'If You Can Keep It': What The Wealth Gap Means For Democracy

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0:18This is 1A. I'm Todd Zwillick. Jen is in Madrid this week reporting from Bloomberg CityLab. For this week's If You Can Keep It, our series on politics and how it's affecting the health of our democracy, we're looking at America's wealth gap. It's now grown to its widest point in three decades, and it looks set to grow even wider. In the past 60 years, the top 1 % of families saw their wealth increase by more than seven times. That's according to the Urban Institute. Now, a growing number of states are looking at implementing a wealth tax to fund social services. These billionaires are going to learn that we are still living in a democratic society where the people have some power.

1:02That's Senator Bernie Sanders in California in February rallying for a billionaire tax being proposed in that state. Sanders is an independent who caucuses with Democrats in the Senate. California is considering putting a billionaire tax on its ballot in November. And this month, New York City's Democratic Socialist mayor, Zoran Mondani, and Democratic governor of New York, Kathy Hochul, introduced a proposed tax on luxury second homes in New York City. Here's Mom Donnie promoting his tax plan in a recent video. Today, we're taxing. I'm thrilled to announce we've secured a pied-a-terre tax, the first in New York's history.

1:40This is an annual fee on luxury properties worth more than$5 million whose owners do not live full-time in the city. Like for this penthouse, which hedge fund CEO Ken Griffin bought for$238 million. Now, in March, Washington state passed its first ever income tax, and it's already facing legal challenges there. In Washington, D.C., despite years of attempts from Democrats, Congress has shown no appetite to raise taxes, even on the ultra-rich. I'm Todd Zwilich. You're listening to the 1A podcast for this installment of If You Can Keep It, how tax codes are contributing to growing inequality in the country, how to fix it, and what this wealth gap means for the health of our democracy.

2:23That's just ahead after this short break. Stay with us.

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3:46What happens next? At NPR, we stand for your right to be curious and to follow the facts. Follow Up First wherever you get your podcasts and start your day knowing what matters and why. Welcome back to the 1A podcast. We're talking about how tax codes are contributing to inequality in the United States. Let's get into our conversation and meet the panel. Ray Madoff is a professor at the Boston College Law School where she teaches tax law and estate planning. She's also author of The Second Estate, How the Tax Code Made an American Aristocracy. Professor Madoff, welcome. Thank you so much. It's a real pleasure to be here.

4:24It's a pleasure to have you. In the studio with me is Kyle Parmalo. He's a senior fellow at the Center Right American Enterprise Institute, where he studies federal tax policy. Kyle, thanks for being here. Thank you for having me. And also on the line, Morris Pearl. He's the chair of the Patriotic Millionaires. That's a group advocating higher taxes on millionaires and corporations. He's also a former managing director at BlackRock and co-author of Tax the Rich. Morris, welcome to 1A. Great to be on your show. Thank you. Well, Morris, let me start with you. I just mentioned it. Your book, Tax the Rich, a pretty self-explanatory title.

5:00What does that mean in the context of Americans' ability to get by and the state of democracy? Why tax the rich? Well, our basic premise is that some people work for a living, get a paycheck every week with tax deducted from it. And others of us are already rich, don't need to work, and basically pay no taxes at all for all practical purposes. And that's increasing our inequality. If I make money and don't pay taxes, but you make the same amount of money and you have to pay taxes, then every year if we spend the same amount, I get richer and richer and richer while so many Americans are struggling to get by.

5:42And that's causing us gross inequality in our country, and that's causing people to, like, frankly, get fed up with this and sometimes give up on democracy and maybe vote for aristocracy or oligarchy instead. So, Ray, we can see how maybe vast wealth inequality puts pressure on democracy. We're going to talk about income taxes and whether they're fair, but also something slightly different, the wealth tax that I just mentioned. What's a wealth tax? How is it different than just raising the top marginal rate for the richest income earners? Right. So many Americans are familiar with the income tax, of course, because we pay it all the time.

6:26We have to collect all of the income that we receive, report it to the federal government, and pay taxes on it. However, wealth taxes take a different approach. Wealth taxes look at the accumulated wealth of an individual and imposes an annual tax on that. Each version of it is slightly different. Elizabeth Warren has about a 2 % tax, and the California wealth tax is a 5 % tax. But it's designed to look at everything the person owns, not just their stock, but their houses, their artwork, their cryptocurrency, the whole thing, and impose taxes on that accumulated wealth each year. Usually above a certain amount, you might say, you know, 2 % above a billion dollars in assets or something like that?

7:12These are focused on the very rich. They are – each of the plans has a slightly different amount, but it's focused on the very rich. Kyle, your home at the American Enterprise Institute, I think, traditionally hasn't been for things like wealth taxes or higher income taxes. You can talk about that if you want to, but why do you think we're seeing so many states and cities, New York City and other places, pursuing wealth tax right now, as Ray describes it? So I think there are three reasons. So the first, I think, is why do we levy taxes to begin with anyway? It's to raise revenue. So there are a lot of priorities that need to be funded, and a lot of these states need to find revenue to do that.

7:57So they are coming up with different tax instruments to raise that revenue. The second reason I think this dates back actually well before, say, the Trump era is I think that there is this movement towards tax populism, I could call it. in that, and this is particularly the case in the Democratic Party, that they're looking to raise revenue and saying that it can primarily come from very high-income households. This goes back to Obama's promise not to raise taxes on households earning less than$250 ,000. You have then Biden adjusting that for inflation to$400 ,000. So I think there's an idea here that we can get all the revenue we need.

8:36We just need to be super aggressive at the very high end. And then there's a third reason, which I think is a policy reason, and I think it goes back to maybe what you'd call a hole in the income tax, is that a lot of very high net worth households earn income that's not visible to the current income tax. So the wealth tax and to some degree the estate tax is seen as a backstop to that. So I think those three all are kind of pushing in that direction. What you're describing is a world to many people where the ultra-rich don't actually pay a lot of tax, and that to many Americans is a problem. So under the current income tax, and this again is how you define income, if you use the broadest definition of income, which is what economists would say is the amount you consume or the amount you spend in a year plus the change in your net worth, that's kind of like the accounting identity of what income is to an economist.

9:34The income tax taxes that consumption component and some of that change in net worth, but not all of it. So if you're an individual that's a shareholder in a corporation and you hold on to that stock and that stock appreciates year over year, that's income to an economist, but it's not necessarily taxed that year. It may be taxed in the future, but not currently. Right. Income to an economist and maybe to the average person who's watching the accumulated wealth of multimillionaires and billionaires and how they're supporting or not supporting the social safety net. Morris, let's talk about California.

10:10The governor there, Gavin Newsom, he opposes a wealth tax in California. He's also positioning himself potentially for a presidential run. Billionaires in California, people like Peter Thiel, have threatened they might leave California if there's a wealth tax. Talk to us a little bit about what the California tax would look like and how it's being received as they debate it there. Well, it would look like those of us who are the most fortunate, a few hundred people who are extraordinarily wealthy and who, as he was just saying, don't have income, but according to the Internal Revenue Service, but have enormous amounts of income, billions and billions, according to any normal person's definition of having made money, pay virtually no taxes at all.

11:02Even me, I'm not a billionaire, but I'm relatively wealthy, but I pay almost no income taxes because I have essentially no income according to the IRS definition. I have plenty of income according to an economist's definition of income. So I think that's that gross unfairness that's driving people. And, yeah, some people are against it. the people who are going to pay and the few people who are expecting to become billionaires, I guess. The vast majority of people think this is a perfectly reasonable thing to do. And yeah, I mean, billionaires can threaten to move away if they want to. But I think people live in California and New York and places like that for a reason, because these are wonderful places to live.

11:54And the whole point of being rich is you can live wherever you want. So I think that's the idea of moving because the tax system is changing just seems absurd to me. I'm not moving. Well, we have to take a short break. When we come back, we'll talk more about wealth, wealth inequality, and billionaire flight, the threat of moving away from your state if the rich are taxed. But before we go, we got this message from Troy in Illinois. He says, as long as the rich are allowed to influence policy and their own interests, they will act against the general public whenever it's profitable. And Jason says this, we need to tax the rich at the same effective rate as the average American.

12:35Just because they pay more dollars out doesn't mean they contribute more. The more you take out of the system, the more money you owe the system. A lot more to come on the wealth gap and democracy in America. We'll be right back.

13:25This message comes from Ritual. You want to know exactly what you're putting in your body. At Ritual, they have those same ultra-high standards. Every ingredient they use is traceable, science-backed, and formulated by dieticians, from their best-selling multivitamins to their 3-in-1 gut support. Get 25 % off at ritual.com slash podcast. These statements have not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease. Welcome back. It's 1A. I'm Todd Zwilich. For today's installment of our politics series, If You Can Keep It, we're looking at how a growing number of states are considering a wealth tax to tackle inequality in the United States.

14:07We were talking before the break about the risk of billionaire flight, people who say, well, there's a wealth tax in my state. I'll just leave the state. We got this message from Professor Stephen Durloff. He's director of the Stone Center for Research on Wealth Inequality and Mobility at the University of Chicago. Listen. The big question on wealth tax is whether they will induce billionaire flight. The evidence that income taxes have caused flight suggests they do not. The proposed California tax, however, is an order of magnitude greater, and so history does not provide guidance. Any predictions on effects of the tax on flight are speculative.

14:47Social scientists do not know the answer, and anyone claiming otherwise is wrong. Morris, before the break, you kind of threw cold water on the idea of billionaire flight. But, Ray, what's your view? What's the history on this? It's not the first time that we've had a populist wave. It's not the first time we've had gross inequality. in America. The last time government decided to tax the rich, to soak the rich, did billionaires flee or the equivalent of billionaires? Well, I think we have to look at the difference between the states and the federal government as they each have separate strengths and challenges.

15:25The federal government has long had a system that is designed to impose its greatest burdens on those with the greatest capacity to pay. We've had this system since the early 20th century. In 1913, when we enacted the first income tax, it was geared only to the very richest 5%. And even as it expanded to include everyone, we had progressive rates to impose greater burdens on those with the most income. And in addition, since 1916, we've had an estate tax, which as Kyle explained earlier, was designed to serve as a backup to any of the problems in the income tax system by imposing an additional level tax on the wealth of the richest 1 % to 2 % of Americans whenever they gave away the property either during life or at death.

16:18And together, they were designed to address the problem, and they were very well accepted. Throughout almost all of the 20th century, there was no question about the system, and together they did quite an effective job. However, there have been changes, which we can get to later on, such that they are no longer doing their work. When we talk about flight risk, I think it is extremely unlikely that we will have flight risk when it comes to the federal level, if we had federal taxes. However, states do have always run the risk of state competition. and Florida actually sued the federal government when they offered a credit for state estate taxes because they felt that it undermined their ability to win people into the state by offering low taxes.

17:09So there's always been competition among the states. That's always been a feature of our country. But I think when people talk about leaving the federal government, that our federal leave the United States, give up their U.S. citizenship, I just think that's highly unlikely. Kyle, go ahead. I want to add to the message that we got. I think the research on migration of individuals due to taxation at the state level is mixed. It's mixed in the sense that on average, responses are quite low to income taxes. But if you look at, say, the population of very high income taxpayers and households, they are more responsive.

17:49So that's just something to keep in mind. And I agree, too, that moving from state to state is much easier than moving out of the United States. Well, we've been hearing from so many of you. Mike in Missouri emails to say, I'm OK with taxing the ultra-wealthy. Only if those revenues go toward education and universal health care. We need to lift the less fortunate up if we ever expect to close the gap. And Michael in Pennsylvania says, a wealth tax would help America in several ways. The most important benefit is that it would be an important step in restoring the sense of fairness that's fundamental to democracy.

18:26The very wealthy have used their riches and power to subvert the tax system to their advantage. It's working people who pay the price. Michael, thanks for that message. And we got this from Eric in Idaho. My name is Eric from Idaho. I'm a millennial, and wealth taxes are super important to generations downstream, Gen X, from Gen X to Gen Z. The unfortunate truth is that the median age of buying a first home has actually gone up into its 40s, and some of us who are approaching 40 still haven't owned a home yet. So I think wealth taxes are going to help even that out and redistribute some aggregated wealth from previous generations.

19:15Okay, so let's talk about the key phrase there, redistribute. We can use the slogan, soak the rich. A little bit vindictive, populism, we get it. The ultra-rich have everything while everybody else loses out, so soak the rich. That's the political appeal. What about the redistribution appeal? Eric in Idaho says he can't afford a home into his 40s. Kyle, millions and millions and millions of young people are similarly situated. They feel that the economy, they can see that the economy isn't filtering resources to them for the same amount of work that they've always done while the ultra wealthy accumulate wealth.

19:50So redistribution is what he's interested in. Talk about whether that can work and to the benefit of the country. So when we think about tax policy and its impact on redistribution, we want to know how much it impacts inequality. And if we're talking about wealth taxes in particular, I don't think they're going to have much of an effect one way or the other. And the reason is because I think they'll also have a limited impact on total revenue. Because the amount that the federal government or state governments are able to redistribute depends on how much revenue they raise. And there are other tax instruments that raise a lot more revenue if that is what you want to accomplish.

20:27And you look overseas at how other countries raise revenue. They do it through broad-based taxes on payroll, value-added taxes, which are a type of sales tax. And those raise a lot as a share of GDP. And they have systems that are a lot more redistributive than the United States' system. Adding a wealth tax really is not going to change that for the U.S. because it's not going to raise very much revenue. What about the very simple math that you hear all the time? A 2 % tax on assets over a billion. Nobody needs more than$10 billion, let's say. Your lifestyle doesn't change whether you have$10 billion or$70 billion.

21:06You get the same life. Tax it at 2 % for the richest of the very rich, and we could pay for big expansions to Medicare and Medicaid. People could get health care for that money. What about that argument? Yeah, that's simply not true. So one, the amount of wealth people have and whether that's appropriate, that's a normative question. But from the perspective of how much this is going to raise in revenue, a 2 % wealth tax is not going to raise enough in order to finance those types of programs. Those programs are several percentage points of GDP and needed revenue every single year. A wealth tax is going to raise less than a percent of GDP optimistically.

21:46A lot of these numbers that are thrown around are just not realistic. They're not accounting for the type of avoidance that we see in the literature. They're not accounting for the fact that when you tax wealth, there's less income for the income tax to hit. So that's an offsetting effect. Some of these numbers, like Sanders estimated that his tax would raise$4.4 trillion over a decade. I looked at that, and I think it's probably less than half that all said and done. So it's just not a lot of revenue. Well, Ray, Kyle mentions avoidance. It's important. Let's talk about the ways that the current tax code allow the country's wealthiest to avoid paying taxes.

22:26What are some of the biggest loopholes that people use to avoid taking a salary, essentially borrowing against their own wealth? The ultra-rich have some, well, legal tricks, but they use them. How do they work? Yeah, well, what's interesting is that the public has been led to believe that our system is kind of basically fair. And to the extent the rich avoid taxes, they do so by following these highly complex transactions that, you know, there's no point in stopping them. They'll always find them. And I think that's really a mistake to view our tax system that way. Because, in fact, the ways the wealthy are able to avoid taxes are really front and center and easy for them to access.

23:10As you mentioned, so there are in my book, I talk about the three steps of the tax avoidance playbook for the very wealthy. The first one, as you mentioned, is avoid salary. So if you look at all of our richest Americans, you know, the highest paid is Warren Buffett at$100 ,000. Jeff Bezos has always kept his salary at$82 ,000. And many of our other multibillionaires get a dollar a year. Hang on. Jeff Bezos makes$82 ,000 a year. Yes. And that is an amount that has enabled him to claim the child tax credit, which he has. So that's been his choice dollar amount. And then the next step of the tax avoidance playbook is, so of course, when they're forgoing salaries, they're not forgoing profiting from their businesses because these people own the stock of their companies and they retain the stock of their companies.

24:12And as a result, they enjoy extraordinary growth of wealth, wealth that has been in the$100 to$200 billion range just since 2023. and of course Elon Musk's wealth has grown by about$600 billion just since 2023. So we're talking about massive growth of wealth. But people think, well, surely they're going to have to pay taxes on this growth because they're going to sell the stock and that will at least be subject to capital gains. However, the super wealthy don't need to sell in order to support their lifestyles. They are able instead to simply use their stock as collateral against which they can borrow all the money they need to support their lifestyle.

24:56And that's because the amount that anybody needs to live is just minute in comparison to the amount of wealth that they own. So it would be as if you or I had to support a loan of like$100. Could we do that for our lives? No problem, right? That's what it is for them to support their lifestyles. It doesn't make a dent into their holdings. Well, Morris Pearl, what about it? I mean, Ray just described some of the popular tax avoidance strategies that the ultra wealthy use to avoid actually paying. We learned that Jeff Bezos makes$82 ,000 a year and claims the child tax credit, which I'm sure he puts to excellent use to raise his children.

25:39Morris, do you see this kind of behavior among your wealthy friends and colleagues? What do they say about avoidance? Perfectly legal, but their role in supporting the country that has supported them. Yes. It's not even avoiding anything, really. I don't pay income taxes because I don't have income. If you don't have any income, you don't need to pay any income taxes. It's not like I'm avoiding anything. I don't need to make money because, as Dr. Madoff described, I can just withdraw amounts from my brokerage accounts and never pay an income tax on that. And eventually, I'll pass away, presumably.

26:20And because of the step-up basis rules, neither my estate nor my children or anyone else will ever pay an income tax on all of that money that I made over the years, even using Kyle's definition of economic income. If you look at the list of the richest people in the country, you know, half of them inherited money and never did anything to earn it anyway. And the other half are owners of huge companies like Mr. Bezos, like Mr. Musk, who also never paid income tax on their money either. So the richest among us don't pay any taxes, really. You know, are they going to move to another state when we raise our taxes?

26:59A few of them will. We did lose one guy that moved from Fifth Avenue to Mar-a-Lago, but we can handle that. But the vast majority of people can live wherever they want, and these taxes are so insignificant. I mean, Kyle's right about one thing. Two percent is not enough to really make a huge difference in the world, but it's a step in the right direction. I think it's clearly a step that we need to take. Kyle, what about that from your perspective? Two percent is not enough? Okay, I assume you wouldn't say, okay, make it 12 percent then. That might not be the solution in your view. How do we use the tax code, tax fairness, or tax rules as a way to get at the problem that is obvious, which is yawning inequality?