Not Quite a Nobility
Ray Madoff’s The Second Estate is the clearest short account of why America fails to tax the wealthy. Its diagnosis is right. Its metaphor, its headline and its arithmetic need more care than the book gives them.
Ray D. Madoff teaches tax and estate law at Boston College. The Second Estate: How the Tax Code Made an American Aristocracy (University of Chicago Press, 2025) is short, written for general readers, and was among The New Yorker’s books of the year.[1] Its thesis fits in a sentence: the United States taxes the money people earn but largely does not tax the wealth they hold, and that gap has produced a class that, like the nobility of pre-revolutionary France, sits mostly outside the tax system.
The mechanisms are not exotic, and that is her point. Gains are taxed only when an asset is sold. At death, the tax basis of everything a person owns is reset to its current value, so a lifetime of gains is never taxed. Inheritances are excluded from a definition of income broad enough to cover gambling winnings and money found inside a second-hand piano. Trusts have hollowed out the estate tax, which now raises about half a per cent of federal revenue. And giving away appreciated assets earns a deduction for gains that were never taxed.[2] Readers who want the mechanics explained from zero, with worked numbers, will find them in the companion essay, The Gain That Dies With You.
Her remedies, as summarised by reviewers: tax capital gains and dividends at the same rates as wages; close the carried-interest loophole; treat a gift or a death as a sale of the assets transferred, as Canada has done since 1972; abolish the estate tax and replace it with an inheritance tax paid by heirs at income-tax rates above an exemption of perhaps $1 million; and tie charitable tax benefits to money that actually reaches working charities.[2][3] She rejects an annual wealth tax, on the grounds of valuation and of its uncertain constitutional standing.
What it gets right
It moves the argument from rates to the base. Most arguments about taxing the rich are arguments about the top rate. Madoff’s real contribution is to show that the rate hardly matters when the income never appears. Someone whose wealth grows untaxed and is then inherited with a fresh basis faces a rate of zero however high the top bracket is set. That is the correct diagnosis, and the book states it more plainly than most of the academic literature it draws on.
Its sharpest point is about inheritances. The tax code calls a lottery prize income and a $50 million inheritance not income. No coherent definition of income produces that result; it survives only because the estate tax was supposed to do the job at the other end. Madoff uses the inconsistency well. If an inheritance is income like any other, the “death tax” framing that did so much to dismantle the estate tax loses much of its force: the tax falls on the living person who receives the money, not on the dead.
It is pragmatic about the wealth tax. Many books on inequality end with an annual tax on net worth. Madoff declines it for practical reasons (annual valuation of illiquid assets, and a constitutional question the Supreme Court left open in Moore in 2024) and proposes taxing at the moment of transfer instead, a model Canada has run for half a century.[4] That makes the book much harder to dismiss as utopian.
Events have proved it right. The book went to press before the July 2025 budget act made the estate tax exemption permanent at $15 million per person, indexed to inflation; without that act it would have fallen to about $7 million in 2026.[5] Her claim that the estate tax is “effectively dead” as an instrument of policy reads better now than when she wrote it.
The aristocracy metaphor does too much work
France’s Second Estate was a legal status: hereditary, and exempt by law from the main direct tax. America’s wealthy face the same code as everyone else; what separates them is the composition of their income, not their standing before the law. That distinction matters for the book’s own argument.
Most of the mechanisms Madoff describes — deferral, low rates on gains, borrowing against assets — help a founder who built a fortune as much as an heir who inherited one. Erik Jensen, reviewing the book for the Civitas Institute, makes the point with Mark Zuckerberg, who built a product rather than inherited a title.[3] Only the step-up at death, the exclusion of inheritances and the weakness of the estate tax are dynastic. The metaphor fuses two problems that call for different repairs: capital that is lightly taxed while its owner is alive, and inheritance that is lightly taxed when it passes on. It makes the title louder and the analysis less precise.
“Buy, borrow, die” is the wrong headline
The phrase carried the book’s publicity, partly through Madoff’s interview with Ezra Klein. But Edward Fox and Zachary Liscow, using two decades of household data, find that the top 1 per cent of wealth-holders borrow about 1 to 2 per cent of their economic income each year, while their new unrealized gains are 20 to 40 times larger. The rich mostly do not borrow to live; they save out of taxed income while their assets grow untaxed. Fox and Liscow call the real strategy “buy, save, die”.[6]
Madoff’s central proposal, taxing gains at death, deals with this correctly whatever the borrowing numbers say, and she deserves credit for that. But the headline sends reformers after loans, which the Yale Budget Lab judges to have “somewhat limited revenue potential”, and away from the larger leak, which is untaxed growth held until death.[7] The same research has a second finding the book’s framing obscures: for the top 1 per cent as a whole, the income tax still sees about 60 per cent of economic income. The rich as a group are not untaxed. A large and growing slice escapes, concentrated in fortunes made of a single company’s shares.
The order of the reforms matters
Two of Madoff’s proposals pull in opposite directions if they are not enacted together. Taxing gains at the same rate as wages, up to 37 per cent plus the 3.8 per cent investment surcharge, while the step-up survives would make holding until death more attractive than it is now: the penalty for selling would rise and the escape at death would remain. Economists call this lock-in, and a partial reform would worsen it. The book presents its proposals as a package; it should say more loudly that they only work as one, because partial versions are what usually pass.
The same applies to the precedent it cites. The United States did tax gains and wages at the same top rate from 1988 to 1990, under a law signed by Ronald Reagan. But the shared top rate then was 28 per cent, after a reform that had cut the top rate on wages from 50 per cent.[2] Equalising at 28 per cent and equalising at 37 per cent plus surcharges are different policies, with different effects on how often people sell.
The combined rate should be on the page
Suppose death is treated as a sale, with the gain taxed at income-tax rates, and the heir then pays income tax on what is left. The two taxes stack. The summaries of the book do not say how they interact, so Figure 1 takes a deliberately charitable reading: an exemption of $1 million on the gain at death, as in the 2021 Biden proposal, another $1 million on the inheritance, ordinary 2025 brackets, one heir, and no other income.[8]
The results are worth stating plainly. A $10 million estate made entirely of untaxed gains pays nothing today; under the stacked package it would pay about 54 per cent. A $100 million estate pays at most 34 per cent today, before planning; under the package, about 60 per cent if it is all gain and 37 per cent if it is all cash. At the very top the package and today’s headline rate are not far apart. The large change is in the middle, between about $2 million and $15 million, where today’s tax is zero.
That may be the intended result, and there is a respectable case for it. But a reader should be told the combined rate and how many families would pay it. The estate tax reaches about 4,000 estates a year.[9] An inheritance tax above $1 million would reach many times more, and the book, judging by every summary of it, does not say how many. A reform that would move tax from roughly one death in 750 to a much larger number deserves a headcount.
The political puzzle is left unsolved
The estate tax was not killed by bad design. It was dismantled by Congress over twenty-five years, in steps visible in every exemption increase since 2001, and it was dismantled while it applied to a small number of very large estates. Madoff proposes a broader tax that would reach many more families. Why would that survive the politics that destroyed a narrower one?
Her implicit answer is that taxing inheritances as income is easier to defend than a tax on the dead, and that may be right. Opinion research could test it; history offers a warning. When Congress tried to end the step-up in 1976, it retreated within two years and repealed the change retroactively in 1980, before it had ever applied.[10] The book would be stronger if it treated that episode as the central obstacle rather than as background.
A new tax inherits the old one’s weak points
The estate tax lost much of its bite through technical channels: discounts on minority stakes in family companies, annuity trusts that the Tax Court blessed in 2000 and Congress never closed, and trusts that last for generations in states that abolished the old limits on their duration.[11] An inheritance tax still has to value private businesses at the moment of transfer, and it needs rules for distributions from trusts that already exist. A short book cannot write those rules, but a reader could come away thinking that changing the tax’s name solves the avoidance problem. It does not. A tax on transfers is only as strong as its anti-avoidance rules and the IRS budget available to enforce them.
Some economic objections get too little space
Inflation. Part of the gain on an asset held for forty years is not a gain at all: $10,000 in 1980 is worth about $40,000 in today’s money. Taxing nominal gains at ordinary rates taxes that phantom part too. The preferential rate on gains is a crude correction for this; indexing the basis to inflation would be the honest companion to equal rates.
Corporate tax. Dividends are paid out of profits that have already borne the 21 per cent corporate tax. At ordinary rates on top, the combined rate on distributed profits passes 50 per cent. That may be acceptable, but it is the figure critics will cite, and it should be answered.
Payroll taxes. Calling them regressive looks only at what is paid. Social Security’s benefit formula replaces a much larger share of low earnings than of high ones, so the system taken as a whole is less one-sided than the tax alone suggests.
None of these defeats the thesis. Each is an objection a sceptical reader will raise, and the book is meant to persuade sceptics.
Strong on philanthropy, but it needs distributions, not averages
The critique of charitable giving is the book’s most original material and largely well founded. A donor who gives appreciated shares can collect tax benefits worth up to about 60 per cent of the gift: a deduction at full market value and a gain that is never taxed.[12] Donor-advised funds give the deduction at once and have no payout rule. Madoff estimates the charitable deduction alone cost $64 billion in 2024.
Two things would make the case stronger. Defenders of donor-advised funds cite the sector’s aggregate payout rate, which looks healthy. The real question is the distribution: how many accounts are dormant, and how much money sits in them. An argument made at the level of accounts would be harder to answer than one made against the aggregate. And her central fix, tying benefits to money that reaches “active charities”, needs a workable definition of active. A 2020 proposal she drafted with the philanthropist John Arnold to speed up payouts did not pass, and her ideas have been opposed across the sector, by the Council on Foundations, Independent Sector and the Philanthropy Roundtable alike.[12]
Read it for the diagnosis
The Second Estate is the clearest short account available of why taxing the wealthy fails in the United States. Its central diagnosis is right: the problem is the tax base, not the rates. Its main proposal, treating death and gifts as sales and inheritances as income, is serious and has been tested abroad. Its weaknesses are mostly the omissions of a book written for a general audience: rhetoric that runs ahead of the analysis, combined rates and headcounts left unstated, and politics and anti-avoidance rules treated as afterthoughts.
Read it for the diagnosis. Read Fox and Liscow, and Jensen’s review, alongside it for the stress test. And for a Portuguese reader there is one more reason to read it: Portugal has the same step-up and no tax at all on inheritances between parents and children, as The Gain That Dies With You explains. Much of what Madoff says about America applies here too.
This piece was written collaboratively with Claude Opus 5.5 (Anthropic): human specification, editorial direction and critical review; machine research and drafting. This review was drafted from the publisher’s description of the book, published reviews (Untereiner, Jensen) and interviews with the author; where it says what the book does not contain, that refers to what those accounts report. Figure 1 is computed by scripts/second_estate.py (results in docs/second-estate-results.json); it applies stated rules under stated assumptions and is not a costing of Madoff’s proposals. The cover is computed by the same script.
Authored by: Luis Matos Ferreira — Physicist, Developer, Writer
- The Gain That Dies With You — how gains are erased at death, step by step, in the US and in Portugal.
- Earned and Unearned — how work and ownership share income in Portugal.
- Who Gets the Profits — where the income that is not wages goes.
- R. D. Madoff, The Second Estate: How the Tax Code Made an American Aristocracy, University of Chicago Press, 2025; publisher’s page.
- A. Untereiner, review of The Second Estate, The Burton Book Review.
- E. M. Jensen, “A Fairer Tax System?”, Civitas Outlook, 21 November 2025.
- Moore v. United States, 602 U.S. ___ (2024); Income Tax Act (Canada), subsection 70(5).
- Haynes Boone, “Federal estate, gift and GST tax highlights from the One Big Beautiful Bill Act”, 2025; Morgan Lewis, “Estate tax alert: new $15 million federal exemption becomes law”, August 2025.
- E. Fox and Z. Liscow, “The Role of Unrealized Gains and Borrowing in the Taxation of the Rich”, working paper, January 2025; Tax Policy Center, “The rich’s real tax trick isn’t ‘buy, borrow, die’”.
- The Budget Lab at Yale, “Buy-Borrow-Die: options for reforming the tax treatment” (policy options paper).
- US Treasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, May 2021; Tax Foundation, “Biden’s proposal to tax unrealized capital gains at death”. Income tax brackets: IRS, 2025 single filers.
- Tax Policy Center, “How many people pay the estate tax?” (estimate for 2023 decedents).
- Greenleaf Trust, “Stepped-up basis: a short history”. Carryover basis: Tax Reform Act of 1976, postponed by the Revenue Act of 1978, repealed by the Crude Oil Windfall Profit Tax Act of 1980.
- Walton v. Commissioner, 115 T.C. 589 (2000); IRS Notice 2003-72.
- B. Gose, “How the rich use philanthropy to dodge taxes”, interview with Ray Madoff, The Chronicle of Philanthropy, October 2025.
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