Pod Insights Prof G Markets How To Actually Tax The Rich — ft. Ray Madoff About this episode Scott Galloway and Ed Elson sit down with Ray Madoff to break down how America's wealthiest avoid taxes — legally. They dig into the biggest loophole the ultrawealthy use to their advantage and discuss what it would actually take to fix a system that was designed to fail.
Ray Madoff is a professor at Boston College Law School and the author of The Second Estate: How the Tax Code Made an American Aristocracy.
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Transcript 10,828 words · 16 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:29 Scott Galloway? Today's number five. That's the number of days left until Prop G Markets kicks off its live tour and a sold-out show in San Francisco. Tickets are still available in Chicago, Los Angeles, and Miami.
1:46 Speaker 06 Listen to me. Markets are bigger than us. What you have here is a structural change in the world's distribution. Cash is trash.
1:51 Speaker 07 Stocks look pretty attractive. Something's gonna break.
1:54 Speaker 06 Forget about it.
1:56 Scott Galloway? No joke today.
1:57 Ed Elson? No joke. Why is that?
1:58 Scott Galloway? Claire was giving me shit about our guests showing up in 20 minutes and I just didn't have time to find a offensive, yet not too offensive joke. So I'm going with our constant self-promotion of the tour.
2:09 Ed Elson? Well, the promotion is very important, especially for all of our Chicago listeners and our Miami listeners. I think we need to pump crypto a little bit if we're going to get all the Miami people to show up to the film. Or I think that I think that's that's something that we should maybe get into. We've got five days left to pump some altcoins. Maybe we could get into some cum rocket, maybe some fart coin, maybe just keep it simple and stick with Bitcoin.
2:34 Scott Galloway? This is just making a whole lot of sense to me.
2:36 Ed Elson? It's all resonating.
2:37 Scott Galloway? Yeah. No, this is a, so I told you who I I came up, actually, this wasn't my idea. This is who we're going to invite, although we're trying to track him down, but I think it'd be great if he said yes. So if he's listening, I think we should have Adam Newman.
2:50 Ed Elson? That's not a bad idea. I agree. You know, he's actually an incredible speaker and communicator to everything he says. He just.
2:57 Scott Galloway? Did I tell you my story about Adam Newman?
2:59 Ed Elson? I don't think so. Not coming to mind.
3:01 Scott Galloway? So I was invited to the JP Morgan Alternative Investments Conference, which is literally one of the, I'd say it's kind of second only to Davos in terms of what would happen to the GDP if all of a sudden the earth opened up and swallowed all the people there. And they had me do my predictions thing. I've done it twice, I think. And then they had me interview somebody. And the first year I'm up there, I did my predictions thing. And I said, and now I want to welcome to the stage Adam Newman. And I interviewed him and he went into his whole rap about community and elevating the world's consciousness and everything else he figured out on a wild mushroom trip that thought he could turn into a public company. So we did this thing and he's, he was like wearing no socks. He looks like Jesus. He's very handsome. He's very compelling. He has a whole rap. And then there
3:45 Scott Galloway? was a movie called We Crashed, where I played me. No, I didn't play me. Kelly O'Conne from Billions played me interviewing him. Somebody got ahold of the transcript. And the next year I was invited back and they had me interview some influencer who's come and gone. I don't even remember her name. And at the end of the thing, I said, I said, and by the way, you know, who the last person I interviewed on this stage was? And she said, what? And the audience went stone cold silent. I said, Adam Newman. And I guess that was not the right thing to say, according to JP Morgan executives. And I have not been invited back. I have not been invited back. Yeah. I've also been disinvited from another unbelievable gathering that I went to for the first time last year,
4:28 Scott Galloway? because I've been saying that Elon Musk would lose his case. And I guess the guy who hosts the event, the event is butt buddies with Elon.
4:35 Ed Elson? That's a shame, but you were right. I mean, that's what we learned this week. You were right.
4:39 Scott Galloway? I have that, Ed.
4:40 Ed Elson? So that's, that's all that really matters. Yeah. Yeah, I actually, I don't remember the, the story itself, but I remember watching, it wasn't a movie. It was a show. It was a series.
4:50 Scott Galloway? It's Apple. We crashed.
4:51 Ed Elson? Yeah, exactly. On Apple.
4:52 Scott Galloway? With Jared Layton.
4:53 Ed Elson? I remember seeing that scene.
4:56 Ed Elson? Yeah, with Kelly O'Conne, who played you very, very well. That was, I believe he was on Billions, I want to say.
5:01 Scott Galloway? Yeah, Dollar Bill on Billions.
5:03 Ed Elson? Yeah, I mean, he crushed that role. He nailed you.
5:05 Scott Galloway? Yeah, he's been, he's been on a lot of stuff. I thought he was, he played a better me than me.
5:09 Ed Elson? We should have him stand in for you on, on this show at some point.
5:13 Scott Galloway? You know, I'm all for it because I'd like to go buy, I'd like to go get Tapas right now.
5:18 Ed Elson? You've got about 15 minutes. Why don't you order some room service, get yourself a snack?
5:22 Scott Galloway? I did. It's sitting here. I'm in this beautiful hotel that feels like some, I don't know, prince or someone lived here and then got beheaded. But yeah, it's beautiful. I haven't been to Lisbon in a while.
5:32 Ed Elson? Very exciting. Well, we're going to learn all about princes in a second with our guest. But before we do that, I'm just going to reiterate, we are heading to LA on the 28th. We will have Ted Sarandos, co-CEO of Netflix. He will be our special guest. We'll be in Miami on May 30th, then in Chicago on June 1st. Governor JB Pritzker is joining us onstage. Tickets are still available to that show, also still available for the Miami show. And then on June 2nd, we're finishing things off in New York City with the one and only Anthony Scaramucci. I think there might be a couple tickets left in New York City. It might actually be sold out. Either way, go check it out. Go see if they're available. Prof G Markets Tour.com to secure your tickets.
6:16 Ed Elson? It's going to be a lot of fun. We're going to have a Q and A section at the end. You'll ask some questions. We'll do our song and our dance and we'll have some interesting voices onstage to discuss things with us as well. Very excited. Prof G Markets Tour.com.
6:30 Scott Galloway? Ed, should we get on with the show?
6:32 Ed Elson? Let's do it.
6:35 Ed Elson? Wealth inequality is reaching a breaking point in this country. The top 1% now command roughly a third of the nation's wealth. Meanwhile, the bottom half of Americans control only 3%, and 1 in 10 Americans still live below the federal poverty line. One instrument that might have created this divide is the tax code. There are a number of loopholes in the tax code that have enabled America's wealthiest to increase their wealth. And today, the average American is paying a higher tax rate than the wealthiest 400 people in the country. Meanwhile, audit rates, particularly of the ultra wealthy, have collapsed to a historic low. And we've spent some time discussing these issues on the show, but we wanted to bring in someone
7:18 Ed Elson? who has dedicated their career to studying how the tax code shapes inequality, and how the wealthiest Americans use it to preserve and to grow their wealth across generations. So this is our conversation with Ray Madoff, professor at Boston College Law School, and author of The Second Estate: How the Tax Code Made an American Aristocracy. Ray, thank you so much for joining us on the show. I'd like to start with a potential rebuttal to your thesis, which in so many words is that the wealthy are not paying enough in taxes compared to the rest of us. And then we'll get into the conversation.
8:01 Ed Elson? But the rebuttal, the statistic that a lot of people use, is the fact that the top 1% of Americans pay 40% of the federal tax revenue in America. So if that is true, if the wealthiest are paying most of the taxes, then the first question is, what's the problem?
8:20 Speaker 09 First of all, thank you so much for having me. I know that the two of you talk a lot about taxes, and it's wonderful to have the chance to join you in conversation on this important topic. And I'm particularly grateful that you have started with that question, because I call that the statistic that saves the rich from taxes. And we see it being published in lots of publications, Wall Street Journal, The Economist, The Washington Post has now joined in. And this is a statistic that is both true and highly misleading. And so the way it's described as the top 1%
8:56 Speaker 09 Pay forty percent of all income taxes. But what they're not saying there is, what do they mean by top one percent? What they're actually talking about is the top one percent of income earners, those with high taxable income, high-paid lawyers, bankers, surgeons, anybody with a very high salary. And those people are indeed paying heavy taxes. And however, the problem is that this says nothing about our wealthiest Americans. And that is because our wealthiest Americans avoid income taxes by avoiding taxable income. And as a result, they are just as likely to be in the forty percent of Americans
9:40 Speaker 09 who pay no income taxes as they are in the top one percent that pay forty percent of income taxes.
9:46 Ed Elson? So the statistic that we find quite fascinating here is that Americans pay an average effective tax rate of thirty percent. And then among the four hundred wealthiest Americans, the average effective tax rate is twenty-four percent. And that goes back to what you have just laid out, which is the difference between making your money via income and then making your money via wealth via the appreciation of your assets. Just so that we're all on the same page about what this difference is, could you lay out exactly what that difference is? How do the wealthiest, the very, very wealthiest, make their money compared to, let's say, just average wealthy?
10:28 Speaker 09 Or even average American?
10:30 Ed Elson? Or average American.
10:31 Speaker 09 Yeah, so let's start with the tax and the tax lives of most Americans. The tax lives of most Americans is that they earn their money through work, as I imagine the two of you do and I do and most of our listeners do, right? And whether they work as independent contractors, whether they work for somebody else, they are subject to the heaviest taxes. They're subject to income taxes at rates up to thirty-seven percent and payroll taxes at rates at fifteen point three percent rates. And payroll taxes- Taxes are paid there, we call them the hidden taxes because most Americans don't even realize that they're taxes. They show up as things like FICA and FUTA, very hard
11:16 Speaker 09 to understand what they are. They're called contributions, not taxes, but they actually impose quite heavy taxes so that somebody who, a self-employed person who earns $60,000 will pay more than $13,000 in federal income and payroll taxes. That is a significant burden for somebody trying to get by on a $60,000 salary. As people go up the income tax brackets, the taxes get even more burdensome. So a very high-income person will pay typically 50% in taxes, maybe a little bit more if they're in a high-tax state. And so they are paying significant amount of taxes. Now, let's move over to our wealthiest Americans,
12:01 Speaker 09 all the names that we have all come to know so well, Buffett, Bezos, Musk, all of those fellows. And for that group, they live a very different tax lifestyle. And that's because they acquire their wealth, they do not acquire their wealth from salaries. The one thing all of them have in common is that they take very low salaries. The most highest-paid salary of all in that group is Warren Buffett, and he has never made more than $100,000 in both salary and bonus combined.
12:36 Ed Elson? Humble of him, yeah.
12:37 Speaker 09 Yes, and he even cuts it back a little bit to pay for the fact that he sometimes uses his office space for his personal investments. So he charges himself for that and further reduces his salary. Jeff Bezos has always kept his salary at $82,000, which has enabled him to claim the child tax credit, which he has done in the past. And all the others are just dollar-a-year guys. And so they take no salaries, so they don't pay payroll taxes, they don't pay income taxes, pay very minimum taxes on that side. And so then, well, why were they not taking taxes? As you said, are they just being humble? No, the, it, the, what they are doing is they are counting on the growing value of their stocks.
13:20 Speaker 09 All of these people own significant amounts of their companies and their stocks have appreciated extraordinarily in value. So if you look just since 2023, there, many of their have, have seen stock growth between like 50 and 150 billion dollars just in the past three years. It's been extraordinary, that amount of growth.
13:40 Ed Elson? So then the question becomes, I mean, if they're, if they're making their money because their stocks are going up, well, then how are they paying for their lifestyle? Like, you can't buy a, a Louis Vuitton handbag with Amazon shares. You need to pay with dollars. So if they're not getting salary, then how are they paying for themselves?
14:02 Speaker 09 Exactly. And the key here is that they are using their stock and other assets to, as collateral for loans. And they are able to get very favorable rates on their loans because they have so much wealth, right? So this is an extremely well-secured loan and, and they borrow lots and lots of money to support their lifestyles. And they borrow enough money to cover the interest payments, which are usually pretty modest because of the fact that their loans are so well-secured. So they're able to support their lifestyles and their borrowing by borrowing. Now, some Americans might think, yeah, but surely they've got to pay that money back
14:45 Speaker 09 because the rest of us are used to loans where we're given maybe even 20 years for a house loan or 30 years, but our other loans, you know, they, they want them back in a set period of time. The difference is for the very wealthy, there are all sorts of people in the business of lending money. And when you have these very well-secured loans, there's always people ready to just lend you money and to keep lending you money on that loan because they get paid for that service of lending money. And so, so there's never a problem rolling over the loans or getting somebody else to give you a loan. These loans don't really have to be paid back because of the big market of people that are in the business of lending money.
15:28 Ed Elson? I'm glad that you laid it all out for us there because I just want to make sure that all of us are on the same page here. We're not saying, or you're not saying, that the lawyer or the doctor who's making $300,000, $400,000 a year isn't paying enough in taxes. Those guys are paying, as you say, 50% in taxes in many cases. What we're saying here is that there are a handful of billionaires who make their wealth via the appreciation of their assets. And because of the way that the system is set up, where you can essentially just borrow against those assets, and especially at a very low interest rate, the more money you have, what it basically means is that you can get by as a billionaire, paying almost nothing in taxes. And that's the point.
16:12 Speaker 09 The only tweak I'd like to make to that otherwise perfect description is that we're not just talking about a handful of billionaires. Somebody who has $100 million could still do this, right? And so it's a much larger group. I think it makes, we make a mistake when we describe this as a billionaire problem, because the problem really is for anybody who has enough assets that they don't need to work, they can depend on the growing value of their assets, they too can avoid taxes. And that's where, why our problem, that's why our system is so problematic, is because it loses so many people. And that's the real problem.
16:50 Scott Galloway? So Professor, that'll bridge us nicely into, I think, possible solves. And I want to propose two possible solves and get your response. I think what we want are taxes that are the least taxing. And one of my intellectual role models is a guy named Daniel Kahneman, and the Israeli-American psychologist who writes a lot about money, and basically came to the conclusion that money does buy happiness, but it flattens out at a certain point. Which says to me, if we're in fact going to need to fund our navy and our parks, that the least taxing tax would be an alternative minimum tax. I think trying to redo the tax code, which has been weaponized by wealthy people and corporations, would be a fool's
17:33 Scott Galloway? errand. But an alternative minimum tax of, say, 40 or 50% on any income investment gain, or if you borrow against that, that's a trigger for capital as an event.
17:48 Scott Galloway? And alternative minimum tax of, say, forty percent on corporations. And then the second thing would be to lower the estate exemption from thirty million to one million. And I believe no one gets hurt, no decline in the quality of life, and you can fund the programs that substantially increase the quality of life and general well-being and happiness, universal childcare, food stamps, tax credits for young people trying to buy homes. I would put forward to you, and I want you to nullify or validate my thesis, that the illusion of complexity has been weaponized by the incumbents. Get rid of the estate tax exemption, alternative minimum tax on any income above a million
18:31 Scott Galloway? dollars or corporations making above a certain amount.
18:34 Speaker 09 I agree conceptually that we need to bring in investments and inheritances. I think that description is a little bit, I want to push back a little bit on the, because the alternative minimum tax is, what that is, is it's something that disallows deductions. Okay? So you can't take a charitable deduction, you can't take a home interest deduction. It doesn't do anything about the problem that we have in our system of the failure to tax appreciation, which is a problem of realization that's separate from deductions, and about the failure to tax inheritances, which again are subject to broad exclusion.
19:19 Speaker 09 So the problem that we have, as I see it as a tax person, it's, I share the, I share the desire for the solution, which is we need to bring investments and inheritances into the tax system, but I disagree with the alternative minimum tax and estate tax framing. The alternative minimum tax for that reason that I say, the alternative minimum tax is really about deductions. And so it's not really about all these things that are written out of the system. You say, well, then we should write them into the system. So that's how I would focus on it. I agree. We should bring in appreciation. The problem is if you tax appreciation as it occurs currently each year, right? That's which is, I don't know if you're proposing that. That was one of the, right?
20:03 Speaker 09 So how are we going to handle this appreciation? Right? We have all these guys that are walking around with hundreds of billions of dollars. When are we going to tax those gains? And different proposals have been made, right? Some say we should tax them each year as they occur. I think that's going to be too burdensome and too complex for people to understand. So what I think we should do is say that whenever the person transfers the property, whether they transfer it by gift, whether they transfer it at death, whatever they do with it, once they no longer own it, then they should tally the gains and pay taxes on it then, so that the person who earns that income earns those profits, pays taxes on them.
20:45 Speaker 09 Our failure is to not tax the appreciation to the person who earns it by letting them pass it tax-free. In Canada, they have this rule, which says that whenever you transfer the property, we're going to tally the gains, and I think we should have that rule here for purposes of investment gains.
21:02 Scott Galloway? I 100% agree with that. What you're basically saying is, what is the trigger for when something becomes a capital event where it's subject to taxation?
21:11 Speaker 09 Yes.
21:11 Scott Galloway? And the basic strategy now is buy, by investing in your own company or buy a stock, borrow against it, and then die and get a step up in basis. So I think we're brothers from another mother here. I think the wealth tax is class welfare. I think it makes for a speech. All you're going to do is fill the pockets of every accounting firm and trying to assess value. I can't imagine what a boon it would be for appraisers trying to convince you that one property is worth negative value and then try and figure. And we've talked about this. 16 countries have proposed a wealth tax, 13 Never peeled it. They typically just don't work very well.
21:52 Scott Galloway? But the only thing I would add to you in terms of it triggering a capital event that's taxable is when they borrow against it.
21:59 Speaker 09 And that's fine. I'd be perfectly happy to do it. I think there are some problems because, first of all, you can borrow against any number of assets, right? You might have lost assets that you can borrow against, so it's not really clear. And also, people's borrowing is very small in relation to their total wealth. So the only thing I'd be concerned about when we talk about taxing borrowing is I wouldn't want that to be seen as the solution to the problem. Because when somebody has $200 billion, you can live a pretty good lifestyle with just $1 billion. Hard to believe. And so then we don't want people to think they're solving the problem by taxing borrowing. So that would be my only hesitation as you and I are fine tuning our tax systems.
22:46 Ed Elson? We'll be right back after the break. And by the way, we're heading out on tour next week. So for more info and to get tickets to a show near you, head to profgmarketstour.com.
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24:37 Ed Elson? We're back with Prof G Markets. So Ray, one of the things you propose here is that we don't see enough realization events for the appreciation of assets. And, you know, you keep on borrowing, you borrow and you borrow against your assets continually, continually. You never have that moment where you sell those assets and then realize the tax. And so you're saying anytime there's any transfer of any kind, if you donate it, if you transfer it into a new account, that is a moment to say, okay, let's figure out how much the assets have appreciated and let's tax them. One thing that I, that is confusing to me, though, is we do have a moment where
25:21 Ed Elson? rich people do transfer assets and that is when they die. And they hand it over to usually their children. And so the question for me is, and that is, this is the estate tax. That's we tax those assets. Why isn't that working? Why is that a problem still?
25:39 Speaker 09 And that's a really important part of this conversation of understanding this issue. Because we have all these seeming failures in our income tax system, right? We don't tax appreciation. We also don't tax money received by inheritance. So if, if you find a hundred dollars on the street, you leave your office, you found a hundred bucks, you are supposed to report that to the IRS and pay taxes on it. However, if somebody hands you a million dollars or 10 million dollars or even 10 billion dollars. You don't even have to report it. You don't have to tell anybody. You don't have to pay any taxes on it. And that also applies to money you receive by life insurance and money you receive by gifts.
26:23 Speaker 09 All of that is entirely tax-free. Well, why do we have this enormous giveaway in the income tax system? The answer is because we count on a robust estate tax system sweeping up and making sure that these untaxed forms of income are eventually subject to tax with what had previously been a pretty onerous tax. The estate tax was enacted just a couple of years after the income tax, 1916. We've had it a long time. And for a long time, it did its work. Basically, we had a tax and we had a Congress that kept up with reforming the tax.
27:04 Speaker 09 So in 1976 and 1986, we had a problem of these long-term trusts and Congress enacted this whole additional tax as a backup called the generation skipping transfer tax. Then we had a problem with valuation gaming techniques. So four years later, Congress enacted special valuation rules and a whole other, you know, group of, a whole other section to the code. And these were both enacted under Republican presidents. So this was broad bipartisan support, supported keeping this tax up to date. However, what, you know, you and your listeners might, might remember, or, well, I guess maybe, Ed, you might not remember it, but maybe you've heard about it.
27:49 Speaker 09 I'll pretend I did. Pretend you did. Before you were born, there was, in the early 1990s, a campaign funded by 18 of the country's richest families. And that campaign was designed to turn the public against the estate tax. They sought estate tax repeal. And George W. Bush was a big carrier of the banner. And they, their most effective thing that they did was they hired this guy by the name of Frank Luntz, who was a communications expert, and he said, "Never call it the estate tax because that sounds like something that's for rich people." Instead- Call it the death tax. And we'll bring this campaign and we'll say it's unfair and it's a double tax and it hurts family farms and businesses and and we're going to run this campaign.
28:34 Speaker 09 And this campaign was extraordinarily effective, not for their goal that they sought to achieve, which was actual get rid of the estate tax from the from the books. But it was successful in a way that was ultimately even, I'll argue, more successful, which is what they did is they were so successful in their campaign to make people feel uncomfortable with this idea of the estate tax that Congress stopped doing its job in terms of closing loopholes. Indeed, the last time that Congress has closed a single loophole was in 1990, 36 years ago.
29:17 Speaker 09 And so as a result, over the past 36 years, there has been a proliferation of tax avoidance techniques that have been allowed to occur. They all have this sort of Dr. Seuss sounding names, Kratz and Krutz, Klutz and Klutz, Gratz and Grutz, Q Perch, Q Tips, Q Dots, the whole panoply of them. And and as all of these exclusions have developed, the estate tax has been completely corroded. So it no longer does anything, not because the exemption is too big, which it is big. It's 15 million and it used to be 1 million, but because of all of these things that take
30:00 Speaker 09 these transfers out altogether. And so to raise or lower the exemption or raise or lower the tax rate will not be effective because this tax has been effectively killed. And so we're not going to start seeing all types of robust action with respect to this estate tax. And I think it's because the estate tax, it wasn't just, well, we're always vulnerable to rich people. I think the problem was that the estate tax had an Achilles heel. And that is that it was.
30:36 Speaker 09 Theoretically designed to be imposed on the donor. And so what the on the dead person. And so what it meant was for those individuals who indeed paid high income taxes their whole lives, right, they paid lots of income taxes. Now we're imposing a second tax on them. And it seemed kind of just punitive in some weird way to the public. This was made easier because the public doesn't know very much about what happens on the income tax side. Most people don't know that money received by gifts and inheritances and all of those things are tax free. And I know this is true because in this area, a lot of people ask me, well, if I give more
31:17 Speaker 09 than $19,000 to my kids, don't they have to pay income taxes on it? This is because of some gift tax exclusion amount. But people are confused about this. And so the estate tax is a kind of an awkward tax and it made it. It made it easy for Congress to stop acting. What's particularly interesting is that the estate tax has become so ineffective that and I'm going to give you a number, which is truly shocking. When the top 1% of Americans had $55 trillion, which is how much they had in 2025, the
31:59 Speaker 09 total amount raised by the estate and gift tax, which is supposed to be a 40% tax on all transfers during life or at death, the total amount raised was $28 billion.
32:10 Ed Elson? Wow.
32:10 Speaker 09 That's 0.06%.
32:13 Ed Elson? Oh, my gosh.
32:13 Speaker 09 It's nothing. And it's not because of the exemption amount. It's not because of the lower rate. It's because people are able to avoid the tax altogether. And that's what the problem is.
32:24 Ed Elson? I was just about to ask you if there is a rough number that we can estimate on how much we are losing to this issue, to this estate tax loophole. And you've given us our answer there, north of $20 trillion, close to $30 trillion, it sounds like.
32:39 Speaker 09 Right. If you think about that we're designed, we're supposed to have a tax on the top 1% and that that percent has 55. By the way, this is a time where the total revenue raised by the federal government is like $5 trillion. So they have massive amounts of wealth. So when people say it doesn't matter if we tax the rich, that is just simply not true.
32:59 Ed Elson? It almost sounds as if fixing this problem would solve a lot of our problems. And this gets to something else that I'd like to get your views on.
33:09 Speaker 09 Yeah, can I add one more piece here before we do?
33:11 Ed Elson? Please, yeah.
33:11 Speaker 09 I think the thing that makes it most telling that the estate tax is actually something that now works as a cover for the rich rather than as a burden is the fact that in 2025, a time when the Republicans fully controlled that new tax bill, and they easily could have repealed the estate tax, they chose not to do it. No mention of it. It had been their number one issue, but now all of a sudden they didn't care. And that's because they wanted to preserve all of the income tax benefits they got when there was an estate tax that provided cover.
33:46 Ed Elson? So Ray, this gets to one of my concerns about our future in America. I am becoming increasingly concerned about the possibility of what we're calling an inheritocracy, where we have been in so many ways ruled by the Elon Musks and the Bezos's of the world. And that was especially true after Citizens United and the billionaire spending on political campaigns exploded. And they started to buy our elections. And that's not hyperbole. That is literally what happened. And we're seeing a lot of blowback and pushback to that. But I think that we're about to see something even worse. If we start to see that the world isn't run by the guys who created these incredible tech companies, but by the children of the guys who created these incredible tech companies,
34:31 Ed Elson? which by the way, we're already starting to see in the media world, where Paramount and Warner Brothers Discovery soon enough is about to be owned not by Larry Ellison, but by the guy who inherited the Larry Ellison fortune, by David Ellison.
34:49 Ed Elson? We see this in the world of the Murdochs. We see this with Candace Fitzgerald, where the Commerce Secretary's sons are now running one of the most important banks on Wall Street, et cetera, to the point where it seems that we're going to see a real loss of faith in the system itself if we wake up one day and suddenly we're ruled by all of these rich kids. I had always thought that maybe the estate tax exemption is the way to fix that. And the fact that we increased it with the big, beautiful bill to me was like, well, that's obviously not the right direction. You're saying that, no, that's not the problem. It's these loopholes. My question is, what do we do about this then?
35:28 Speaker 09 So I think the first thing that we need to do is we need to recognize that the estate tax has been really effectively killed. And as I mentioned, I think it is because it was easier to kill because of this vulnerability that it was imposed as a sort of a second tax on the person who dies. And, and so for a lot of reasons, I think that we have to understand that this is not a tax that's going to be resurrected. But it will actually help us more to get rid of the tax than to keep it. Because when we get rid of the estate tax, we see about how our income tax system preferences inherited wealth.
36:13 Speaker 09 And we have a tax system, as I mentioned, that has, the income tax system is designed to be very, very broad. It starts this idea that gross income includes all income from whatever source derived. And so much so that even if two people do a barter exchange, right? Somebody says, I paint your house in exchange for you filing my taxes. Each of those people are supposed to pay taxes on the value of what they received for that exchange. Really broad, comprehensive tax. And then you look at this tax and you look at gifts, inheritances, life insurance, and they're all excluded. Well, there's no justification for having a broad exclusion of all of those sources
36:56 Speaker 09 of income when lottery winnings in every Every other type of acquisitions of money is subject to tax. So by getting rid of the estate tax, it frees us up to bring inheritances, gifts, and life insurance back into the income tax system where they belong. And there's a number of advantages to that. First of all, the tax will be imposed on each person who receives the money based on their appropriate income tax bracket. And so, and it will also give us a chance to get rid of all of those problematic aspects of the estate tax that allowed for so much tax evasion, right? We could do a tax on inheritances 2.0 that is more appropriately levied on the recipients of inherited wealth.
37:41 Speaker 09 When we do so, we're going to need to think directly about how much, if at all, do we want to subsidize inheritances? I do think inheritances have become increasingly important for a lot of Americans, particularly as, as our young Americans are having a hard time getting jobs that are sufficient to support the lifestyle, what we used to consider a basic middle-class lifestyle, things like owning a home, being able to send your kids to school. A lot of people are depending on inheritances to help them acquire those basics in life. And so I think that we need to understand that we need to provide some exemption for,
38:25 Speaker 09 for inheritances. But when we recognize that it is an actual exemption for inheritances, then we can come up with a reasonable amount. Maybe each person should inherit, be able to inherit $1 to $2 million tax-free, and after that, they'll pay ordinary income rates. We can have a more coherent system by bringing it into the income tax system.
38:47 Ed Elson? Beyond loopholes, one thing that's also interesting, we were discussing the difference between capital and labor, and outside of these loopholes and outside of borrowing against the assets, the reality is the tax rate on capital gains is just significantly lower than the tax rate on income. And I'm, I, we have this chart here from this, this 2020. Study which shows that the percent that the tax rate on capital actually used to be higher in America compared to the tax rate on labor and then recently it flipped. But also I would point out that this has been the subject of debate on like how exactly are you calculating what that tax rate is on labor versus capital.
39:29 Ed Elson? So Gabriel Zuckman, who's written a lot about this, he did a study and he said that it flipped as recently as 2018. So there's all this debate on like, what actually is the true tax rate on capital versus labor. But the larger point being, should we really be taxing people's work, people's income at a higher rate than the income that they receive or the appreciation that is realized on the appreciation of assets. And I'd just like to get your views on that. Should we essentially be just increasing the capital gains tax?
40:05 Speaker 09 We absolutely should be increasing the capital gains tax and equalizing it with the ordinary income rate. There's a lot of, you know, you'll get 50 reasons about why people who want to keep that reduced rate, you know, all sorts of reasons that they have, but none of those 50 reasons actually stand up on their own. And so I believe absolutely we should be equalizing the rate. The one thing that I think that we could do is we could provide inflation adjustment for for recognizing gains. So let's say that somebody buys a house a long time ago, they buy it for $100,000 and now it's worth a million dollars.
40:45 Speaker 09 But inflation has gone up so much that their actual gain, they're not really better off by $900,000 because that money isn't going to buy as much anymore. Right. They can only just buy that same house or buy a less good house. I'm not explaining this well. But a lot of that gain will be due to inflation. And so I think that we could equalize rates, but allow for adjustment for inflation of basis so that people are paying, are not paying taxes on the inflation gains. And that would be a way of softening, of softening that as it applies to long-held assets.
41:26 Ed Elson? That seems like a great solution to me. Just make them equal capital gains and income tax, just make them the same. The thing that has confused me, though, is that I'm not aware of any societies, or maybe Western societies, maybe I'm just not looking hard enough, where that is the case. And I guess my question is, why? Why is it standard that capital gains are taxed at a significantly lower rate than standard income?
41:55 Speaker 09 Well, first of all, right here in the United States, they were taxed at the same rate in 1986. This was a tax bill. The 1986 Tax Act was put forth by President Ronald Reagan. And I think that what he did was he brought down top rates, but equalized capital gains and ordinary income. So it's definitely something that can be done. And one of the things I talk about in my book is how Andrew Mellon, who was one of the early Treasury Secretaries and was very conservative, a staunch anti-tax-the-rich kind of guy, wrote himself that he saw no reason for taxing capital less than labor. And indeed, he thought capital should be taxed much higher than labor because capital
42:37 Speaker 09 is something that grows without anyone's effort, whereas labor is something that requires a lot of work. And so, and so I think that this is, it's definitely doable, and we've had it in our not-so-distant past.
42:50 Ed Elson? Is there an argument that maybe it reduces investment or that it could, you know, just have an overall downward effect on? I guess the stock market.
43:01 Speaker 09 One argument that you'll often hear is somebody will get very wonky and they'll say, "The statistics show that if you raise capital gains rates above a certain amount, then you stop raising money because people stop selling their property," something like that, right? But the reason that that is the case is because we allow people to avoid capital gains by avoiding sales. The problem was that loophole. If you close that loophole, then people will not be able to avoid capital gains. And that is one of these arguments that looks and sounds really persuasive, but really isn't when you look at it.
43:42 Ed Elson? We'll be right back. And for even more markets content, sign up for our newsletter at profgemarkets.com.
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45:31 Ed Elson? We're back with Prof G Markets.
45:33 Scott Galloway? So Professor, let's assume the administration comes to you and says, okay, we're going to cut some expenses. We need fiscal sanity here. And we're going to cut some spending, but we need to raise revenues. What would be your two or three ideas for what I would refer to as the least taxing or most equitable tax increases?
45:54 Speaker 09 So the first thing, as we talked about, is to make sure that unrealized gains are have a time of realization. So that should be whenever the property is transferred. That's the first step. Brings coherence to the system.
46:07 Scott Galloway? So just let me press pause there. So what about 1031 exchanges or putting things into an LLC? Doesn't matter. As soon as you change its title, it's taxed.
46:15 Speaker 09 Absolutely. When you change title, you're subject to tax.
46:18 Scott Galloway? And within hedge funds, when you buy and sell stocks, they're also sometimes able to defer taxes. Any transaction would that go for equities and other property as well?
46:27 Speaker 09 Whenever somebody no longer owns that property, that's when the gains should be tallied for that person. The second thing that I would do is repeal the estate tax because it is providing cover for the rich and not imposing any taxes or raising any revenue. And, and we should decide how much we want to subsidize inheritances. Let's look. That's the question that we're asking, right? To what extent should somebody who would otherwise be subject to tax on all income that they acquire be able to inquire an inheritance tax free? Maybe it's a million dollars. Who knows what that amount would be. But bring that into the income tax system. Bring inheritances into the income tax system.
47:07 Speaker 09 And when we do so, we'll have the chance to fix those, all of those various avoidance techniques that we have that have become so entrenched in the estate tax world because it'll be a clean slate and we'll be able to have a smarter, a smarter tax that avoids those problems. And then the third would be to equalize the tax rates between capital gains and ordinary income.
47:30 Scott Galloway? Love that. And then my fear, the only thing, and again, it's the only thing you've said that I'm not 100% in line with. But I find that the tax code has gone from something like 400 pages to 4,000. And those 3,600, I think, are mostly to screw the middle class by creating all sorts of loopholes. When I sold my company, the first 10 million was exempt. And I just don't see any reason for that. I still think alternative minimum tax is the way to go because there's too many lobbyists who will figure out a way to keep inserting different loopholes.
48:02 Speaker 09 But we have an alternative minimum tax right now, and it's not doing its job.
48:06 Scott Galloway? So it doesn't have any teeth?
48:08 Speaker 09 Exactly. The AMT doesn't have teeth.
48:10 Scott Galloway? Well, isn't that because the AMT, quite frankly, isn't an AMT? It's an AMT that you can still stop, that exemptions can still get around?
48:17 Speaker 09 Right. But if we can, I mean, I think that what you're saying is we need to clean up the system and make it better. I totally agree. But I just think the use of the word AMT makes it sound like that is a single response to the problem, rather than the problem is to actually do a more granular approach to things like, for example, like that exemption, those exemptions for startup businesses that you got. You know, I think those all need to be cleaned up. But I think a lot of work can be done by invest, by making sure that we're taxing investment gains and making sure that we're taxing inheritances.
48:53 Scott Galloway? I was gonna say, not on that list is a wealth tax, which is the most popular proposal in the political sphere right now, making ground in California. ASC has been talking about it. Why no wealth tax?
49:05 Speaker 09 I think that we all understand now that the problem is that wealth owners have enormous acquisitions of wealth and they're not paying tax. And so the answer, the obvious answer seems to be, let's tax their wealth. And particularly for people who have publicly traded stock where we can so easily see how much wealth they have. The problem is that these, sometimes these easy answers don't actually work, and I feel that's the case with the wealth tax. On a federal level, there's a very serious problem about whether the Supreme Court would find it unconstitutional. We have every reason to think that the Supreme Court would, based on a recent case.
49:49 Speaker 09 And, you know, they didn't have to go that way, but there was a recent case, Moore, where they basically said, oh, yeah, we might very quite well find this unconstitutional. So, so on a federal level, there's a real problem. And then on state level, there's a problem because states, people can easily move from one state to another, and we see this happening.
50:09 Scott Galloway? They can move countries.
50:10 Speaker 09 Well, I disagree about that. You cannot, in Europe, you can move countries very easily, because in Europe, you have the EU, you have free transport, and you don't have a unified tax system. I do not think we're going to have a serious problem in the United States of people leaving the United States and becoming citizens of Qatar or other countries.
50:30 Scott Galloway? Well, you have to turn in your passport, and there's an exotax. What I'm talking more about is corporations.
50:35 Speaker 09 Well, that's a separate, corporations is a whole separate issue, but I think that right now, we're talking about individual taxes.
50:41 Scott Galloway? To your point, a wealth tax is what I think my party does a lot, and that is they want to be right as opposed to effective. I think a wealth tax makes a lot of sense, but they don't work, because wealthy people are incredibly mobile, capital's incredibly mobile. And also, I think on the corporate side, and I'm curious even going broader, don't you think we're going to need some sort of, and to her credit, Secretary Yellen was able to get this through, I think that's right, unless we get other nations to cooperate and unilaterally enforce some sort of corporate minimum tax, you're going to continue to see taxation not realized, or revenues not recognized or realized, there's still going
51:25 Scott Galloway? to be all sorts of arbitrage internationally taking place, no?
51:28 Speaker 09 I want to add one thing about the estate tax that makes the, I mean, about the wealth tax, that makes the wealth tax particularly problematic, which is the problem of valuation, as you mentioned earlier. We tend to think of it as like publicly traded companies, but lots of people own these highly complex partnership interests that are like 50 levels deep of partners, and people might own levels at all different, at all different places. And the idea that we're going to have a strong enough IRS to be able to do annual taxation on these very complex interests. Think is really problematic and there's going to be a great incentive for people to move their assets out of the easy to value stock market to the difficult to value partnership interest.
52:10 Speaker 09 And that could impose a cost on all of us who have retirement and other savings that really depends on a robust stock market for our own savings. And so I think there's a lot of problems with the wealth tax.
52:22 Ed Elson? If we could get it done, let's say that our IRS was highly effective and our appraisal systems worked. Do you think that it would be the right move if it were possible?
52:34 Speaker 09 I think if it were possible that it was constitutional, that people weren't going to move, that it could be effective and that we could get the value and we could get the public to not recoil at the idea that you have to report every single thing you own to the government, which I think is another potential problem with the with the wealth tax. Sure, I think it would be great. I think it does the most direct addressing of the problem, but those are a lot of ifs. And so I think we have to live in the world that we live in and not in a fantasy world where we're able to in one step curb the enormous power of the wealthiest Americans.
53:15 Speaker 09 I think it's a real problem that we have, which is we have people who have astronomical amounts of wealth and we want to get it and we want to get it today and we want to address it. But we don't live in a political system where that is going to happen. And I think that we and and my concern is when we focus on that type of thing, we create a false narrative about what's going on. And it makes it seem like, well, we have to punish the rich, when really the problem is that we have to bring the wealthy, their investments and their inheritances into our income tax system. They should join us as fiscal citizens like everybody who earns money is already doing.
53:58 Ed Elson? So we mentioned the deficit earlier and this unbelievable national debt that is piling up and up.
54:05 Speaker 09 Huge problem.
54:06 Ed Elson? And
54:08 Ed Elson? It seems as though there's sort of this divide between the left and the right, where the right says that the problem is how much money we spend. I would also add that the right is actually the one that is more responsible for the irresponsible fiscal spending, but that's maybe another conversation. But that's the argument on the right. The government, that's their area of focus. The government's spending too much. Let's get Doge and let's make sure that we see less wasteful spending. And then on the left, it's that we're not bringing in, we're not taxing rich people enough. We're not generating enough tax revenue. And so that's the thing that we got to focus on. My question for you is, what is a bigger problem? Is it the spending or is it the tax revenue?
54:49 Speaker 09 It's the tax revenue, without a doubt. It's the tax, it is. And I think that if you look at the numbers, as I say, from, let's say, 2024, those are the numbers I have in my book, right? The country took in $5 trillion from all sources, just under $5 trillion. That's income tax, payroll tax, corporate tax, estate and gift taxes, tariffs, everything, right? Fees at the, fees at the national park. Total revenue, just under $5 trillion. We spent $6.8 trillion. So we had a shortfall. We had to add to our national debt. We had to borrow to make that $1.8 trillion deficit to cover it, causing huge problems to have this growing debt.
55:34 Speaker 09 Meanwhile, at the same time, the richest 1% of Americans owned $55 trillion. I say that, and we know that there are all sorts of ways that that wealthiest 1%, not just the billionaires, are able to avoid taxes because they don't pay taxes on their most common sources of income, which is their investment gains and their inheritances. So the failure to bring them into the tax system, I find it hard to believe that we wouldn't have been able to easily cover that $1.8 trillion shortfall by taxing people that owned $55 trillion.
56:13 Ed Elson? I've looked at some of the numbers in terms of tax revenue as a percentage of GDP. And what I found in the US over the last, I don't know, few decades is that it's actually relatively stable. Like, we've had some dips for sure.
56:28 Ed Elson? But sort of at a very, very broad level, it hasn't really gone down or up in a significant way. And so I guess what you would be asking of our nation is to make a significant change, if the problem is the tax revenue, would be to be making a significant change in terms of how much we are taxed overall.
56:52 Speaker 09 I don't think that's the case at all. I mean, if we're talking about, when you start using a number like the GDP, the GDP is enormous. So you can't really see the differences, right? I don't think the differences of raising 4.9 trillion and 7 trillion, when you're talking about in relation to GDP, is going to be a significant difference. So I don't think that that's what we're doing.
57:18 Scott Galloway? I think one thing we haven't talked about is what I would describe as the biggest tax cut in history in the US, and also the most elegant, and that is neutering the IRS.
57:26 Speaker 09 It's a travesty, and it's a giveaway, and it is, I couldn't agree with you more.
57:31 Scott Galloway? What is it, $750 billion a year that goes to tax gap that goes uncollected?
57:35 Speaker 09 I'm sure it's greater than that. So, I mean, we need to fix the tax code, and we need to fix the IRS.
57:42 Ed Elson? The next big change in our economy is supposed to be likely to be AI. We're seeing these data centers go up all over the place. We've discussed sort of in general terms about figuring out a way to tax this. Maybe you tax the data centers. What do you think is the right taxation approach to the next big technology?
58:05 Speaker 09 AI is really going to cause a problem for our tax system, if you think about it. And it's interesting, I was on a, I was at a program the other day, actually one where Scott got an award, and Leadership Now, somebody was speaking, an AI expert was speaking about, well, how AI might very well be disruptive, right? We're gonna, we're gonna replace a lot of, a lot of workers with AI agents. And he said, well, the answer is gonna have to be UBI, universal basic income. And I'm thinking, and who's paying for this universal basic income? Because in fact, when you look at our income tax system, right?
58:46 Speaker 09 Eighty-five percent of the revenue comes from individuals and labor and payroll taxes. And so if we remove workers and we, we're gonna have massive capital growth, we're gonna have a lot fewer workers, we're gonna really suffer in the amount of revenue that we're raising under our existing system. So I think it's a serious problem. So one thing is that we need to address is by making sure that we are in fact taxing capital, because under our current system, we don't tax capital, and that's of course where all the gains are occurring. As opposed to taxing companies, I think that we're gonna have to figure out how to do it.
59:29 Speaker 09 I don't, I don't have the, the particular answer to it, but it, you know, we're gonna, we're gonna have to find a way of bringing this massive, growing concentrations of wealth into our tax system as well, either under corporate taxes, business taxes, or special AI taxes.
59:46 Ed Elson? The big problem in the political world is getting everyone to agree on this stuff. We can have the right answer, but if we can't get people to agree and get behind it, then doesn't matter, doesn't work. So I'd love to get your thoughts on how we do that. What is the message? What is the argument that we can get everyone behind such that we do come up with the right solution and fix the problem?
1:00:13 Speaker 09 I love your question. Thank you for that. The answer starts with educating the public. As you started your very first question, right? People are being told that the rich people are already paying taxes. And because our tax system is complicated, they think, all right, I guess, I guess we're wrong, right? And because individuals are paying such burdensome taxes, it never occurs to them that the rich aren't paying taxes. So the first step has to be educating the public, which is one of the reasons I'm so happy that you guys had me on your show, right? You're already doing that work. You're already spreading the good word, but I'm, it's a pleasure for me to be able to join in that. The problem with our system is that we are heavily burdening work income and people who
1:00:56 Speaker 09 have investments and inheritances, we are giving them a free pass. And the public can understand that. The public is clamoring to understand that. And once they understand that, then they understand that the solution involves making sure that we're taxing investments and inheritances, just as we tax labor income.
1:01:16 Ed Elson? Ray Madoff is a professor at Boston College Law School, where she teaches tax law and policy, wills and trusts law, and estate planning. She is co-founder and director of the Boston College Law School Forum on Philanthropy and the Public Good, a nonpartisan think tank that explores how the rules governing the charitable sector could best serve the public good. She was named one of Time's 100 Most Influential People in Philanthropy in 2026 for her work critiquing the tax code. And her most recent book, The Second Estate: How the Tax Code Made an American Aristocracy, is available now. Professor Madoff, thank you so much for your time.
1:01:50 Speaker 09 Thank you so much for having me. I really enjoyed our conversation.
1:01:53 Scott Galloway? We love your work, Professor. Keep it up.
1:01:55 Speaker 09 Oh, thank you. Have me back on another show, Scott. I've been clamoring.
1:01:59 Ed Elson? We'd love that.
1:02:00 Speaker 09 Okay. Thanks. Bye-bye.
1:02:05 Ed Elson? This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carti. Our research team is Dan Shalane, Isabella Kinsel, Kristin O'Donoghue and Mia Silverio. Jake McPherson is our social producer. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.
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