorry, this is not just an accident. There was a meeting, another secret meeting taking place in 2009. So tell us about the secret meeting. Ah, the secret meeting, yes. Okay, so I mentioned there have been times where we have raised taxes on the rich, sometimes in connection with wars and sometimes in connections with massive societal problems, right, like the depression. And of course, we had these problems in 2008, 2009. At that time, Bill Gates, Warren Buffett and David Rockefeller got together and said like, "Whoa, we got to do something about this." And they sent out letters to the 400 richest families, which of course we all now know because of the Forbes 400. They wrote to them all to say, "Hey, there's a problem now, right? The country, everybody is suffering. We've got all this money. It's being advertised to the world that we have all this money." They didn't exactly put it that way, but they said, "We need to do something to address this situation." What they decided to do after a year of meeting, secret dinners, was they decided to do the giving pledge. And the giving pledge was it's just had its 15th year. And the giving pledge, it was with such fanfare. Gates said it was like redistributive taxes. It was the equivalent of that. And Bill Ackman, he had my favorite quote in his letter. He wrote, although his letter has since been pulled, but at the time he wrote, it's what John Rawls would have wanted in his theory of justice. And here's what the plan was. The richest Americans would make a non-binding commitment to give 50% of their wealth to whatever they thought good. That was it. That's what the giving pledge was. And they were tremendous fanfare about what a great thing this was for society and how we're all going to be benefited by all of this charitable thing. There was no payout requirement. There's no money of actually spending it. So if you just put it in your private foundation and you never spent it at all, that qualified for your 50% for your non-binding 50%. If you used it like the Mars family used it to fight tax reform that also counted. Whatever you thought was good, that would be good enough for them. And it does seem like the giving pledge was a little bit of a story to make it seem like the rich were going to really care. And I think probably to take the heat off them from taxes. And is it that Congress is captured by the very wealthy or is it that Congress is clueless and doesn't want to understand? I think it's three things. One is sure they're captured by the wealthiest. We know. I mean, they're always interested in serving the interests of the wealthy. As is everybody else in the world. And probably they think like taxes are boring. However, the bigger problem is that the public isn't advocating for this because the public has been duped. And that's why it is so important that the public be educated about what's actually going on here. And I think that one way of seeing it is to actually look at some numbers to see how it is that we are in the situation that we're in and why it's as bad as it is. And I'm going to wait to be invited to actually talk about numbers before jumping into them because I know how numbers can be. Luigi has an economist he should like numbers. I was once upon a time a math major. I'm supposed to somewhere in my deep dark past like numbers too. So let's talk about some numbers. Thank you so much. You know, I've been wanting to. Okay. I just want to throw a couple of numbers out there. And I'm going to use the most simplified version of them because we don't have a chart to look at. In 2024, the country took in from all sources income taxes, payroll taxes, estate taxes, corporate taxes and tariffs and fees at the national parks, right everywhere. We took in about $5 trillion, $4.9, but we'll call it $5 trillion. Okay. And we spent a little under $7 trillion on all the things that the country spends money on. National defense, interest, social security, Medicare, everything. Okay. We took in $5 trillion. We spent $7 trillion. We had a shortfall of just under $2 trillion. Okay. Guess how much wealth, but you don't have to guess because you read the book is owned by the richest 1% of Americans in 2024. And I know you know the answer. So, but it- - 47 trillion. - Actually 50 trillion by the time you put in Q4. The book has only gets up to Q3, but by Q4 it was 50 trillion dollars. Okay? Now people might say, well you're confusing stocks and flows or whatever it is. Is that what you economist say, Luigi? - Yes. - Yes, love to say stocks and flows. But the issue is that when it comes to the richest Americans, we don't know their flows of income because they're not reporting it, right? They don't have to report the increase of their wealth by investment gains and they don't report the inheritances. So it is all- So somebody inherits $100 million. On our records, on our tax returns, they look the same as a person who has earned nothing. They look identical and obviously, their capacity to pay is very different. So how much taxes were collected by the estate tax? Let me tell you a little bit about what the estate tax is imposed on. It is imposed on a flat 40% on all transfers by gift and at death. So you get the first 15 million free and then all those other transfers are supposed to be subject to tax at a flat 40% when the person transfers. And by the way, gifting is happening in every single law office around the country right now because it is the most effective way of reducing one's tax liability. But 40% tax on all of those transfers, right? I mentioned the billions of dollars in these dynasty trust and things. Okay, the amount of revenue raised on this $50 trillion of wealth. Obviously, it wasn't all transferred in 2024. We'd have no idea how much it was transferred, but the total tax raised $30 billion, 0.06% of all of that wealth was $30 billion. And that's an amount that Elon Musk has like both earned and lost in a single day in 2024. So the estate tax is really doing nothing by every except for supporting my students and me as the lead author of a book on estate planning. But it's in terms of generating revenue for the country. It's not doing a single thing. - So if you were queen for a day, what would be your reform? - Yeah, so I have a few reforms. First of all, I love that reference of queen for the day by the way. And it's a very old school. But here's what I would do. First of all, I think we need to abandon this idea of having the separate tax on the rich, the estate tax because the effect of it is to provide cover for the rich, right? When we have this tiny tax that raises less than one half of 1%, right? People think of it as some big huge burden and it doesn't do anything. So it's been so pumped up in people's minds that they think it's really real. We have to get rid of the estate tax and bring inheritances into the income tax. I also think that what we need to do is we need to bring investment gains into the income tax. Because right now when somebody has assets like let's take Mark Zuckerberg, since 2023, he's acquired $142 billion of wealth, right? So his current wealth is over $200 billion. This will not be subject to tax during his life. And if he passes it on either a death or during life to his kids or to anybody else, it will never be subject to tax either. Because none of those are taxable events. And as we know, the wealthy people don't have to sell. They can simply borrow against their assets and live a tax-free existence. So we need to find a way of taxing gains. This is a very hot topic now. Obviously the wealth tax would be one way that would try to currently tax that amount of the enormous wealth by the and had a version where we would tax the gains each year. I personally am concerned about something that would have an annual tax because of the tremendous incentive it would provide for people to hide their value of their assets. And I'm concerned that the first way they would do so is to stop investing in the stock market because it's so easy to value, right? We all know what the reason that we can say, these are their interests. We can track them as because their values are all publicly traded. But there's all sorts of other super rich people who own partnership interests and tangibles and all different types of property interests that are much more difficult to value. And I'm concerned that we would see money wishing out of the stock market and into these hard to value assets. And that would impose a tremendous burden on all the rest of us who count on a robust stock market for our retirements and other savings. But there's a midpoint between taxing every year and never taxing. And that is to say that when property is transferred, whether by sale, by gift, or a death, right? And as Luigi said, one of those is going to happen, right? One of them is certain to happen that we impose tax on the gains then. And this is a rule they have in Canada. And it was proposed here in the United States by both Obama and Nixon. And there's no reason for us not to have that rule. So we should tax gains either whenever the person disposes of the property and we should tax inheritance to people who receive it. And finally, we need to do something about our rules regarding philanthropy, which is a complete escape hatch for people who want to avoid taxes. And I think we need to reform those rules as well. What about the arguments that aggressive tax reforms here could push wealth offshore? That these days, Scott Gallowy is one of the people who makes this argument that the ultra rich are bound to no country. And they can just simply pick up and move their wealth in a world where countries are competing for the rich, just as states here are competing to have businesses located in them. What stops people just from leaving the country? I think that's 100% wrong. I do agree about states. I think that states are vulnerable in their capacity to impose taxes on the rich because it is so easy to move from a state. Maybe in Europe where people can freely move within different countries, right? It's very different. But here in the United States, first of all, if you leave the country, you're still subject to tax for 10 years, just the same as if you were in the country. And you have to give up your citizenship. And I just don't think people are really freely giving up their US citizenship. It's just-- it doesn't really seem likely to me. So I'm sorry to break to you. You're not queen for a day. So you need to have an majority to reach this goal. So how do you do politically to implement this? Because in a war in which both republics and democrats rely heavily on financing by billionaires, I don't see this coming any time soon. Well, first of all, I think you have to realize that the current problem is that there's some pressure from the public, but much of the pressure from the public is kind of ill-informed. Like we should raise tax rates or we should get rid of billionaires or things like that. There's an uninformed public. So I do believe the first step is that the public needs to get more informed, and that would make a big difference. And I think that democrats have played a role in creating this problem by framing things like we have to raise income taxes on people who have more than 400,000 right. We're conflating high income earners and high wealth owners. So that was like a Biden proposal. And I think that high income earners really are paying a lot of taxes. There's a statistic that's often used to confuse people, right, that the top 1% of earners pay 40% of the taxes, and 40% of Americans pay no income taxes at all. But that talks about the high income earners, not the high wealth owners, because as we talked about the high wealth owners can have no income. They're just as likely to be in the 40% that pay no income tax as they are in the top 1% that pay all the taxes. But the people who really do pay all the income taxes are high income earners. They're paying the vast majority of the income taxes, and they also pay payroll taxes on top of that. So I think the public needs to be educated. And I think democrats have harmed things by conflating high earners and high wealth owners and saying all of those people are the rich. The other thing that I really think has been a mistake is to say that billionaires are a problem. We have to get rid of billionaires, because that suggests that what we need to do is impose more and more taxes on the rich, rather than the more accurate statement that our billionaires are able to avoid taxes altogether. And I think if the public knew that we had created a second of state that rich people cannot pay taxes, can rich people don't have to pay taxes, right? It's like, you know, it's like salad or french fries. It's their choice. Taxes or no taxes. I don't think the public would accept that, right? Because people-- and I know it from the reaction that people have had to my book. I'm a sucker. They thought that they were rich, maybe, because they have a couple of million dollars and a house and things like that. They are completely, they are Mars and Venus totally different from each other. And I think recognizing the alignments is would make a difference. I find your strategy of breaking the coalition between the high earners and the high wealth individuals very clever. However, I'm concerned because you say, oh, if the people just knew, but you just said that the people are confused not because they're ignorant, is because a lot of people pay very heavily to confuse them. And we are moving into the world where more and more media are owned by billionaires. So first of all, I ask as a favor that at the end of your tour, you suddenly be the list of where you got interview and what podcast you. And I want to do a comparison between podcasts that you and podcasts that have the abundance book, for example. And I'm sure that you can do an interesting analysis on that. But even unfortunately that we leave in a world of the media that is fairly captured, how can you break it through? Yeah, you know, I mean, let me just confess in case it hasn't come out. I mean, I'm an incorrigible optimist. So that you'll have to take everything I say with a grain of salt, but I feel like otherwise it's just despair. I mean, there's so many ways that one can turn to despair, but I kind of just refuse to do it. Everybody's talking about taxing the rich, but then the proposals that are made are not actually going to address the problem of taxing the rich for the most part. I mean, you know, some of them may be a wealth tax would, but it's the real problems with the constitutionality of it. So I believe that there is a hankering for this information. I think that young people have a hankering. So I just have to hope that breaking through is possible. Although I agree, you know, I had a piece in the Wall Street Journal that the editor wanted to publish as a front page story and the senior editor said, you know what, we think we want to do beauty queens of Magga instead. There have been other things that we think, well, this can never change and it changes. So I do think that Pendulums do swing and that's possible for them to swing back. Because we're certainly way over on the other side right now. If you're enjoying the discussions we're having on this show, then there's another university of Chicago podcast network show you should check out. It's called the Chicago Booth Review Podcast. What's the best way to deliver a negative feedback? How can you use AI to improve your business strategy? And Wilhae is achieving a soft landing so very hard. The Chicago Booth Review Podcast addresses the big questions in business, policy and markets with insights from the world's leading academic researchers. Its groundbreaking research delivered in a clear and straightforward way. Find the Chicago Booth Review Podcast wherever you get your podcasts. It's interesting, I have found myself on the other side of the tax equation I have often thought about the numbers that she cited sort of with a sneer about the huge amount of taxes paid by those at the upper end of the income stream. And I've actually never thought about that being a misleading number. I found this fairly revelatory. I'm not sure how realistic her solutions are back to our previous discussion about the fact that we might be becoming a plutocracy. But I like that this is something that has the potential to galvanize people. Yeah, I thought that she was pretty clever also from my political economy part of you because her suggestion was not trying to reintroduce the state tax, was to kill the state tax so to kill any pretension. What I got from her book, I don't think she would be unfair to put in a mouth, but I think that there is a lot of misinformation even from people that pretend to be nice like Warren Buffett. So realizing that the Warren Buffett rule, the famous Warren Buffett rule so touted by President Obama would not have changed anything for Warren Buffett or Bill Gates. It's pretty amazing. I found that absolutely stunning. I completely believed in the benevolence of Warren Buffett and had no idea that that rule would actually change nothing. And it does help to square these two things that have long felt incompatible to me, which is the sheer amount of rage that people in the upper middle class feel about the amount of taxes that they're paying. But then when you look at it, if you look at it purely on an income tax basis, you think, well, that's fair. That's the way it should be. But of course, it isn't fair. And this squares the circle as to why it's not fair. I thought that was or reveals the hidden mechanism by which this situation really, really isn't fair at all. And I think people do know that they just haven't been able to analyze why, precisely why it feels so wrong. This answers that. It's funny because in the previous episode we're talking about, you shouldn't believe in the benevolence of the butcher and the baker, but you do believe in the benevolence of Warren Buffett. But our episode with Sven Becker also did make me think about Raymade, often an interesting kind of way because if you do believe his analysis, and I do that the state makes the market, taxing wealth is only fair because the state set the rules that enable that wealth to grow. In other words, I think the unspoken philosophical justification for people not paying tax on the enormous gains in their wealth is that, well, this is mine. And I built it and I created this. And therefore I don't owe any money to the government out of these increases in my wealth. But of course, not to pick on Jeff Bezos here, but per Becker's point that Amazon wouldn't exist without the rules laid down by the United States. So then why does this vehicle that contributes to that is the cause of the massive gains in Bezos's wealth get to sit outside of any obligations to America itself? And so I thought there's actually an interesting link between the two books. And in addition to that, I do believe that it's good to have some form of taxation of inheritance. Now, she wants to abolish the estate tax because she wants to tax inheritance at the receiving end, which I think is a clever solution. But especially when you exceed some small normal amount, this transfer of massive amount of wealth into generation of wealth is negative from a lot of points of view. And I think it's a good way to finance all the expenses we have. Yeah, it's hugely negative. And in so many ways, I mean, I think about there's almost a crisis of cynicism that you see in young people applying to college now because they all have a story about the person who is nowhere near as qualified, who got in because their parents donated the building. And everybody knows who those kids are and everybody knows that it doesn't matter what grades they get and everybody knows that they're going to get into whatever school they want to go to because their parents will donate something. And I just I think it's it breathes an extraordinary amount of cynicism at exactly an age group that you don't want to see becoming cynical about the way our system works. Yeah, absolutely. But I thought the other point that was clever is that if you start to fracture today's elite because at the moment there are a lot of people defending the the which and say we shouldn't tax them as well. So for the because at the end of the day, if you tax the reach, you tax also yourself and there is this solidarity if you want between the intellectual elite and the the the billiness. But she creates a kind of a wedge between the two and say, actually, we don't want to tax the intellectual elite more, we only want to tax the billionaires. I think that if you make that a rallying cry of a campaign is very difficult to resist people voting for that. And I I probably would have been without having thought too much about taxation admittedly, I probably would have been on that side before her book of look at how much people the wealthy already pay in taxes as a share of the money, the money collected. And I just would have seen that it was that it was a fake leaf of sorts. And I think I also might not have if I hadn't read Becker's book, I might still have had a hard time with that idea of taxing wealth because I would have thought it belongs to somebody. And I think when you when you start to realize how much of wealth creation is enabled by by the state and by the rules set by the state, that also does start to change things. I think it provides overall a philosophical framework for thinking about this differently. And maybe it would be a smarter spin than Mamdani's line about billionaire shouldn't exist. Billionaires should exist. Sure, fine. Create, create your billions, but pay your fair share. What we say is that the emitters of billionaires should not exist. Right. Yes, since when did we lose, lose sight of that? I guess maybe that is part of us becoming a more feudal society or plutocracy because there used to be, I think this pretty ingrained sense that the way you destroyed your kids was by having them inherit wealth and that that was a really bad idea. And that second and third generation generations became increasingly degenerate. And that seems to have gone by the wayside in today's America where people want their kids to inherit fortunes. And I wonder why that social change has come about? Why that cultural change has come about? I think that's what I think. I think there is a lot of social norms and the social norms have changed dramatically. She associates the taxation of wealthy people with a prescription army. Whenever there is a war, that's making it easier. But also whenever you actually call on everybody to fight, you find it very disturbing. The wealthy are not paying their fair share. As you probably know, one of the first movements of the time you were a publicans was to abolish the draft. Milton Friedman was a big opponent of the draft. But why remind me, I just don't remember from his book, why was Friedman opposed to the draft? I think it's a libertarian. He didn't want to force people. And then if you think in purely economic efficiency terms, why do you have everybody sort of tax in the most inefficient way that spend a year of your life like this? When I was a young kid in Italy and I had to go through the military service, I was very much in favor of a volunteer army. But you see economic efficiency isn't everything. There's something to be said for societal solidarity, right? Absolutely, absolutely. But then as the issue of prescription disappear, also taxes of the wealthy disappear. That is a really interesting linkage. I would love to see somebody explore that. I mean, it's obviously correlated. Is it causal? Fascinating. Fascinating. Anyway. So Bethany, let's take a bet. Do you think that anybody in the 2028 election will any candidate, I'm not saying even presidential candidate, even at the beginning of the campaign and prime minister, or anybody will run on a platform of taxation? I can't separate wishful thinking from an honest answer here. So I declined to answer. I plead the fifth or whatever our podcast opinion of the fifth is. What about you, Luigi? I think that somebody will. I think that somebody. I'm not so sure that maybe the winner of the primaries, but somebody will pick it up. I think it's such a good idea that it is hard to resist. I think so too. And I love what she said about the amount of uptake that her ideas have gotten already. And we'll see what happens with this podcast. But it'll be an interesting barometer of how much people care, I think. That's I think what that's one of the things that I like so much about her argument is it isn't just tax the rich, in which case it's really easy for people to just point to the income tax numbers and say, say, look at how much of their fair share of the rich are already paying. This is a much more substantive argument that that that that gets underneath all the fag leaves that were all that are all used to paper over this this this situation. And so I think it is different. I think because for me, I have a little bit for some reason, but of an automatic rejection of Bernie's position, perhaps because it doesn't seem as it because people tend to run away then from those income tax numbers or come up with ways of fudging them. And this to me feels like the first time that I've seen something that is solidly intellectually justified. Yeah. And also I think Elizabeth Warren ran on a wealth tax idea and Ray makes it pretty clear that it's probably unconstitutional. And also is a bit of a slippery slope. Once you start to introduce a wealth tax, what is the right amount is going to pretty quickly escalate. And it's funny that Elizabeth Warren escalated herself the tax during her campaign, proving the point. This is much cleaner. And to your point, Bethany is not a tax the rich, which is an American is actually tax everybody the same, which is very American. Yes. And thank you. That's very well said. That's it's it's an intellectual justification and an explanation of fairness. And that's what I like about it. And that's what resonated for me. Capitalism is a podcast from the University of Chicago podcast network. And the Steakler Center in collaboration with the Chicago booth review. The show is produced by me, Matt Hodeb and Leah C's Reign with production assistance for Utsav Gandhi, Matt Lucky, Sebastian Berka, Andy Shee and Brooke Fox. Don't forget to subscribe and leave a review wherever you get her podcasts. And if you'd like to take our conversation further, also check out promarket.org, a publication of the Steakler Center and subscribe to our newsletter. Sign up at Chicago Booth.edu/Steakler to discover exciting new content, events and