Review of "The Second Estate", by Ray Madoff, about how the rich have excused themselves from paying taxes.
"A system that requires someone who earns $100,000 to pay almost 30 percent in payroll and income taxes while giving another person who inherits $10 million a free pass is indefensible."
As we head into the nation's birthday, we should take stock of how we are fulfilling its founding propositions and promises. There have been good and bad times, and one has to say that the current time, while generally prosperous, is extremely fraught. A psychopathic (and rich) demagogue is President, and the good will and respect we have spent these centuries building around the world is being rapidly squandered. Internally, the Republic is being gnawed by any number of ills, but one of the deepest is extreme inequality. Paul Krugman has commented on this a bit, comparing our current moment unfavorably with the Gilded Age. Despite the Occupy movement and glimmerings of democratic socialism, the rich are lording it over the rest of us more blatantly and destructively than ever.
Everybody loves money, but the rich have a special, and frankly dysfunctional, relationship. There is never enough, and always too much in taxes. When they are in power, tax cuts and cuts to the IRS. When they are out of power, complaints about the "death tax", and heavy political spending by cloaked groups to get back into power. And all the time, they invest prodigiously in the "wealth management" industry, whose job is mostly to cheat the government and avoid taxes. This is not civically enlightened, nor edifying, behavior. But since the rich have the levers of power, (being the first funding filter for all political candidates of either party), they have been successful getting what they want. As Madoff explains, the rich have by this point almost entirely excused themselves from federal taxation, putting the whole burden on labor income. As the saying goes, what is criminal is not what is illegal, but what is legal.
The first step was setting the capital gains tax rate to roughly half of the labor income tax rate, with a max of 15% for long term gains. This is excused in many ways. Much of investment gains come from inflation. Corporate profits are already taxed, thus this is "double" taxation. Or, that capital investment is just great and deserves lower taxation to drive economic growth. Or, that they raise taxes eventually, after they supercharge economic growth! Etc., etc. Obviously, these are all excuses, disingenuous at best. For the recipient of capital gains, they are income in the form of money, pure and simple, and they are gains on top of whatever they had originally invested. And these gains are unearned, in the sense that no work/labor was done- merely waiting. How that makes it somehow more deserving of love from the tax system is hard to understand. There should be a uniform tax rate for it all.
The next step is inheritance, which is currently tax-free, as the estate tax is more or less a dead letter. It applies only to very large estates, and only to those dumb enough to not evade them through trusts, etc. This takes unearned income to a whole new level. No work was done here at all, other than being born to the right people. Nothing is earned or contributed to the country or economy. Inheritances should be taxed at the normal income tax rate, period. Not only are inheritances free, but their cost basis is stepped up to the time of death, so that redemption is now pain-free for the heirs, in terms of capital gains taxes. One could hardly imagine a less equitable arrangement.
Madoff then describes one unholy intersection of investment and inheritance, as the borrow-and-die technique. Rich people can let their investments sit untouched till death, so that their heirs get the whole amount, tax-free. In the meantime, they can take out loans from banks (having plenty of collateral) to live from. Such income does not apparently count to the IRS as income, and thus they can leave the debt to their heirs, who can pay it back with easy money when the time comes. All tax-free.
Additionally, Madoff goes on a lengthy discussion of charitable giving, which in the hands of our current rich has been degraded into a font of power and control, with very little giving. While the money given can not be taken back, (generating enormous tax deductions), there few rules about how rapidly, or how beneficially, the money needs to be given out. The rich now routinely set up donor-advised funds (DAF), which allow them to exercise ongoing control over investments, over the "charity", and over rate of disbursement. Not only that, but control can pass to heirs, establishing an aristocracy of putatively charitable pots of money, in addition to the non-charitable pots they are already getting. These points are all separate from the routine, and perhaps purposeful futility of most philanthropic giving, and the trend of cloaking political organizations (frequently dedicated to further reductions in taxes) in charitable garb.
Thus the current tax system makes a mockery of this country's founding principles, and creates the mortal danger of an unbridled and perpetual aristocracy of wealth, increasingly influential over the political system. What is the solution? Bring all income under the same progressive income tax system- inheritances, capital gains, lottery winnings, wages, winnings, ... everything. And apply payroll taxes (that is, the funding streams for Social Security and Medicare) to everything as well.
The US deficit is getting into dangerous territory. Social Security and Medicare are not fully funded past the next decade. What this book makes clear is that there is plenty of money to fund everything. What we are lacking is proper knowledge about the true state of play, and the courage to tax everyone equally from the income that they receive. The idea that, as cited at the top, income earned by the sweat of one's brow should be split with the government, while income that floats down unearned from a will should not be, is insulting to every working person and to the very idea of work.
For, to take a step back, what is the point of having a society and an economy? It is not to enshrine an undeserved hierarchy of unjust power in hereditary perpetuity. It is to motivate everyone to work towards the common good. There are many kinds of work, but evasion of taxes and political corruption are probably not what count, to most people, or to our founders. It takes unstinting work to make a great society, and if the culture and rules don't foster that work, decline is inevitable.
- A fellow crank agrees with me.
- Let's kill Social Security!
- Let's make America ungreat!
- A new vampire squid.
- "Certainly we do the opposite of what Biden did"
