America’s superrich have always found ways to avoid paying taxes, but in recent years, they’ve discovered what might be the mother of all loopholes. It’s a three-step process called “Buy, Borrow, Die,” and it allows people to amass a huge fortune, spend as much of it as they want, and pass the rest—untaxed—on to their heirs. The technique is so cleverly designed that the standard wish list of progressive tax reforms would leave it completely intact.

Step one: buy. The average American derives most of their disposable income from the wages they earn working a job, but the superrich are different. They amass their fortune by buying and owning assets that appreciate. Elon Musk hasn’t taken a traditional salary as CEO of Tesla since 2019; Warren Buffett, the chair of Berkshire Hathaway, has famously kept his salary at $100,000 for more than 40 years. Their wealth consists almost entirely of stock in the companies they’ve built or invested in. The tax-law scholars Edward Fox and Zachary Liscow found that even when you exclude the 400 wealthiest individuals in America, the remaining members of the top 1 percent hold $23 trillion in assets.

Unlike wages, which are taxed the moment they are earned, assets are taxed only at the moment they are sold—or, in tax terms, “realized.” The justification for this approach is that unrealized assets exist only on paper; you can’t pay for a private jet or buy a company with stocks, even if they have appreciated by billions of dollars. In theory, the rich will eventually need to sell their assets for cash, at which point they will pay taxes on their increase in wealth.

That theory would be much closer to reality if not for step two: borrow. Instead of selling their assets to make major purchases, the superrich can use them as collateral to secure loans, which, because they must eventually be repaid, are also not considered taxable income. Larry Ellison, a co-founder of Oracle and America’s fourth-richest person, has pledged more than $30 billion of his company’s stock as collateral in order to fund his lavish lifestyle, which includes building a $270 million yacht, buying a $300 million island, and purchasing an $80 million mansion. A Forbes analysis found that, as of April 2022, Musk had pledged Tesla shares worth more than $94 billion, which “serve as an evergreen credit facility, giving Musk access to cash when he needs it.”

This strategy isn’t as common among the merely very rich, who may not have the expensive tastes that Ellison and Musk do, but it isn’t rare either. Liscow and Fox calculated that the top 1 percent of wealth-holders, excluding the richest 400 Americans, borrowed more than $1 trillion in 2022. And the approach appears to be gaining momentum. Last year, The Economist reported that, at Morgan Stanley and Bank of America alone, the value of “securities-backed loans” increased from $80 billion in 2018 to almost $150 billion in 2022. “The real question is: Why would you not borrow hundreds of millions, even billions, to fund the lifestyle you want to live?” Tom Anderson, a wealth-management consultant and former banker who specializes in these loans, told me. “This is such an easy tool to use. And the tax benefits are massive.”

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You might think this couldn’t possibly go on forever. Eventually, the rich will need to sell off some of their assets to pay back the loan. That brings us to step three: die. According to a provision of the tax code known as “stepped-up basis”—or, more evocatively, the “angel of death” loophole—when an individual dies, the value that their assets gained during their lifetime becomes immune to taxation. Those assets can then be sold by the billionaire’s heirs to pay off any outstanding loans without them having to worry about taxes.

The justification for the stepped-up-basis rule is that the United States already levies a 40 percent inheritance tax on fortunes larger than $14 million, and it would be unfair to tax assets twice. In practice, however, a seemingly infinite number of loopholes allow the rich to avoid paying this tax, many of which involve placing assets in byzantine legal trusts that enable them to be passed seamlessly from one generation to the next. “Only morons pay the estate tax,” Gary Cohn, a former Goldman Sachs executive and the then–chief economic adviser to Donald Trump, memorably remarked in 2017.

“All of this is completely, perfectly legal,” Edward McCaffery, the scholar who coined the term Buy, Borrow, Die, told me. But, he said, the strategy “has basically killed the entire concept of an income tax for the wealthiest individuals.” The tax economist Daniel Reck, who has spent his career documenting the various ways the rich evade taxation, told me that Buy, Borrow, Die is “the most important tax-avoidance strategy today.” The result is a two-tiered tax system: one for the many, who earn their income through wages and pay taxes, and another for the few, who accumulate wealth through paper assets and largely do not pay taxes.

Much of the debate around American tax policy focuses on the income-tax rate paid by the very wealthiest Americans. But the bulk of those people’s fortunes doesn’t qualify as income in the first place. A 2021 ProPublica investigation of the private tax records of America’s 25 richest individuals found that they collectively paid an effective tax rate of just 3.4 percent on their total wealth gain from 2014 to 2018. Musk paid 3.3 percent, Jeff Bezos 1 percent, and Buffett—who has famously argued for imposing higher income-tax rates on the superrich—just 0.1 percent.

The same dynamic exists, in slightly less egregious form, further down the wealth distribution. A 2021 White House study found that the 400 richest American households paid an effective tax rate of 8.2 percent on their total wealth gains from 2010 to 2018. Liscow and Fox found that, excluding the top 400, the rest of the 0.1 percent richest individuals paid an effective rate of 12 percent from 2004 to 2022. (Twelve percent is the income-tax rate paid by individuals who make $11,601 to $47,150 a year.)

One solution to this basic unfairness would be to tax unrealized assets. In 2022, the Biden administration proposed a “billionaire minimum tax” that would have placed a new annual levy of up to 20 percent on the appreciation of even unsold assets for households with more than $100 million in wealth. Experts have vehemently debated the substantive merits of such a policy; the real problem, however, is political. According to a survey conducted by Liscow and Fox, most Americans oppose a tax on unrealized gains even when applied only to the richest individuals. The Joe Biden proposal, perhaps unsurprisingly, went nowhere in Congress. Making matters more complicated, even if such a policy did pass, the Supreme Court would very likely rule it unconstitutional.

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A second idea would be to address the “borrow” step. Last year, Liscow and Fox published a proposal to tax the borrowing of households worth more than $100 million, which they estimated would raise about $10 billion a year. The limitation of that solution, as the authors acknowledge, is that it would not address the larger pool of rich Americans who don’t borrow heavily against their assets but do take advantage of stepped-up basis.

That leaves the “die” step. Tax experts from across the political spectrum generally support eliminating the “stepped-up basis” rule, allowing unrealized assets to be taxed at death. This would be far more politically palatable than the dead-on-arrival billionaire’s minimum tax: In the same survey in which respondents overwhelmingly opposed broad taxes on unrealized assets during life, Liscow and Fox also found that nearly two-thirds of them supported taxing unrealized assets at death.

Even a change this widely supported, however, would run up against the iron law of democratic politics: Policies with concentrated benefits and distributed costs are very hard to overturn. That’s especially true when the benefits just so happen to be concentrated among the richest, most powerful people in the country. In fact, the Biden administration did propose eliminating stepped-up basis as part of its Build Back Better legislation. The move prompted an intense backlash from special-interest groups and their allied politicians, with opponents portraying the provision as an assault on rural America that would destroy family farms and businesses. These claims were completely unfounded—the bill had specific exemptions for family businesses and applied only to assets greater than $2.5 million—but the effort succeeded at riling up enough Democratic opposition to kill the idea.

The one guarantee of any tax regime is that, eventually, the rich and powerful will learn how to game it. In theory, a democratic system, operating on behalf of the majority, should be able to respond by making adjustments that force the rich to pay their fair share. But in a world where money readily translates to political power, voice, and influence, the superrich have virtually endless resources at their disposal to make sure that doesn’t happen. To make society more equal, you need to tax the rich. But to tax the rich, it helps for society to be more equal.