Beginning in the early 20th century, a new ethos for taxes took hold: Taxes should be imposed on the basis of means, with the greatest burden falling to those with the greatest capacity to pay.
Such “tax the rich” sentiments informed the design of the two tax rules at the core of the modern tax system: the income tax, adopted in 1913, and the estate tax, adopted three years later, in 1916. The income tax had “progressive” tax rates, meaning taxes were higher for people with more taxable income; and it exempted many lower-income Americans altogether. And the estate tax was designed to impose a separate tax on the richest Americans as they pass their wealth to the next generation.
These two taxes originally applied to only the very wealthy, leaving more than 95 percent of Americans unaffected. But even when the income tax system was expanded to apply more broadly to fund World War II (which is sometimes described as moving it from a class tax to a mass tax), the focus on the rich was maintained.
Our income and estate taxes are still structured the same way, with progressive income tax rates and an estate tax that only applies to the richest Americans. Yet evidence shows that these taxes are not doing what they purport to do.
The capacity of the income tax to take the most from people who can most afford it has been undermined by wealthy people’s avoidance of taxable income. Economists and tax experts have long recognized the ability of the wealthy to avoid taxable income, but with secrecy around tax returns, it was difficult to uncover real-world examples. This all changed in June 2021, when journalists at ProPublica published a series of articles based on actual tax returns leaked by an Internal Revenue Service (IRS) contractor (his name: Charles Littlejohn, like the Robin Hood character). These tax returns confirmed that many of the richest Americans — like Jeff Bezos, Elon Musk and Michael Bloomberg — were able to avoid income taxes altogether by avoiding taxable income.
The other plank of the tax code, the estate tax and gift tax (along with the generation-skipping transfer tax, adopted to fortify the estate and gift tax in 1986), was explicitly designed as a bulwark against large intergenerational transmissions of wealth. They promised to preserve an egalitarian American society for many decades they largely did.
But the estate tax, like the income tax, is no longer doing what it was designed to do. While there is no Charles Littlejohn-style cache of elite tax returns to substantiate how the tax isn’t working, the American economy itself provides the proof. Concentrations of wealth have moved from historic lows in the 1970s to heights not seen since before the advent of the modern US tax code. And while the richest Americans control more wealth than ever, the amount of money raised by the estate and gift tax is minuscule, providing less than one-half of percent of total federal revenue. The channels to avoid the estate tax are not just well known; they are thriving, and the result has been the safe passage of wealth within families across decades.
The tax life of America’s rich is, by nature, unique to each individual. But a few core themes have emerged in the new school of tax avoidance and the building of dynastic wealth — that is, wealth passed down through families.
How rich people avoid income taxes
Most Americans depend on heavily taxed earnings from work to support themselves and their families. Meanwhile, many of the richest Americans avoid taxes by avoiding salaries — with many like Larry Ellison (Oracle) and Mark Zuckerberg (Meta) having taken $1 a year, while others, like Elon Musk (Tesla), have taken zero, causing the state of California to charge Tesla with violating its minimum-wage laws. In some cases, these billionaires paid no income taxes at all despite their shared status as some of the wealthiest people in the world.
Avoiding salaries provides other tax benefits as well since avoiding salaries also avoids payroll taxes, which are used to fund the country’s biggest expenses, Social Security and Medicare.
When the wealthy avoid salaries, these individuals are not eschewing financial gains from their businesses altogether. Instead, they are counting on the growing value of their stock holdings to build their wealth. Relying on growth instead of income helps them avoid significant taxes because that growth is not subject to tax until and unless they sell the stock. And if they hold it until their death, all the gains are washed away, never to be taxed. Then, their heirs are treated as if they bought the stock at market value, so they don’t pay taxes on any of the deceased’s gains, either. Meanwhile, by using these assets as collateral for loans, the wealthy can enjoy all of the financial benefits of selling without the burden of taxes.
Separate from the question of how to share the costs of government fairly, the failure to tax the rich also allows for that wealth to grow at warp speed, producing ever-greater concentrations of wealth.
The ability to avoid taxable income is not limited to billionaire entrepreneurs. Many “regular” rich people can also enjoy the benefits of borrowing tax-free against their growing investments instead of selling their stock or receiving dividends. What is relatively new, though, is the widespread reliance on increases in stock value, as opposed to salary or dividends, as a means of acquiring wealth.
Before 1982, this path was not generally available, because corporations typically shared profits by paying salaries to top executives and other workers, and stock dividends to shareholders. Both salaries and dividends were generally subject to tax at the highest rates. However, after 1982, due to a change in Securities and Exchange Commission (SEC) rules, many companies stopped using profits to pay dividends to shareholders —and instead used profits to purchase their own stock on the open market (called stock buybacks), which had the effect of raising the value of said stock. The shift from dividends to stock buybacks eliminated a significant source of tax revenue (taxes on dividends) and gave wealthy investors an easy way to grow their assets tax-free.
In terms of the raw volume of taxes being paid, no group pays more than the working rich of the United States: the people working high-paying jobs (and thus paying high income taxes on top of payroll taxes) and not benefiting from the tax-avoidance devices of those who can afford to live without salaries. This amounts to a crucial difference between America’s working rich and its plutocratic rich: The former work and have to pay taxes; the latter might work but have the means to circumnavigate the system to avoid paying taxes in ways the working rich can’t.
A frequent refrain of those defending the status quo is that the income tax system already heavily burdens the rich because the top 1 percent of earners pay 40 percent of all income taxes while 40 percent of Americans pay no income taxes at all. This is partially true: Individuals with the most taxable income do pay the most income tax. However, this statistic is about people who have high incomes, typically from work; it tells us nothing about the tax liability of those with the most wealth. Studies have shown that there is only about a 50 percent overlap between America’s wealthiest people and those who earn the most income. Moreover, as the leaked tax returns of several of the wealthiest Americans reveal, the ability of wealth owners to avoid taxable income means that they are just as likely to be among the 40 percent of nonpayers as they are the top 1 percent of earners.
The death of the estate tax
Although the estate tax — a tax paid on inherited wealth over a certain threshold — still officially exists, its efficacy and public perception was severely damaged as part of a 1990s public relations campaign to portray it as a “death tax” and “an unfair double tax that hurt family farms and businesses.” The campaign, financed by some of America’s wealthiest families, achieved only limited success in its goal of repealing the estate tax altogether — they managed a one-year suspension, in 2010 — but its more fundamental success was turning public sentiment negative against the tax. Since then, public antipathy, along with pressure from rich donors, has deterred lawmakers from doing basic upkeep to close the tax’s loopholes.
Indeed, since 1990, Congress has not taken a single step to close any loopholes in the estate tax. As a result, the tax stands in name only, and wealthy Americans and their financial planners avoid taxes through a virtual alphabet soup of loopholes: names like SLATs, SLANTs, GRATs and GRUTs, CRATs and CRUTs, QTIPs and QPRTs and NIMCRUTs and Flip CRUTs.
The US income tax system—developed on the assumption of a well-operating estate and gift tax— continues to impose no income taxes on people who receive gifts, inheritances, or life insurance distributions, no matter how large.
The rich are frequently celebrated for their charitable largesse, but their philanthropy often imposes significant costs on the federal government in terms of forgone revenue, and it often provides uncertain benefits to the public. People who work for their money receive few, if any, tax benefits from charitable giving, despite most people’s assumptions to the contrary. Indeed, 90 percent of Americans get no tax benefits for their charitable donations. In contrast, those with wealth who plan their philanthropic gifts well — as most wealthy people do — can save on income taxes, capital gains taxes, and estate and gift taxes by making charitable donations of appreciated property, including stocks, real estate, cryptocurrency, and other property interests that have gone up in value. Taken together, these tax savings can save the donor, and thereby cost the federal government in forgone revenue, as much as 74 percent of the value of the donation. This makes American taxpayers, who must cover this forgone revenue, the unwitting and principal funders of the philanthropy of the very rich.
While some donations provide benefits to the public, there is no certainty that this will be the case. The reason is that the wealthiest Americans frequently donate their money not to food banks or homeless shelters (or even already-rich alma maters) but to their own private family foundations or donor-advised funds. These charitable intermediaries provide wealthy donors all the immediate tax benefits of charitable giving without imposing any time frame for the funds to be spent toward charitable ends. As a result, there is no certainty that the public will ever benefit from the donations.
The future of the United States and its economy depends on decisions the country makes today about taxing the rich.
Separate from the question of how to share the costs of government fairly, the failure to tax the rich also allows for that wealth to grow at warp speed, producing ever-greater concentrations of wealth. As others have noted, extreme concentrations of wealth threaten the continuing existence of American democracy. This is not only because wealth confers power — over companies, the media, philanthropy, and politics — but also because democracy demands that elites and regular people are united in the shared endeavor of a democratic republic.This is an issue not just for Democrats or Republicans, but for all Americans.
Reprinted with permission from The Second Estate: How the Tax Code Made an American Aristocracy by Ray D. Madoff, published by the University of Chicago Press. © 2025 by Ray D. Madoff. All rightsreserved.
