The Myth of the Free-Riding Billionaire: Ray Madoff’s ‘The Second Estate’

In her new book, Ray Madoff argues that America’s wealthiest exploit the tax code at the public’s expense. But her critique understates both what the rich pay and what they produce.

By Paul Mueller of AIER. 

"Wealthy professionals can be strident egalitarians or naive optimists about the benefits of government spending — or so it would seem after reading law professor Ray Madoff’s book The Second Estate: How the Tax Code Made an American Aristocracy. 

Madoff clearly has an axe to grind against America’s wealthiest citizens, and she is deeply critical of the legal mechanisms they use to protect and transfer their assets. Her argument often seems to boil down to this: Why should wealthy Americans keep so much of their wealth for personal use rather than allow the public — or, more specifically, Congress — to decide how those resources should be spent?

Yet The Second Estate is no low-brow polemic. Professor Madoff knows federal tax policy well, and her explanations of the tax code and the ways wealthy individuals use it are often insightful. My disagreement is not with her description of the mechanics of taxation, but with her underlying assumption — at times explicit, at times implied — that concentrated wealth is inherently harmful because it deprives the federal government of resources.

The wealthiest Americans pay hundreds, thousands, or even millions of times more in taxes than the average taxpayer. More importantly, the companies they create and build make the country more prosperous and generate enormous tax revenues in the process.

This should be obvious upon reflection. The businesses created, owned, or led by members of the Forbes 400 employ millions of people and generate tens of billions of dollars in federal tax revenue each year.

Yet The Second Estate presents a very different picture: a special class of Americans who exist above the reach of the tax code and avoid contributing their fair share to government revenue. We can set aside the questionable assumption that more federal revenue is automatically beneficial for most Americans. The deeper flaws in Madoff’s argument stem less from what she says than from what she leaves out about the super-wealthy.

Myths About the Rich and Taxes

Professor Madoff is correct to distinguish between different types of federal taxes. Income from dividends, interest, and the sale of assets (capital gains) is generally taxed differently — and often at a lower rate — than income earned through wages.

Long-term capital gains and qualified dividends are typically taxed at rates of 0, 15, or 20 percent, depending on income level, while wages are subject to both income taxes and payroll taxes. Employees pay 7.65 percent in Social Security and Medicare taxes through FICA, and employers pay another 7.65 percent. Capital gains, by contrast, are not subject to payroll taxes.

As a result, a billionaire’s effective federal income tax rate can be lower than that of an employee earning a middle-class salary. Madoff correctly explains how these differences affect taxpayers who receive income through wages versus those who receive income through investments.

Suppose Adam is self-employed while Betty receives all of her income from dividends and long-term capital gains. The following table illustrates how their federal tax burdens would differ at income levels of $80,000, $160,000, and $320,000.

 

Madoff explains how wealthy individuals often borrow against their assets rather than sell them. They don’t pay taxes on those loans (though they do pay interest). This is true. Sometimes individuals with a net worth of tens or hundreds of billions of dollars will report little or no income in a year because their “salaries” or wages are very small and they didn’t realize any capital gains.

But the fact that the ultra-wealthy can avoid paying federal income taxes some years does not mean they avoid them altogether. They have to pay down their loans and lines of credit periodically. And if they want to make exceptionally large purchases or investments, loans from banks are not enough. Then they must sell shares, realize gains, and pay taxes. The super-wealthy undoubtedly pay far more dollars in taxes than any middle-class or upper-middle-class individual.

Elon Musk, for example, famously paid about $11 billion in income taxes in 2021. This particular tax bill was anomalous both for its size and because the IRS taxed much of it as ordinary income at a high tax rate. Musk had a huge block of his stock options that he had to exercise or lose. Yet even if those were the only income taxes he ever paid over the course of 50 years, that would still come out to ~$200 million in taxes annually — far more than any but the very wealthiest Americans earn over their lifetimes, let alone what they pay in income taxes. 

Most of the super-wealthy find ways to pay lower rates on their income. Still, many wealthy individuals pay vast sums, in the tens or hundreds of millions of dollars, annually on dividend income (Steve Ballmer pays approximately $250 million every year). There are also large one-time tax payments from capital gains. Ken Griffin paid roughly $4 billion in 2021, Jeff Bezos paid about $2 billion in 2020 and 2021, Jensen Huang paid more than $100 million in 2024 and 2025, and Tim Cook paid roughly $300 million in 2021. 

Even accounting for the payroll taxes paid by ordinary wage earners, these tax payments represent the equivalent of thousands upon thousands of “Adams” paying federal income taxes. And this is where the shortcomings of Professor Madoff’s argument become clear.

Her account gives the impression that the ultra-wealthy largely avoid taxes because their effective tax rates are often lower relative to their income or wealth. While wealthy individuals certainly have ways to reduce their tax liabilities and structure their assets efficiently, it is inaccurate to suggest that they simply avoid paying federal taxes. 

It is also misleading to ignore the many other taxes the super-wealthy pay. 

They pay property taxes on their land and houses every year. In places like Los Angeles and New York City, those tax bills can reach hundreds of thousands or even millions of dollars. They pay taxes when they shop, dine, or travel. They pay transfer taxes, building fees, development fees, and a host of other taxes and charges. 

That is hardly “free-riding” on the tax system — especially when they pay many times (10, 100, or even 1,000 times more) than the average taxpayer while consuming nowhere near that proportion of government services. 

The Wealth Creation the Tax Debate Ignores

Even this oversight, however, misses the most important contribution of the super-wealthy to society: wealth. Focusing on how much Elon Musk or Jeff Bezos or the Mars family pays in personal income or other federal taxes in a specific year is a red herring. It is a rounding error compared to how much wealth their companies have generated for shareholders and how much tax revenue they have generated. Focusing on the corporate income taxes paid (or not) by individual companies makes similar mistakes. 

Consider Tesla. Over the past five years, the company has reported relatively little federal income tax liability (about $48 million in 2023) despite nearly $20 billion in net income. This is largely because Tesla has carried forward previous losses, invested heavily in new capital, and benefited from certain green energy and research-and-development tax credits. Yet Tesla employs roughly 134,000 people. If the average wage for those employees is $100,000, the company would pay more than $1 billion annually in employer-side FICA taxes alone. Employees would pay another $1 billion-plus through their share of payroll taxes — not including the income taxes they pay.

Those figures are small compared to what Amazon (1,100,000 employees), Apple (90,000 employees), Meta (45,000 employees), and Alphabet (115,000 employees) pay in FICA taxes — over $10 billion annually for the employer share alone.

Madoff’s quixotic crusade against dynastic or family wealth is just that — tilting at windmills. Only a quarter or so of people on the Forbes 400 list inherited the majority of their wealth. And that number gets smaller as you move to the top 100 and then the top 50. Inherited wealth can only last if it remains invested in companies rather than cashed out or spent. For every example of inherited wealth growing, there are more examples of inherited wealth becoming depleted.

Who Owns Wealth?

All of this raises a basic question: Why should we care that families such as the Mars, Walton, or Koch families possess wealth they can pass on to future generations?

Madoff argues that the wealthy “free-ride” on the tax system. But this assumes their money somehow already belongs to the government or the public.

It does not. 

Madoff also suggests that the super-wealthy exercise undue political influence from the shadows. In this, she leaves the solid ground of analyzing existing tax rules and mechanisms to the ideological concerns and disapproval she has for large concentrations of wealth in general.

Could the tax code be fairer and better than it is? Certainly. Will her specific recommendations make it so? I’m not sure. But will politicians implement her “ideal” policies? Assuredly not. 

Besides raising revenue, the tax code should distort and discourage economic activity as little as possible. While everyone benefits from clear rules of the game that promote competition and responsibility, it’s far from clear that they would all benefit from more “tweaks” to the tax code to close loopholes. Revenue with minimal distortion, not leveling the fortunes of the super-wealthy or making sure they pay their “fair share,” should guide tax policy.

Lobbyists, insiders, and wealthy individuals have certainly influenced the tax code for their own benefit. But so have middle-class homeowners through mortgage deductions, residents of high-tax states through state and local tax (SALT) deductions, and lower-income Americans through welfare programs and tax credits. This is how the political game is played. 

Rather than criticizing the super-wealthy for minimizing their tax liabilities as best they can, policymakers should focus on reducing government spending so that everyone else’s taxes can be reduced too. Reducing political power, limiting the coercive reach of the state, and allowing individuals to keep more of what they earn would do far more to improve Americans’ lives than taking more money from the wealthy and giving it to politicians.

Such broad-based reforms would also be more just."

Yes, Americans Probably Are About 46 (or Maybe 65) Times Richer Than in 1776

By Jeremy Horpedahl.

"My post and chart from last week showed the phenomenal growth of average income in the US since the Founding. Using GDP per capita historical estimates and adjusting for inflation, this figure is about 46 times greater today than right around the time we declared independence.

It will probably not surprise you that some folks were skeptical. Could this really be true? Two major objections were raised to using GDP per capita. First, wouldn’t it be better to use a median income value rather than a mean (simple average)? Second, wouldn’t a measure of wages be better than GDP per capita?

I really would like to show you an annual series of median income data back to 1776, but unfortunately it just doesn’t exist. Good median income data are hard to find much before the 1950s, much less the 1770s. However, while median values are often better for showing levels, the growth rates of median wages and mean wages aren’t that different for periods when we have comparable data. Consider the following chart, which compares median wages (as calculated by EPI using CPS data) and mean wages (from BLS’s series for non-supervisory workers) since 1973. I have stated these in nominal terms, so don’t take this as real growth rates, but rather it is a raw comparison of two series (we could apply the same inflation adjustment to both, but that won’t change the picture, only the numbers).

 

Median wages increased by 667% and mean wages increased by 657%, almost identical. Again, these aren’t inflation adjusted, but that’s not the point of this exercise. The point is that whether you use mean or median wages, at least since 1973, the growth rates are the same. Was this true if we went back another 200 years? We can’t say for sure. But many people have this same skepticism about mean wages in recent decades. I think it is better to use median values when you have them, but we shouldn’t throw up our hands and claim we know nothing if all we have is mean wages.

Next, consider the following chart. It begins in 1790, but instead of using GDP per capita, as I did last week, it uses a measure of average wages from economic historian Lawrence Officer. This measure is for “production workers in manufacturing,” and it is a total compensation measure, meaning that it will include the value of fringe benefits as well — though these aren’t noticeable in the data until the 1930s. This is still an average value, but because it is for manufacturing laborers, it won’t be distorted by the wages of managers and owners in that industry, and it won’t be affected by the growth of new industries that might require more years of education (indeed, manufacturing wages are lowering than overall average wages today, so this is taking the hard case). I have also included a second line, which only includes manufacturing wages (not benefits) that I have blended with Officer’s compensation series starting in the 1930s, in case you think including benefits is somehow “cheating.” (Note the log scale again, as in last week’s chart.)

 

The trends here are very much in the ballpark from the GDP per capita chart I created last week. Using total compensation, wages are 65 times higher than in 1790. Using only wages, they are 49 times higher. Notice that these are both better than the 46 times multiplier using GDP per capita. How is that possible, since I am using the same price deflator in both cases? First, average hours of work have fallen significantly since the 18th century, so incomes haven’t risen quite as much as wages. Second, there was a bit of a decline in GDP per capita during the Revolutionary War, and if we use 1790 as the baseline for GDP per capita, the multiplier is 63. But again, these numbers are all in the ballpark: whether the true figure for a typical American is 46x, 49x, 63x, or 65x, this is a tremendous amount of economic growth.

If you want to look at that chart pessimistically, you will see that there is some reduction in growth rates in the past few decades. That’s true whether we use wages or compensation. This is a well known issue, and has been discussed endlessly in academic papers and on social media. I don’t want to glaze over it here, but I mostly will: the long-run trend of growth in the US is amazing. That’s true whether you use GDP per capita, or wages or compensation for production workers.

So once again, Happy 250th Birthday to the USA and all of you living in the wake of that amazing 250 years of economic growth!"

Decriminalization versus Legalization

By Jeffrey Miron.

"A new study argues that recent drug de-criminalizations in Oregon and Washington caused substantial increases in drug overdoses.

Is this plausible? And does it imply that prohibition is better than legalization?

Yes, and no.

Decriminalization means elimination of criminal penalties for drug possession. Legalization means elimination of criminal penalties for production and sale.

Standard economics suggests that decriminalization, by reducing the full price of purchasing drugs, shifts demand outward, implying greater use.

This causes, since production and sale are still illegal, a larger underground market and therefore more of the associated negatives. These include increased violence, because black market participants cannot resolve disputes with courts and lawyers; and additional overdoses, because quality control is difficult in black markets.

Thus the study’s result makes sense. But rather than supporting prohibition, it shows that full legalization – rather than decrim – is the right path. Indeed, if policy legalizes only one side of the market, it should be supply rather than demand. A related point is that legalization must not include too much regulation and taxation; that just re-creates the black market.

A possible qualification is that some decrims seem to have avoided increased violence or overdoses. The likely explanation is that in these instances, policy de-escalated supply side enforcement along with decriminalizing."

The China dish industry claimed it was a militarily strategic good in 1951

Tweet from Daniel J. Smith.

"A representative from the fine China dish industry lobbying for protectionism as a militarily strategic good during congressional testimony in 1951"

  

After decades of warnings, new data suggest the Atlantic’s vital circulation may withstand climate warming better than feared

See Shifting currents by Paul Voosen in Science. Excerpts:

"Climate models have long warned that global warming could weaken “deep-water formation”—the density-driven sinking that is the engine of the AMOC. The logic is straightforward: As Greenland’s ice sheets melt and sea ice formation declines, North Atlantic waters will freshen. Combined with warmer sea temperatures, the freshening makes surface waters more buoyant. The AMOC was thought to have shut down abruptly during past climate warmings, and a handful of researchers now argue such a tipping point could occur this century. A sputtering AMOC could trigger a sharp cooldown in northwestern Europe, rising seas along the U.S. east coast, and shifts in tropical rainfall."

"most climate researchers think the AMOC is more resilient than these worst case scenarios make it seem. Emerging evidence suggests the AMOC may not have actually collapsed in the warm climates following ice ages. More detailed climate models suggest it could weaken but not collapse in the current surge of warming. And studies of the AMOC’s present behavior do not yet show any clear signs of trouble. They’re also exposing new facets of the circulation that could buffer any eventual weakening."

"That stately flow actually swings wildly year to year, masking any long-term trend, the first RAPID measurements showed. Swings between apparent decline and recovery have since become a hallmark of AMOC monitoring, and a recurring source of alarm and reassessment."

"Gerard McCarthy remembers well the first time he saw an AMOC decline. It was 2011, and McCarthy, now a climate scientist at Maynooth University, had just joined the RAPID team. His first task was calculating AMOC’s strength. Beginning in 2009, it plunged. “Everyone was like, ‘The new guy made a mistake,’” he recalls. Others checked the numbers. The drop held. “We all realized that something dramatic had happened.”

What happened was not caused by climate change, but rather the weather. That winter, unusual swings in air pressure weakened the jet stream and shifted wind patterns, disrupting the AMOC’s flow. The decline likely contributed to a frigid European winter in 2009 and, by leaving more heat in tropical basins, also led to an active Atlantic hurricane season the following summer."

 "It seems the AMOC is not a single conveyor belt, but a belt of belts, each part operating semiautonomously."

"OSNAP has changed the picture in other ways, including by showing that overturning occurs not so much in the Labrador Sea, as models suggested, as it does farther north, in the Irminger and Iceland basins. Additional data suggest deep-water formation is migrating even farther north, into the Arctic Ocean, following the retreat of sea ice, Årthun says. “You’re expanding the reach of this cooling machine.” The northward migration could make the AMOC more resilient to warming"

"New climate model runs that capture more realistic melt from the Greenland Ice Sheet are less dire. In two preprints posted online in the past year—one led by Chuncheng Guo, a climate scientist at the Danish Meteorological Institute (DMI), the other led by Oliver Mehling, an ocean modeler at UU—researchers created multiple simulations where carbon emissions continued until 2250 and temperatures rose by up to 7°C. In both studies the AMOC weakened, losing about 40% of its strength. But it never collapsed. Both studies also suggest the weakening is reversible"

"that resilience persisted even in the face of catastrophic warming."

 "even if atmospheric carbon dioxide levels quadrupled, driving extreme warming, the AMOC would decline by 40% after 20 or so years—but once again, it would rebound."

"Evidence from past ice ages seemed to suggest the AMOC switched off entirely when massive pulses of freshwater from the melting of the North American ice sheet poured into the Atlantic. But new work, also presented at Ocean Sciences, suggests the AMOC may not have collapsed at all during these periods." 

New York’s Data Center Self-Sabotage Gov. Kathy Hochul finds another way to hurt economic development in the state.

WSJ editorial.

The article discusses how it is regulation and not data centers that are driving up costs. 

Medicaid Spending Keeps Soaring So much for Democratic claims of onerous cuts. It’s up 10% so far this fiscal year.

WSJ editorial.