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Chapter 1: What is the main topic discussed in this episode?
What does it take to be prepared for disaster? You have to be confident. You have to be calm. Will you be perfect? No. But the idea is that you'll have your bearings and this won't be something new to you. This week on Explain It To Me, how to stay ready so you don't have to get ready. New episodes Sundays wherever you get your podcasts.
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That's the number of days left until Prof 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.
Ed?
No joke today. No joke. Why's that? 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. Well, the promotion's 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. uh, to the Fillmore. 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. Um, maybe we could get into some Comrocket, maybe some Faltcoin. Maybe we'll just keep it simple and stick with Bitcoin.
This is just making a whole lot of sense to me. It's all resonating. Yeah. No, this is, uh, 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. Uh, I think we should have Adam Neumann.
Ha ha ha.
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Chapter 2: How do the ultra-wealthy avoid paying taxes?
That's not a bad idea. I agree. You know, he's actually an incredible speaker and communicator. Everything he says, he just... Did I tell you my story about Adam Neumann? I don't think so. Not coming to mind. So I was invited to the J.P.
Morgan Alternative Investments Conference, which is literally one of the... 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 have me do my predictions thing. I've done it twice, I think. And then they have 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 Neumann. 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 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 was a movie called We Crashed where I played me. No, I didn't play me. Kelly Alcoyne from Billions played me interviewing him. Somebody got a hold 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, 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. And I said, Adam Neumann. 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 because I've been saying that Elon Musk would lose his case. And I guess the guy who hosts the event is butt buddies with Elon. That's a shame, but you were right. I mean, that's what we learned this week. You were right. I have that, Ed. So that's all that really matters.
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Chapter 3: What is the impact of the tax code on wealth inequality?
Yeah. Yeah, I actually, I don't remember the story itself, but I remember watching, it wasn't a movie, it was a show, it was a series. It was Apple. We crashed. Yeah, exactly, on Apple. We'll share it later. I remember seeing that scene. Yeah, with Kelly O'Coin, who played you very, very well. I believe he was on Billions, I want to say. Yeah, Dollar Bill on Billions.
I mean, he crushed that role. He nailed you. Yeah, he's been on a lot of stuff. I thought he played a better me than me. We should have him stand in for you on this show at some point. You know, I'm all for it, because I'd like to go get tapas right now. You got about 15 minutes. Why don't you order some room service, get yourself a snack? 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. 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 on stage. 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. ProfitGMarketsTour.com to secure your tickets. It's going to be a lot of fun. We're going to have a Q&A section at the end.
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Chapter 4: What loopholes do the wealthy exploit in the tax system?
You'll ask some questions. We'll do our song and our dance. And we'll have some interesting voices on stage to discuss things with us as well. Very excited. ProfitGMarketsTour.com. Ed, should we get on with the show? Let's do it. 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 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. 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?
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% tax pay 40% of all income taxes. But what they're not saying there is, what do they mean by top 1%?
What they're actually talking about is the top 1% 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.
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Chapter 5: How do we define wealth versus income in taxation?
How do the wealthiest, the very, very wealthiest make their money compared to, let's say, just average wealthy?
Or even average American. Or average American. 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 37% and payroll taxes at rates at 15.3% rates. And payroll 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 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 percent 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, 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.
Humble of him, yeah.
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. They pay very minimum taxes on that side. And so then why were they not taking taxes? As you said, are they just being humble? No.
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Chapter 6: What are the proposed solutions to tax the wealthy fairly?
What they are doing is they are counting on the growing value of their stocks. 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, many of them have seen stock growth between like $50 and $150 billion just in the past three years. It's been extraordinary, that amount of growth.
So then the question becomes, I mean, 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 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?
Exactly. And the key here is that they are using their stock and other assets 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 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 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, 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 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.
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.
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Chapter 7: How does the estate tax function in the current system?
So, Professor, that'll bridge us nicely into, I think, possible solves. I want to propose two possible solves and get your response. I think what we want are taxes that are 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 gonna 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 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 and alternative minimum tax of say 40% on corporations. And then the second thing would be to lower the estate exemption from 30 million to 1 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 wellbeing 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 dollars or corporations making above a certain amount.
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 a, what that is, is it something that disallows deductions. Mm-hmm. OK, 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 alternative from deductions and about the failure to tax inheritances. which, again, are subject to broad exclusion.
So the problem that we have, as I see it as a tax person, 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, I don't know if you're proposing that. So how are we going to handle this appreciation?
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Chapter 8: What changes are necessary to reform the tax code?
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.
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? Yes. And the basic strategy now is buy, buy 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 gonna 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 have repealed it.
They typically just don't work very well. 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.
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 know, you can live a pretty good lifestyle with just a billion dollars. 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.
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 ProfitMarketsTour.com.
Hi, I'm Maria Sharapova, host of the Pretty Tough Podcast. Each episode, I sit down with high-achieving women to discuss the pursuit of excellence without apology. This week on the show, comedian and best-selling author Chelsea Handler gives her tips on independence and aging gracefully.
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