The Second Estate
In pre-revolutionary France, the highly privileged nobility known as the Second Estate was legally exempt from paying taxes, shifting the burden to everyone else, including peasants, wage-earners, and the professional and business classes.
In Ray D. Madoff鈥檚 new book, The Second Estate: How the Tax Code Made an American Aristocracy, the Boston College Law professor and Eileen Colligan Morrissey Law Faculty Fellow reveals how the American tax system has changed over the past 40 years to create a situation in which the wealthiest Americans are allowed to effectively secede to a tax-free version of American life, forming the contemporary second estate.
鈥淚t鈥檚 particularly surprising given the intention and design of the American tax system, which was conceived in response to the highly regressive tariffs of the early 20th century to impose its greatest burdens on those with the greatest capacity to pay,鈥� said Madoff. 听鈥淭hrough the progressive income tax, adopted in 1913, and the additional estate tax implemented in 1916, the levies were intended to limit concentrations of wealth among the richest Americans.鈥�
While the American tax structure was meant to serve as a counter to inequality today, it does just the opposite: Imposing its greatest burdens on earners at all income levels, while those with high wealth get a free pass, according to Madoff.
She believes that the American public would never knowingly accept a system in which the wealthiest Americans were given a free pass on taxes, but it鈥檚 the result of confusion about who bears the costs of government. Because individual tax burdens occur under three different taxes鈥攊ncome, payroll, estate, and gift鈥攊t鈥檚 difficult for Americans to understand the overall picture.
An oft-quoted statistic about the allocation of income taxes fuels the misunderstanding: 听Those with the top one percent of income pay 40 percent of income taxes, while 40 percent of Americans pay no income taxes at all.
This measurement suggests that the richest Americans carry the lion鈥檚 share of the burden while a significant portion of Americans are freeloading off their largesse. But it鈥檚 highly misleading, she notes, because it fails to recognize the significant payroll taxes carried by all income earners.
Ray D. Madoff
鈥淧ayroll taxes are referred to as hidden taxes since they are concealed behind terms like FICA and FUTA and because they are called 鈥榗ontributions,鈥� making them seem like they are somehow voluntary or savings for future employee benefits,鈥� explained Madoff. 鈥淚n fact, these are taxes like any other and pay for the country鈥檚 biggest expenses: Social Security and Medicare for current retirees.鈥�
Additionally, this statistic also overcounts the richest Americans鈥� contribution, she said.听 The figure refers to the contributions of the top one percent of earners, but the richest Americans, such as Jeff Bezos, Mark Zuckerberg, Warren Buffett and others, are just as likely to be in the 40 percent of non-payers as they are in the top one percent because of the way that our income tax code excludes their most common sources of income: investment gains and inheritances.
As she outlines in The Second Estate, wealth taxes are not the solution since they鈥檙e unlikely to be adopted and would be almost impossible to administer, particularly now with the recent gutting of the Internal Revenue Service. Most concerning, she argues, is that the adoption of an annual wealth tax could motivate the wealthiest Americans to flee the publicly traded鈥攁nd easy to value鈥攕tock market, in favor of more private interests that are more difficult to value. This could have disastrous effects for all Americans who depend on the stock market for their retirement and other savings.
鈥淣or is the solution to restore estate taxes,鈥� she added. 听鈥淒ue to an effective public relations campaign in the early 1990s funded by 18 of the country鈥檚 richest families, the perception of the estate tax changed from an innocuous reinforcement to the income tax to an immoral double tax imposed on people at death鈥攖he moment of greatest vulnerability.鈥�
The campaign was so successful that Congress under both parties has engaged in a form of 鈥渜uiet quitting,鈥� she quipped. 听
鈥淐ongress has not closed a single loophole in the estate tax since 1990, even as the tax has become even more hollowed out by a growing panoply of tax avoidance techniques.鈥�
The answer, she argues, is to abandon the estate tax, which currently provides more cover to the rich rather than burden, and instead bring investment and inheritance income into the income tax system so that all Americans are subjected to the same rules.
She also advocates reforms to the philanthropy regulations to strengthen the nonprofit sector, specifically endorsing meaningful payout rules on donor advised funds, or DAFs鈥攃haritable giving vehicles that allow individuals to donate to a public charity, receive an immediate tax deduction, and then recommend grants to other qualified charities over time鈥攁nd private foundations, to clarify that contributions to DAFs are not the same as transparent charitable giving.
The Second Estate closes with a vignette that recounts 19th-century diplomat, political philosopher, and historian Alexis de Tocqueville鈥檚 examination of the causes of the French Revolution. He concludes that the crucial factors were taxes, and how the 鈥渄isparate treatment of the rich鈥� created divisions that 鈥減ermeated all aspects of life,鈥� eliminating their common interests, and the desire to act in concert.
鈥淯nlike pre-revolutionary France, the United States was founded on principles of equality,鈥� writes Madoff. 鈥淭hese principles, though incomplete at conception, have served as a continuing guide for the ongoing process of building 鈥榓 more perfect union.鈥� Bringing the rich back into the tax system is an essential step in this ongoing endeavor.鈥澨�
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