You Pay Taxes. They Don't Have To.
It isn't a conspiracy. It's the law, written in the open, passed by Congress, and almost nobody noticed. That's what makes it worse.
Watch first (26 min): "America's New Aristocracy," Institute for New Economic Thinking. Boston College law professor Ray Madoff, author of The Second Estate: How the Tax Code Made an American Aristocracy. Can't see the player? Open on YouTube or on INET's site.
Budget: Congressional Budget Office. Wealth: Federal Reserve Distributional Financial Accounts. Sources below.
The rich aren't breaking the law. They wrote it.
Every escape hatch on this page is printed in the tax code or an agency rule. Someone drafted it. Someone lobbied for it. Someone voted for it. And that means someone can vote to close it, if enough people find out it's there.
01America built its own Second Estate
In pre-revolutionary France, the nobility was called the Second Estate. Its defining privilege: it didn't pay taxes. Professor Ray Madoff argues the United States has quietly recreated that class.
The American tax system was designed to lean hardest on those most able to pay: higher income tax rates as income rises, and an estate tax as a backstop to catch big fortunes passing between generations. On paper, it's highly progressive.
In practice, Madoff explains, the very wealthiest have found a way to step outside it. Not by hiding money offshore, and not by breaking the law. They simply arrange their lives so they almost never have what the tax code counts as income.
Verified checked against a primary source Attributed Madoff's claim, credited to her Corrected we adjusted the figure
02What this costs you
The bill doesn't disappear. It moves to you.
Every dollar the wealthiest legally avoid is a dollar the government either borrows, which you and your family inherit as debt, or collects from people who can't avoid it: wage earners.
Verified Payroll taxes, the Social Security and Medicare money taken out of every paycheck, raised $1.71 trillion, about 35% of all federal revenue, in FY2024, per the Congressional Budget Office. Individual income taxes raised $2.43 trillion (49%). Corporate taxes, $530 billion (11%).
Verified The payroll tax is 15.3% from your very first dollar: no standard deduction, no exemption. Half is withheld from your check; economists generally agree the employer's half comes out of your wages too. On a $60,000 salary that's $9,180. That can be the difference between making rent or not.
Income tax on wages. Payroll tax from dollar one. Can't defer it, can't borrow around it.
To the income tax, the two of you look identical. The $10 million is not income under federal law.
Verified Even when the wealthy do sell, the IRS taxes long-term capital gains at 0%, 15% or 20%. Wages are taxed at rates up to 37%, plus payroll tax. Same dollar, two different price tags.
03The playbook: buy, borrow, die, inherit
The strategy has a name. USC law professor Edward McCaffery coined "buy, borrow, die" in the 1990s to show students how unfair the system was. Madoff adds a fourth step.
Own assets that grow: stock, real estate, a company. Growth in value is not taxed until you sell (IRS Topic 409). So don't sell. Take a tiny salary instead.
Need cash to live? Pledge the stock as collateral and take a loan. Loans aren't income. Tax-free spending money, while the assets keep growing.
At death, the IRS resets the asset's basis to its fair market value on the date of death ("stepped-up basis"). Decades of gains vanish, never taxed.
Gifts and inheritances are excluded from the heirs' income entirely. The only tax left is the estate tax. And that's the next problem.
Verified When ProPublica obtained a trove of IRS records in 2021, it found the 25 richest Americans paid $13.6 billion in federal income taxes over five years while their wealth grew by $401 billion: a "true tax rate" of about 3.4%. Names in the files included Bezos, Musk, Buffett, Bloomberg and Zuckerberg.
The receipts: ProPublica's Secret IRS Files
Verified From actual IRS records, published June 8, 2021:
- Warren Buffett: wealth up $24.3 billion, 2014–2018. Taxes paid: $23.7 million. True tax rate: 0.1%.
- Jeff Bezos: paid $0 in federal income tax in 2007 and 2011.
- Elon Musk: paid $0 in 2018. He had pledged about 92 million Tesla shares as collateral for personal loans.
- Michael Bloomberg, Carl Icahn, George Soros: each had recent years with $0 federal income tax. Icahn had a $1.2 billion bank loan.
- Larry Ellison: Oracle disclosed a personal credit line secured by about $10 billion of his shares.
How the "true tax rate" works: federal income taxes paid, divided by the growth in Forbes-estimated wealth over the same years. ProPublica published its full method; see For the Record for the main objection to it.
Attributed Madoff points to Mark Zuckerberg's dollar-a-year salary at Meta as the textbook example of avoiding wage income.
04The estate tax: a decoy that protects the rich
The estate tax is supposed to be the safety net: 40% on large transfers at death or by gift. In reality, it barely functions. Madoff's provocative argument is that its mere existence now helps the wealthy, because it lets everyone assume big fortunes are being taxed somewhere, when they mostly aren't.
Attributed A sustained public campaign recasts the estate tax as a "death tax": an immoral double tax on family farms and businesses. Congress grows afraid to touch it, in either party.
Verified For one year, there is no federal estate tax at all.
Corrected Estate and gift taxes raise about $32 billion: roughly 0.6–0.7% of federal revenue. (Madoff says "less than half of 1%"; it's slightly more than that, but still a rounding error.) In the 1970s the share averaged about 2%.
Verified Under the One Big Beautiful Bill Act, the IRS Form 706 instructions set the 2026 exclusion at $15,000,000 per person ($30 million for a married couple), with a top rate of 40% above it. The higher exemption is now permanent and indexed to inflation. Even fewer estates will owe anything.
051982: the rule change nobody voted on
For most of the 20th century, companies shared profits with shareholders through dividends, which were taxed at the same top rates as wages. An investor living off the stock market paid real tax.
Verified In November 1982 the Securities and Exchange Commission adopted Rule 10b-18, a "safe harbor" protecting companies from manipulation charges when they buy back their own stock. Buybacks went from legally risky to routine.
Attributed Madoff's point: buybacks shifted shareholder returns away from taxable dividends and into rising share prices, which aren't taxed until sold. Combine that with buy-borrow-die, and the gain may never be taxed. The stock market's long climb since 1982 became, for the wealthiest owners, a largely tax-free escalator.
No member of Congress voted on this. It was an agency rule, and it reshaped how fortunes grow.
06Who wrote it in: the sweetheart deals
A tax accountant will tell you the same thing: none of this is a trick. It's in the code. Here is the paper trail for some of the biggest provisions, and who was behind each one.
The step-up: the deal Congress tried to kill once
Verified The rule that erases capital gains at death took effect in 1921. In the Tax Reform Act of 1976, Congress actually repealed it and replaced it with "carryover basis," so heirs would owe tax on the original gain when they sold.
The fix never took effect. After an outcry, led by complaints that heirs couldn't reconstruct what relatives paid decades earlier, Congress delayed it and then repealed it in 1980. The step-up came back and has stood ever since.
Cost today: about $58 billion in lost federal revenue in 2024 alone (Joint Committee on Taxation, via Peterson Foundation).
The buyback rule: written by a Wall Street executive
Verified In February 1981, President Reagan named John Shad to chair the Securities and Exchange Commission. Shad was vice chairman of E.F. Hutton, one of the country's largest brokerage firms, and had chaired the Reagan-Bush New York finance committee in the 1980 campaign.
Under his chairmanship, the SEC adopted Rule 10b-18 in November 1982, the safe harbor that made stock buybacks routine. No vote in Congress was required.
We document the appointment and the rule. We make no claim about Shad's motives.
The GRAT: Congress closed one loophole and opened a bigger one
Verified In 1984, New York estate lawyer Richard Covey popularized a trust shelter called the GRIT. In 1990, Congress shut it down as abusive and, in the same law, created a replacement: the grantor retained annuity trust, or GRAT.
Covey found the replacement had a bigger hole. A "zeroed-out" GRAT could pass investment gains to heirs with essentially no gift tax. A Treasury lawyer who helped draft the 1990 law later said its authors never anticipated this. Covey set up two $100 million GRATs for Audrey Walton, a Walmart heir by marriage. The IRS challenged them, and in 2000 the U.S. Tax Court ruled for Walton.
Cost: Covey himself estimated GRATs may have cost the government more than $100 billion since 2000 (Bloomberg, 2013). Casino owner Sheldon Adelson alone avoided an estimated $2.8 billion in gift taxes.
The "death tax": a word built to win a vote
Verified Jim Martin, founder of the conservative 60 Plus Association, says he coined "death tax" in 1993. GOP pollster Frank Luntz found the phrase angered voters far more than "estate tax," and it went into the Republicans' Contract with America. Called a "death tax," repeal polled near 80% support, even though only the richest 2% of estates were subject to it at the time.
In 2006, Public Citizen and United for a Fair Economy reported that 18 super-wealthy families, tied to fortunes including Walmart, Mars candy, Gallo wine and Campbell's soup, had bankrolled a multimillion-dollar repeal campaign that would have saved them about $71.6 billion.
Both parties: President Clinton vetoed repeal in 2000. In 2001, 58 House Democrats joined the vote for repeal. In 2010 the estate tax lapsed for one year.
Carried interest: saved in the final hours
Verified "Carried interest" lets private equity and hedge fund managers pay the lower capital gains rate on their pay. The 2022 Inflation Reduction Act included a provision to limit it. Sinema's vote was needed to pass the bill. She fought to protect the break, and Majority Leader Chuck Schumer removed the provision to win her support. A last-minute carve-out also exempted companies owned by private equity funds from the new corporate minimum tax, worth an estimated $35 billion to the industry (NBC News).
The bill passed the Senate 51–50. This is a Democratic-era example; the loophole has survived Congresses of both parties for decades.
The $15 million exemption, made permanent
Verified The One Big Beautiful Bill Act raised the estate tax exemption to $15 million per person, $30 million per couple, indexed to inflation, with no expiration date (IRS Form 706 instructions).
How these deals get made
07Charity: two rulebooks
Most Americans who give to their church or the food bank get no tax break at all. The wealthiest can use philanthropy to wipe out entire categories of tax.
| Working Americans | The wealthiest | |
|---|---|---|
| Who gets a deduction | Verified About 90% take the standard deduction and got nothing for giving. Starting 2026, a new deduction allows up to $1,000 ($2,000 joint) for cash gifts. | Itemizers, especially those donating appreciated stock. |
| Limits | Payroll tax can't be reduced by giving. Income tax deductions are capped at 20–60% of income. You can never zero out your bill. | Donating appreciated assets can eliminate capital gains and estate/gift tax on them, with no comparable overall cap. |
| Where the money goes | Usually straight to a charity that spends it. | Often to a private foundation or donor-advised fund (DAF), which gets the tax break now and may pay out later, or barely at all. |
| Payout rules | — | Attributed DAFs have no payout requirement. Foundations must pay out 5% a year, but can meet that by giving to a DAF. The new 2026 deduction for regular donors excludes DAF gifts. |
08High earners are covering for high wealth
When someone says "the rich pay most of the taxes," they're usually citing income tax data. Attributed The top 1% of income earners do pay roughly 40% of federal income taxes.
Madoff's point is that high income and high wealth are not the same people. A surgeon or a lawyer earning $800,000 in wages pays heavily. A billionaire living on loans against stock may report very little income at all. The high earners, she argues, provide political cover for the high-wealth owners who sit outside the system.
09What Madoff says should be done
- Tax gains at death or gift. No annual tax on paper gains, but when assets pass on, the accumulated gain is taxed. Attributed Canada has done this since the 1970s; President Obama proposed it.
- Repeal the estate tax, and tax inheritances as income. If you win the lottery or find money on the street, you pay income tax. Inheriting $10 million should be treated the same way.
- Force charitable money out the door. Set a time limit for foundation and donor-advised fund money to actually reach the public.
- Cap charitable tax benefits for the wealthy, the same way working Americans are capped.
Notably, she opposes a wealth tax. Her concern: an annual tax on total wealth would push fortunes out of easily valued public stock and into hard-to-value private businesses, real estate and partnerships, hurting the stock market that ordinary Americans' retirement savings depend on.
These claims appear in the Madoff interview. They are plausible and come from a credentialed source, but we have not confirmed them against a primary document. They are shown here, not in the body of the page.
- That tax benefits for the wealthiest can be worth up to 74% of a donation's value.
- That only about 50% of high-wealth owners are also high-income earners.
- That about 70% of stock market returns in the 1970s were paid as dividends.
- That President Nixon proposed taxing gains at death. (The Obama proposal is confirmed.)
Corrections & clarifications to the video
- "Not a single amendment to the estate tax since 1990."
- The estate tax exemption and rate have changed many times since 1990, including in 2001, 2010, 2012, 2017 and 2025. We read her point as being about the rules meant to stop avoidance, which have not been seriously updated. We present it as her view, not as fact.
- Dow Jones "at 3,000 in 1982."
- In nominal terms the Dow traded below about 1,100 in 1982. Her 3,000 figure appears to be inflation-adjusted, while her 43,000 figure for 2024 is nominal. The direction of her point holds; the exact comparison mixes two measures. Many factors besides buybacks, including falling interest rates, drove the market's rise.
- Buybacks were "not allowed" before 1982.
- More precisely: buybacks were not banned, but carried a real risk of manipulation liability. Rule 10b-18 created a safe harbor that removed that risk.
- Estate tax "less than half of 1%" of revenue.
- About 0.6–0.7% in FY2024. Still tiny.
- "$46 trillion."
- Federal Reserve data put the top 1%'s net worth at about $49–50 trillion by late 2024. Her figure is in range, if anything conservative.
For the Record
The strongest arguments on the other side, stated fairly.
"It's legal."
- Correct, and this page agrees. The IRS distinguishes legal tax avoidance from illegal tax evasion. Nothing described here is a crime. The question is whether the law should be written this way.
"Buy, borrow, die is overstated."
- Jeff Bezos told CNBC in May 2026, "There's no truth to this 'buy, borrow, die' thing." Loans carry interest and must eventually be repaid, often by selling assets, which triggers tax. Not every billionaire lives on borrowed money.
- Counterpoint: ProPublica's IRS records showed several of the wealthiest did borrow heavily, and stepped-up basis erases the gain on anything held until death regardless.
"ProPublica's 'true tax rate' is apples to oranges."
- Critics note that no U.S. tax, for anyone, applies to unrealized gains. Comparing taxes paid to wealth growth measures something the law never tried to tax. ProPublica also relies on Forbes wealth estimates, which it acknowledges are imperfect.
- Counterpoint: that is exactly the point. The comparison shows how much economic gain the current rules leave untouched, often forever, thanks to stepped-up basis.
"The rich already pay most of the taxes."
- True for income taxes: the top 1% of earners pay about 40%. But that measures income, not wealth, and leaves out payroll taxes, which fall hardest on working people.
"Taxing at death hurts family farms and businesses."
- This is the core argument for the estate tax exemption. Heirs could face a tax bill on land or a business without the cash to pay it. The Tax Foundation argues estate tax repeal would modestly grow the economy and investment.
- Counterpoint: proposals like Obama's and Canada's system include exemptions and deferral options for exactly these cases. With a $15 million per-person exemption, very few family farms owe estate tax today.
"Charitable incentives do real good."
- Large gifts fund hospitals, universities and research. Madoff doesn't oppose charity; she argues the public, which pays for the tax break, deserves assurance the money actually reaches charity in a reasonable time.
the book
The Second Estate: How the Tax Code Made an American Aristocracy by Ray D. Madoff. University of Chicago Press, October 2025. Named one of The New Yorker's Best Books of 2025. Madoff is a professor at Boston College Law School and cofounder and director of the Boston College Forum on Philanthropy and the Public Good. Check your local library.
Sources
- Institute for New Economic Thinking, "America's New Aristocracy" (video, Ray Madoff). Also on YouTube.
- Ray D. Madoff, The Second Estate, University of Chicago Press, 2025. Publisher listing.
- Congressional Budget Office, Monthly Budget Review: Summary for Fiscal Year 2024 (receipts $4,919B; outlays $6,752B; deficit $1,833B; individual income $2,426B; payroll $1,710B; corporate $530B).
- IRS, Topic 409: Capital Gains and Losses (gains taxed on sale; 0/15/20% long-term rates).
- IRS, FAQs: Gifts & Inheritances (inherited basis = fair market value at date of death).
- IRS, Instructions for Form 706 (2026 basic exclusion $15,000,000; 40% top rate).
- U.S. Treasury, FY2024 year-end budget results.
- Federal Reserve, Distributional Financial Accounts via FRED: Net Worth Held by the Top 1%.
- Peter G. Peterson Foundation, What are estate and gift taxes and how do they work? ($32B in FY2024; ~2% share in the 1970s).
- ProPublica, The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax (Eisinger, Ernsthausen, Kiel, June 8, 2021).
- ProPublica, How We Calculated the True Tax Rates of the Wealthiest (methodology).
- ProPublica, The Secret IRS Files: a quick guide; NPR, ProPublica: wealthiest avoid paying their fair share (3.4% true tax rate).
- ProPublica, "Buy, Borrow, Die: How America's Ultrawealthy Stay That Way" (video).
- SEC, Rule 10b-18 final rule amendments (history of the 1982 safe harbor); American Bar Association, Stock buybacks and Rule 10b-18.
- One Big Beautiful Bill Act secondary summaries: Amundsen Davis via JD Supra (exemption made permanent); KJK (non-itemizer deduction, cash only, DAFs excluded).
- Yahoo Finance, What is the 'buy, borrow, die' strategy? (Bezos CNBC remarks, McCaffery origin).
- Tax Policy Center, Carryover basis vs. step-up basis (1976 law repealed before taking effect); Greenleaf Trust, Stepped-up basis: a short history (1921 origin, 1980 repeal of carryover).
- Peter G. Peterson Foundation, What Is Stepped-Up Basis? (JCT: ~$58B forgone in 2024).
- Reagan Library, Nomination of John S. R. Shad as SEC Chairman (Feb. 24, 1981).
- Bloomberg via Accounting Today, Accidental Tax Break Saves Wealthiest Americans $100 Billion (Dec. 17, 2013; GRAT history, Walton case).
- The American Prospect, Meet Mr. Death (Dec. 19, 2001; Jim Martin, Luntz, repeal votes).
- Public Citizen, Spending Millions to Save Billions (April 25, 2006; 18 families).
- NBC News, Kyrsten Sinema delivers gift to private equity (Aug. 2022).
- Tax Foundation, The Estate Tax Provides Less than One Percent of Federal Revenue (case for repeal).
Related on Crisis of Truth: Two Tax Codes · One Big Beautiful Bill · Rigged Game
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