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."

Lifting the SS payroll tax cap would close only about 30% of the long-term cash-flow deficit while raising some top marginal labor income tax rates to over 60%

Letter to The New York Times.

"Senators Bernie Moreno and Elizabeth Warren present lifting the payroll tax cap as a “common-sense” solution to Social Security’s financing challenges. But eliminating the cap would close only about 30 percent of the program’s long-term cash-flow deficit.

It would also sharply raise top marginal labor income tax rates to punitive levels, pushing top rates across many states over 60 percent (58 percent in Ohio and 62 percent in Massachusetts, the senators’ home states). Social Security was created to prevent poverty in old age, not to guarantee affluent retiree households six-figure annual benefits.

Rather than continually raising taxes to sustain ever-larger promises, policymakers should rethink the program’s purpose. A flatter benefit focused on basic retirement security, combined with greater reliance on private savings, would be more cost-effective and sustainable.

Romina Boccia
Washington
The writer is the director of budget and entitlement policy at the Cato Institute."

NYC’s socialist movement forcing millionaires to flee the state — leaving Mamdani, DSA in a bind

By Judge Glock. Excerpts:

"A new Citizens Budget Committee report found that New York’s share of millionaires, those earning more than a million dollars a year, declined more than any other state since 2010. 

The state went from having 12.7% of all millionaires in the nation to 8.7%. 

Worse yet, in the more recent years, the state’s highest earners have been leaving much faster than its lowest earners." 

"New York City’s tax rates on the wealthy are already the highest in the nation."

"Economists Joshua Rauh and Ryan Shyu found that a California income-tax hike drove almost 1% of top taxable incomes out of the state in a single year. 

The loss of taxpayers and other changes among the well-off meant the state lost most of the cash it would otherwise have raised from the tax. 

Another study, by Enrico Moretti and Daniel Wilson, looked at how state taxes affected the movement of top scientists, a group that’s not thought to be particularly mercenary or focused on cash. 

They found a 1% increase in after-tax income in a state brought nearly 2% more star scientists into the state — while a tax increase drove them away."

"New York’s high rates explain why the state lost more than $7 billion of annual taxpayer income just to Fairfield County in Connecticut over a five-year span, 2019 to 2023 — and more than $7 billion just to Palm Beach County in Florida." 

How Government Spending Enriches the Wealthy

Covid relief programs and easy Fed policy inflated the value of assets such as stocks and real estate

By Vivek Ramaswamy. Excerpts:

"When Washington floods the economy with borrowed and freshly printed dollars, the money flows first into assets owned by the wealthiest Americans—stocks, bonds, real estate. Six relief laws pushed roughly $4.6 trillion out the door in the bipartisan response to the pandemic. The Federal Reserve cut interest rates to zero and more than doubled its balance sheet, from about $4 trillion to nearly $9 trillion.

Only some of that money reached working-class Americans. Economists at MIT found that about a quarter of the $800 billion from the Paycheck Protection Program went to workers who would have lost their jobs. Three-fourths landed in the top fifth of households by income, at a cost of $170,000 to $257,000 per job-year saved—a regressive windfall. The student-loan payment pause tells the same story: It has cost well over $200 billion and—because higher earners carry the biggest balances—most of that relief went to white-collar professionals.

As big government pumped money into the economy, assets boomed: The stock market has roughly tripled from its March 2020 low. The wealthiest 10% of households own 89% of all stocks, according to 2021 Federal Reserve data. The top 1% gained more than $6.5 trillion in equity wealth during the pandemic, while the bottom 90% added just $1.2 trillion. The wealth share of the top 1% hit a record high in mid-2021, and American billionaires’ fortunes swelled by roughly 70%."

"Consumer prices peaked at 9.1% in June 2022, with inflation growing at its fastest pace since 1981. Groceries rose 12.2% in a single year and gasoline nearly 60%. As paychecks lagged, real wages fell—down 3.6% over the year ending in June 2022"

"a post-pandemic property tax that hit states like Ohio hard. The only meaningful asset most middle-class Ohioans own is their house, and home prices in Ohio rose over 25% between 2020 and 2022. That paper gain was a financial curse for families intending to stay put: While real income remained flat, tax bills went up. Ohio homeowners absorbed, in 2023, the largest reappraisal shock on record. One analysis found the increase was more than seven times the size of the previous cycle’s, averaging nearly 35%." 

High-ability individuals move in response to tax rates

See Taxation and International Migration of Superstars: Evidence from the European Football Market. 

"We analyze the effects of top tax rates on international migration of football players in 14 European countries since 1985. Both country case studies and multinomial regressions show evidence of strong mobility responses to tax rates, with an elasticity of the number of foreign (domestic) players to the net-of-tax rate around one (around 0.15). We also find evidence of sorting effects (low taxes attract high- ability players who displace low-ability players) and displacement effects (low taxes on foreigners displace domestic players). Those results can be rationalized in a simple model of migration and taxa- tion with rigid labor demand."

Businesses leaving Illinois have rapidly accelerated

 Tweet from Brian Costing.

 

The average federal income tax rate has risen for the top 20% since 1979 but fallen for others and the federal tax code remains progressive

Tweet by Jessica Riedl of Brookings.

 

 

The Surprising Truth About Reagan’s Tax Cut

It widened the deficit—not by cutting the top rate, but purely by relieving families from automatic increases through bracket creep

By Phil Gramm and Michael Solon. Excerpts:

"Since the top 40% of income earners in America pay some 90% of income taxes, reductions in tax rates would be expected to give a larger dollar-value tax cut to people who pay the most taxes. But data from both the Internal Revenue Service and the Joint Committee on Taxation show that when Reagan took office in 1981, the top fifth of income earners paid 64% of all federal income tax, the next-highest fifth paid 21%, and the bottom three-fifths paid 15%."

"By 1985, the 1981 tax cuts, including inflation indexing of the tax brackets, had been fully implemented. The share of the individual income-tax burden had increased to 67% for the top fifth and dropped to 19% for the next fifth and 14% for the bottom 60%. By 1988, Reagan’s last year in office (and after the 1986 tax reforms), the figures were 71%, 17% and 12%.

Incredibly, by 2022, the top fifth paid 88% of income taxes, the next fifth 13% and the middle fifth 4%. That adds up to 105%, but the arithmetic works because the bottom 40% received checks from the Treasury thanks to refundable credits like the earned-income tax credit, on net paying them a total of 5% of all income-tax collections."

"Federal revenue as a share of gross domestic product grew twice as fast from 1973 through 1980 as it had grown to that point in the postwar period—reaching 19.1% in 1980, a peacetime record. Bracket creep had become bracket gallop."

"In the 1970s inflation-adjusted social welfare spending—entitlements and means-tested welfare programs—nearly tripled, but much of the cost never showed up in the federal deficit."

"both political parties supported major tax cuts in 1981"

"When inflation plunged to 3.2% in 1983, a year for which CBO had projected a 9% inflation rate, bracket-creep revenues collapsed and the deficit soared to 5.9% of GDP. By 1985 income-tax rates had been cut by a quarter, and the tax brackets had been indexed to eliminate bracket creep. The economy was in its third year of rapid growth."

"The day Reagan left office, the American economy was one-third bigger than when he arrived. Tax rates had been cut and tax brackets indexed to eliminate bracket creep. Nondefense spending was 2.5% of GDP less than it had been the day Reagan took office, and defense spending was 0.9% bigger."

"the entire increase in the deficit during the Reagan presidency resulted from the abolition of bracket creep which by definition doesn’t help anyone rich enough to be already paying the top rate"

"Even though the level of general prosperity has improved dramatically since 1988, sending real per capita income up by 80%, real means-tested welfare spending has more than quadrupled" 

Is Entrepreneurialism Bad?

By David R. Henderson. Excerpts:

"Imagine a product that costs $1.80 to make and sells for $2. Imagine also that the average household in America buys one of these items per week. There are approximately 134 million households in America. That means that in a given year, US households will buy 6.968 billion units and will spend $13.936 billion on this product.

Then along comes an innovator who has figured out how to produce the item at a cost of only $1.50 per unit. The innovator would ideally like to have a patent and might well get a patent. But even if he doesn’t, it will take time for competitors to notice his innovation, figure out how it works, and implement it. Let’s say it takes a year. For products with a complicated production method, that could well be an underestimate.

What will the innovator do during that year? Cut price? Maybe a little but not much. For one year, all his competitors are using a method that costs $1.80 per unit and are charging $2.00. What the innovator could do is cut the price to, say, $1.90 per unit and take a large share of the market. Let’s say he takes half the market. Then 67 million households will buy 3.484 billion of his units and will spend $6.62 billion on his product.

On each unit, the innovator makes 40 cents, the difference between the price of $1.90 and the cost of $1.50 per unit. For that year, therefore, he will make $1.394 billion. Voila! He’s a billionaire."

"Starting a successful startup is the most common way to become a billionaire"

a 2004 study he (Nobel prize winner William D. Nordhaus) wrote for the National Bureau of Economic Research, Nordhaus wrote:

Only a minuscule fraction of the social returns from technological advances over the 1948–2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

How minuscule? 2.2 percent. The remaining 97.8 percent of the gains from innovation go to consumers."

"Once other competitors imitate the innovator, the price falls and the unusual gains to the innovator go away. Consumers then get the benefits from the innovation year after year." 

The Deceptive Statistics Behind California’s Wealth Tax

Saez and Zucman have spent years using dubious assumptions to push the case for confiscation

By Phillip W. Magness. Excerpts:

"For years the pair (Emmanuel Saez of UC Berkeley and Gabriel Zucman of the Paris School of Economics) have relied on selective accounting methods and questionable assumptions to tilt the scales in favor of confiscatory wealth taxes."

"Under the U.S. system, taxes are generally assessed on income earned over the course of a year. Since 1920, federal tax law has followed the realization principle, meaning that income must actually be realized as earnings before it can be taxed. Messrs. Saez and Zucman instead propose taxing estimated changes in a person’s net worth—including unrealized capital gains that exist only on paper. If a billionaire’s stock portfolio rises in value, they want to tax the appreciation even if the assets are never sold."

"Unrealized gains are notoriously volatile and speculative. They can disappear overnight with a market downturn. Federal courts have long viewed taxes on unrealized gains as constitutionally dubious"

"The underlying wealth estimates are deeply unreliable. Because billionaire tax returns are private, Messrs. Saez and Zucman rely heavily on outside estimates of billionaire wealth. One of their favorite sources is the Forbes 400 list."

"wealthy Americans to exaggerate rather than minimize their fortunes"

"these estimates are systematically inflated."

"the pair has repeatedly asserted that the ultrarich pay a combined federal, state, and local tax rate of only 23%, supposedly lower than the 24% working-class Americans pay."

"Messrs. Saez and Zucman’s own earlier research told a very different story. In a 2018 paper published in the Quarterly Journal of Economics, their own data files showed that the top 0.001% pay an average combined tax rate of roughly 41%."

"they changed their approach and assigned the full burden of the corporate tax to shareholders alone."

"this maneuver dramatically lowers the apparent tax rate paid by billionaires." 

"they artificially inflate the tax burden borne by lower-income Americans . . . omit the EITC from their calculations."

"Jason Furman finds that the bottom 20% of Americans face an overall combined tax burden of approximately 11%"  

Wealth tax equilibrium accounting

By John H. Cochrane.

"The recent Piketty-Saez-Stiglitz revival of wealth taxes, ostensibly to improve the lot of the poor, makes many mistakes. I’ll focus on one: the difference between wealth and consumption. The poor wish consumption. Turning capital into consumption must destroy the capital that produces consumption. Taxing wealth in the name of inequality will make the world, including the poor, much poorer.

Why should billionaires live high on the hog while so many still live such wretched lives? “Tax the rich, feed the poor / Til there are no rich, no more” sang the rock band 10 Years After in 1971. It’s a centuries-old answer looking for new questions. (They made a lot of money on that song! The song is more like Lennon’s “Revolution,” expressing some skepticism. I remembered the lyrics as “till there are no poor no more,” but the actual lyrics are more accurate descriptions, both of the intention and the likely effect.)

However, the vision of high lifestyle amid destitution imagines great inequality of consumption. The current outrage, and demand for confiscatory taxation, is over inequality of wealth. (And that, largely mark-to-market wealth driven by high prices.) There is a big difference.

The hard fact: Our billionaires, and now trillionaire, own wealth that is almost exclusively stock in companies they created. That wealth is almost entirely left reinvested in those companies. And the companies produce great products, innovate, and employ thousands. Just what is the problem, you might ask, but that’s not our point today.

For example, suppose Elon Musk consumes $10 million a year. It’s hard for any human to consume that much. Still, that’s 1/1000 of 1% of a trillion. At 10% per year, Musk earns that much in less than an hour.

The wealthy do not swim in Scrooge McDuck pools of money that can be handed out. And even if they did, that money, redistributed, would swiftly drive up prices rather than feed everyone. Musk’s trillion is not the ready inventory of a huge grocery store that can be handed out to feed people. And if it were, once the store was empty, the poor would be hungrier again, and there would be no store to buy from.

What would the government do if it took over Musk’s SpaceX stock? At best, the government would use SpaceX earnings to buy and hand out, say, food, rather than invest in the company. Others must then produce food and not rocket ship parts. That means reorienting the productive capacity of the economy away from investment and to consumption. It means less capital going forward. Certainly no rocket ships or AI, and all the benefits those stand to bring.

But most of SpaceX value is not a stream of profits like a railroad’s. Most of its market value is investor’s hope that in the future SpaceX will dream up new and profitable ventures. That value would go poof the minute the government took it and stopped investing. It may go poof anyway.

Perhaps you think the government, by taxing Musk and demanding cash, can force Musk to sell his stock to others who won’t implode SpaceX’s value. But where do others get money to buy SpaceX stock? In the end, it must come from other company’s earnings that won’t be invested in other companies. Again, the economy reorients from investment to consumption. Tax the rich feed the poor, till there are no businesses no more.

Perhaps you think the government can manage SpaceX “for people, not for profits.” It used to. And NASA, though one of the best government agencies, was never able to do what SpaceX can do. Socialism never did turn much of a profit for consumers.

The world’s rich consume very little of their wealth. The worlds’ poor consume a lot of whatever they have. Being poor is not fun. If we split up Musk’s $1 trillion and gave about $100 in Tesla stock to each of the world’s nearly 10 billion people, it’s a good bet they would not be content to consume only 1/10 of a cent extra per year.

There are plenty of other reasons that wealth taxation will not help. Even the billionaires’ wealth, even if it could be transferred and consumed without destroying the seed corn of our economy, is trivial. 

 

This is simply false, and innumerate. 15% of a Trillion is $150 billion. The US alone spends $1.8 Trillion on anti-poverty programs each year, to little effect. (Wolfgang Richter is probably a parody account but alot of people have been saying things like this-CM)

The biggest reason it will not work is the simple one: incentives. If you tax wealth, you tax the activities that create wealth.

Taxing billionaires is not enough. Piketty, Saez, and Stiglitz now want the rest of us to “degrowth” in order to transfer resources to the poor. That doesn’t add up either. Degrowth means producing less too. What are the poor to eat? Penury and depopulation used to be embarrassments of the socialist left. I guess they now features.

I too would love to raise the prosperity of the world’s poor. The goal is not the issue. The issue is whether the wealth tax will help or hurt.

What helps? This graph from Max Roser at Ourworldindata makes the point beautifully: 

 

The x axis is GDP per capita, not time. The y axis is the share living in extreme poverty. In fact, our lifetime has seen the greatest decline in global inequality and global poverty ever seen. What helps the poor? Growth. Capitalism and growth. Degrowth and wealth taxation will push us right back up that slope."

Even Californians Are Saying No to New Taxes

Across the state, county and city ballot measures raising levies are trailing or have been defeated

By Allysia Finley.  Excerpts:

"the city (LA) routinely deploys firefighting crews to respond to 911 medical calls that could be handled by emergency medical technicians at much lower cost."

"In Contra Costa County . . . employee salaries and benefits have risen 47% since 2020."

"Even San Francisco liberals rejected a union-backed gross-receipts tax hike on large companies with more than $1 billion in sales in the city."

"Unions dressed up their measure as an “Overpaid CEO tax” because it would hit companies whose highest-paid executive makes more than 100 times its median employee’s pay. This political sales job worked in 2020, when two-thirds of San Francisco voters approved a similar tax. But voters weren’t about to get swindled again."

"Following the 2020 tax hike, businesses reduced their workforces in the city to minimize their tax liability. Business groups championed a 2024 ballot measure to slash the tax, which passed." 

A ‘Millionaire’s Tax’ Is a Tax on Main Street

Wealth taxes like Hawaii’s disproportionately fall on small-business owners

Letter to The WSJ. 

"Your editorial “The Tax Collector’s Paradise” (May 28) is right to warn that Hawaii’s new “millionaire’s tax” won’t stop with high-income earners. In reality, higher income tax rates often disproportionately fall on small-business owners whose companies are organized as S corporations, partnerships, LLCs and other pass-through entities.

The consequences extend beyond individual taxpayers. A Stanford University study examining 30 years of Census Bureau data found that increases in individual income tax rates led to job losses, business relocations and even business closures among pass-through firms. Those are real-world costs borne by workers, families and local communities.

Small-business owners feel these pressures firsthand—and the data confirms that. A 2024 survey from the Job Creators Network Foundation found that more than one in four have considered relocating to a state with lower taxes and less regulatory burdens. Meanwhile, Federal Reserve research has found that tax increases make it more difficult for small businesses operating on tight margins to cover expenses, including payroll.

When lawmakers raise income taxes, they aren’t simply taxing income. They are changing incentives for entrepreneurs, investors and employers. Hawaii’s leaders may discover that the people who create jobs and grow businesses have more options than some politicians assume.

Policy matters, and Americans will continue to vote with their feet.

Taylor Gage

Citizens for Free Enterprise" 

The Big Bob Packwood Tax Reform

The Oregon senator, who died Saturday at 93, closed loopholes and cut the top rate to 28%

By Arthur Laffer and Stephen Moore. Excerpts:

"the Tax Reform Act of 1986" [led to the] "lowering the highest personal income-tax rate—which had been 70% in 1981—to 28%. The corporate rate was slashed from 46% to 34%. The number of individual tax brackets went from 14 to two (28% and 15%)."

"nearly every Democrat voted for a 28% tax rate. Now many Democrats in Congress want to soak the rich with income tax rates as high as 50%, 60% or 70%"

"The law, on top of the 1981 Reagan tax cuts, made America a magnet for capital from around the globe. It helped launch the greatest period of wealth creation in world history over the succeeding 40 years. The Dow Jones Industrial Average closed at 1,808.35 on Oct. 22, 1986, the day Reagan signed the law. Today it is over 50,000.

Tax revenue exploded with lower tax rates. The share of taxes paid by the wealthy rose as they lost their favorite tax shelters and instead put their money to productive use. Economist Martin Feldstein, who served as chairman of the White House’s Council of Economic Advisers (1982-84), wrote on these pages in 2011 that “actual experience after 1986 showed an enormous rise in taxes paid, particularly by those who experienced the greatest reductions in marginal tax rates.”"

"nearly every other nation followed suit by slashing tax rates" 

When New Housing Pays for Old Infrastructure

Impact fees that shift costs from existing homeowners to new ones has a feel of generational and class theft

By Scott Beyer of The Independent Institute. 

"Across the United States, local governments are confronting a problem that has accumulated for decades: aging infrastructure with massive deferred maintenance. Water lines, sewer plants, roads, schools, and more need modernization and sometimes replacement. In theory, the costs should be shared broadly among those who use the infrastructure. But increasingly, jurisdictions solve these budget shortfalls by charging “impact fees” and other development extractions from new construction. This amounts to an unfair shifting of costs away from existing homeowners to new ones, in a dynamic that smells of generational and class theft.

Impact fees were first conceived as a rational planning tool. If a new subdivision required an additional water main, traffic signal, or elementary school, it made sense for the development creating that growth to fund the incremental expansion on a pro-rata basis. That logic remains sound.

But over time, government agencies have gotten carried away with impact fees and similar policies (such as proffers and special assessments). The whole concept has drifted beyond paying for marginal growth-related costs, and become a piggybank for decades of underinvestment in infrastructure that mainly serves current residents.

Tracking down data is hard, given that fees are fragmented across various schedules, jurisdictions, and project types. But the costs to developers and homebuilders, who pass them onto purchasers, are very real.

One example is in San Diego and surrounding Southern California cities. Cumulative impact fees tied there to schools, transportation, parks, utilities, and affordable housing mandates have in some cases veered into six figures per home before construction even begins. School impact fees alone currently run $5.38 per square foot for residential construction within the city’s Unified School District (which is an odd way to calculate it, since larger homes don’t necessarily produce more school-aged children – often it’s the opposite).

State policies contribute to this dynamic. For example, Proposition 13 limits property tax growth by tying annual assessments to a property’s initial purchase price. This means long-time homeowners benefit from low tax burdens and dramatic home appreciation, while buyers inherit escalating infrastructure costs that get embedded into the price of newly-constructed housing.

A similar controversy emerged in Loudoun County during the suburban boom coming from Washington, D.C. The county extracted proffers from developers in exchange for rezonings, often on a case-by-case basis that had the feel of bribery. These proffers funded road widenings, intersections, schools, parks, libraries, and public safety facilities, adding an estimated $30,000-$50,000 per unit – or in many cases much more.

For context, the median home price in Loudoun County is around $800,000 and the property tax rate is $0.805 per $100 in assessed value. This means that the typical homeowner there is paying around $6,400/year in property taxes, far less than the impact fees that new homeowners pay. It should be noted that these new homeowners, upon moving in, are then required to also pay property taxes, rendering their impact fees a sort of duplicative entry tax.

In Austin and the broader Central Texas region, explosive population growth has strained water and wastewater systems. A Texas A&M study found that the city’s development fees averaged $41,303 per housing unit for infill development, which is 2.5x higher than the Central Texas average.

Such examples abound throughout America. I’ve found that fees are generally highest in areas where NIMBYism is strong; and where new development is viewed as a quality-of-life infringement rather than an economic development benefit. Fees are also frequently used as a redistribution tool, with wealthier districts funding poorer ones.

The common thread in any of these cases is political convenience. Raising taxes broadly on existing residents is unpopular, as is increasing utility bills for all users. But charging developers and future homeowners is easy—the former is a boogeyman that garners no public sympathy, while the latter is an “invincible” constituency that has no organizing ability prior to moving into a locale.

The result is an unequal arrangement in which Gen Z and Millennial households—who account for nearly half of home purchases but have far lower net worth than older generations—are forced to shoulder disproportionate infrastructure burdens.

A better approach would fund infrastructure through direct user fees and broad-based revenue sources that distribute costs among everyone who benefits from the system. Water and sewer infrastructure should be financed primarily through utility rates tied to usage; roads through fuel taxes, tolls, or mileage-based fees; and stormwater systems by charging properties based on their impervious surface or other impacts. There should also be a clearer distinction between capital improvements that expand system capacity and routine maintenance or replacement of existing infrastructure. The latter should be funded primarily by the residents and businesses already served by those systems, not newcomers.

By blurring these categories and treating new development as a convenient source of revenue, many local governments have shifted infrastructure costs from existing users onto future residents, increasing housing costs and creating an inequitable transfer of financial responsibility from one group to another."

To Cut Taxes, You Need to Do So for People Who Pay Taxes

David R Henderson. Excerpts:

"In a June 7 post, Eugene Steuerle writes:

"That calculation gives a middle-income taxpayer receiving a $100 tax cut the same weight as a high-income taxpayer receiving a $30,000 cut."

Henderson replied "Nothing in the sentence says they get the same benefit. How would they when someone paid $100,000 in taxes and someone else paid $100, all before the tax cut?"

The Tax Policy Center had a post titled, “The 2025 Tax Bill Was Not Targeted Toward Low-Income Families.”

"Of course it wasn’t targeted toward low-income families. How could it be, when most low-income families pay little or no federal income tax and, in some cases, actually get a subsidy from the tax system? If you want to cut taxes substantially, you need to cut them for people who are paying substantial taxes."

"When I rooted around on the Tax Policy Center’s web side, I found a post that carried this:

"Consider a household that earns $20,000 and pays $1 in taxes and another that earns $2 million and pays taxes of $500,000. Suppose that legislation is enacted that provides a $1 tax cut for the low-income household and a $100,000 tax cut for the high-income household. The percentage change in tax liability is 100 percent for the low-income household but only 20 percent for the high-income household. In terms of its effect on current household resources, such a tax cut increases the after-tax income of the poor household by only 0.005 percent while increasing after-tax income of the wealthy household by 5 percent."

"Did you get that? Even if the low-income household’s tax liability were cut by 100%, the tax cut would not be tilted toward the low-income household. Why? Because that household’s after-tax income is hardly affected.

The only good thing about this statement from the Tax Policy Center is that they admit that they don’t judge tax cuts by the percentage by which taxes are cut. They implicitly judge them by whether they substantially increase after-tax income, even for people who pay almost no taxes."

A cut in the corporate income tax rate leads to a larger expansion of clean firms

See The Environmental Bias of Corporate Income Taxation by Luigi Iovino, Thorsten Martin and Julien Sauvagnat.

"Abstract

We study the relationship between corporate income taxation and carbon dioxide (CO2) emissions in the U.S. We show that CO2-intensive firms benefit more from the tax advantage of debt, and pay lower income taxes on their capital income. Building on these new facts, we provide evidence that a cut in the corporate income tax rate leads to a larger expansion of clean firms. We develop a multi-sector general equilibrium model that accounts for our evidence and quantify the impact of corporate tax reforms on aggregate emissions. A policy that eliminates the tax advantage of debt could reduce aggregate emissions without affecting GDP."

Europe Demands Family Dynasties

By Alex Tabarrok.

"In the US, someone with wealth is free to give it away more or less as they see fit (spousal claims excepted, which partly reflect marital co-ownership). In much of Europe, however, there is forced heirship–a large fraction of wealth must be handed down to children which makes it harder to direct large portions of wealth to charities, foundations, or non-family causes compared to the US. (Louisiana, with its French-Spanish civil law roots, is the one state with forced heirship and even it mostly gutted it in 1995.)

Here is an excellent post by John Arnold who, if he were European, would be required to give 75% of his wealth to his three children instead of spending it on philanthropy as he and his spouse are now doing.

America’s cultural ideal has been the self-made entrepreneur while Europe’s was rooted in aristocracy, with status inherited rather than earned. Europe’s inheritance laws show this divide.

Many European countries have “forced heirship” laws that require people to leave 50-75% of their estates to their children. Want to leave the majority of your wealth to charity? not allowed. Your kids are estranged from you, struggling with addiction, or irresponsible? still required to give them the money. Want your kids to avoid a life of entitlement? tough.

Incredibly, these laws look back at transfers made during your lifetime. If you have 3 children in France, you’re required to bequeath them a minimum of 75% of your estate. Because French law calculates this based on your assets at death plus all lifetime gifts, giving away more than 25% of your wealth while alive means your heirs can legally sue to force charities or foundations to return the funds. This has limited the development of the nonprofit sector on the continent.

The cultural gap between an entrepreneurial society and one shaped by dynastic wealth is enormous. If you make it yourself, you tend to want your kids to do the same. If you inherit it, the primary goal is protecting the estate for the next gen.

Countries like Spain, France, and Italy legally entrench family dynasties, while America has historically sought to limit them through estate taxes. The result is not only a weaker culture of philanthropy and civil society in Europe, but also less economic dynamism.

It’s interesting that in Capital Piketty discusses required equal division to children as an egalitarian legacy of the revolution but, as far as I recall, never reflects on the fact that forced heirship prevents a French entrepreneur from giving his fortune away to charity. A case for laissez-faire, no?"

Britain Versus the Laffer Curve

High tax rates push more Britons overseas—and revenue down

WSJ editorial. Excerpts:

"the number of people who repatriate each year is declining noticeably. This is down to 110,000 in the most recent year, from as much as 170,000 annually in the wake of the pandemic."

"These [those who delay returning to Britain] are some of Britain’s most entrepreneurial people, and they’re spending their prime tax-paying years out of the country."

"One-sixth of the people on the list [of Britain’s wealthiest] two years ago have dropped off, and 111 of the British citizens on the 350-name list live offshore."

"Only one foreign billionaire moved to Britain: Warren Stephens, the U.S. ambassador." 

The corporate tax rate really matters (improvements in aggregate tax competitiveness are positively and significantly associated with real GDP per capita growth)

From Tyler Cowen.

"Three findings emerge. First, improvements in aggregate tax competitiveness are positively and significantly associated with real GDP per capita growth, robust to a wide range of controls. Second, this aggregate effect is driven entirely by the corporate tax pillar; no other component displays a significant growth effect. Third, the corporate tax effect materializes contemporaneously and accumulates over time, with a statistically significant three-year cumulative effect of approximately 0.16 percentage points per one-point improvement in the corporate tax score. These results suggest that the full architecture of the corporate tax system, not merely the headline statutory rate, is what matters for growth.

That is from a recent paper by Michael Christla and Monika Köppl–Turyna."