Let me tell you about the very rich. They are different from you and me.
F. Scott Fitzgerald
According to Ray D. Madoff, a law professor at Boston College of Law, in her book The Second Estate, the United States is now an aristocracy, not the democracy it pretends that it is. The reason is that the American tax system has broken down. Taxes are no longer what Alexis de Tocqueville in 1835 found them to be, a great equalizer. The very rich—billionaires, not garden variety millionaires like your wealthy friends and maybe you—have the most important privilege of “the second estate” in prerevolutionary France. They do not have to pay taxes.
This fact was revealed by the magazine ProPublica in 2021 when a journalist with the remarkable name of Charles Littlejohn illegally published the tax returns of Elon Musk, Jeff Bezos, Warren Buffett, George Soros, Michael Bloomberg and others, revealing that these fantastically rich men paid virtually no taxes at all. What? How do they manage what hardworking doctors, lawyers, businesspeople, and others cannot?
The trick was that the very rich made no taxable salary.
But how does Mark Zuckerberg buy strings of estates and live in ease? How does he obtain the money? Not from a weekly paycheck. That’s for suckers.
Instead he uses his vast stock holdings (in Meta, etc.) as collateral for a loan supplied by a rich private banker (no savings and loan applications for MZ) and lives on borrowed money. He pays interest on that loan, a tax deductible expense. When the loan comes due, he renews it. Same with Sergey Brin, Larry Ellison, the Mars family of Virginia, George Soros, Jeff Bezos, yada yada.
Because many stocks no longer pay dividends to shareholders (the money is “plowed back” into the company) and because they buy back the issues they sold at their initial public offering (IPO), these stocks rise in value. Stockholders become richer. They never pay tax on the gains since they never sell the stocks so don’t have to declare the profit. They retain them until they die. When they pop off, their heirs inherit at the new valuation. The gains are sheltered at a “stepped-up” basis.
This happens over generations. Thus the Waltons, the Mars (M&M’s!), and other families build dynastic fortunes. They do charitable giving, but usually donate to foundations they establish that they control. Since charitable deductions are tax deductible, American taxpayers in effect foot the bill for the revenue that would otherwise accrue to the government.
The tax established to fix this, that is to charge estates (the “estate tax”) when property is transferred at death has been legislated out of existence. Ah, the power of money in politics. In any case the tax can be circumvented through trusts whose provisions enfeeble or defeat any regulations.
What can be done? Madoff has several proposals, all of which would work. Getting them through the House and Senate and persuading the President, Republican or Democratic, is another matter.
The Second Estate will not cheer you up.