Two economics professors detail the unequal taxation in the United States and offer solutions for creating more equitable taxation.
In Search of Equitable Taxation
According to Emmanuel Saez and Gabriel Zucman – professors of economics at the University of California, Berkeley –the United States has unlearned one of its most useful lessons: that the rich earn income on their capital and that if sufficient taxes don’t come out of their pockets, they get richer and richer. The eye-opening data in Saez and Zucman’s comprehensive work show that, for free market capitalism to survive, America needs a more effective, more progressive tax system. Saez and Zucman may not convince everyone, but their perceptive book could prompt many readers to rethink their views on capitalism, inequality and taxation.
Accordingly, David Leonhardt of The New York Times called this “the most important book on government policy that I’ve read in a long time.” The Guardian found it “a bracing and brave formulation of a radical new approach to public funding.”
The Bottom 50%
The authors frame their arguments through one standout statistic: Since 1980, the share of total US income going to the bottom 50% of the population has dropped from 20% to 12%, as the portion going to the top 1% doubled – from 10% to 20%.
Saez and Zucman note that the US minimum wage has also collapsed in real value. A worker making only the federal minimum wage, they explain, collects one-fifth of the average US adult’s income. The authors show that payroll taxes for minimum-wage American earners have risen, from 3% in 1950 to 15% today. Saez and Zucman point out that states tax more of the poor’s consumption than that of the rich. And, they add, US life expectancy is now two years less than that of other wealthy countries.
Tax policy reflected the view that extreme inequality hurts the community; that the economy works better when rent extraction is discouraged; and that unfettered markets lead to a concentration of wealth that threatens our democratic and meritocratic ideals. Emmanuel Saez, Gabriel Zucman
Saez and Zucman find that famed investor Warren Buffet, for example, organized his corporate empire to reinvest profits, not to pay dividends. Buffett pays capital gains taxes only on the modest amount he gets from selling a few shares of his company. Thus, the authors show, Buffett pays a lower marginal tax rate on his yearly financial gains than his salaried secretary does.
The higher the wealthy move up the income scale, Saez and Zucman detail, the more their income consists of returns from capital, which come from owning assets, businesses or shares in companies.
In all capitalist societies, the richest people derive most of their income from shares, the ownership of corporations – the true economic and social power.…In effect, the corporate tax serves as a minimum tax on the affluent.Emmanuel Saez, Gabriel Zucman
The authors find justification for corporate taxes because the wealthy leave the majority of their yearly financial gains to be reinvested within companies. Saez and Zucman maintain that corporate taxation goes to the heart of the matter: It takes tax revenues out of the wealth accumulation system, which they see as a positive step.
Workers Pay More
Saez and Zucman report that the total amount Americans pay in taxes is equivalent to 28% of GDP. They find that everyone pays around 25% to 30% of their incomes in taxes, meaning that the United States has a roughly flat – not progressive – tax system.
The authors reveal that the top 1% pays, on average, only slightly more than that: 32%. But, shockingly, the top 0.001% – or one in every 100,000 people – pays only 25%. Saez and Zucman add that even free market fundamentalists can’t justify that the highest earners pay a lower percentage rate.
The United States, the authors remind readers, once believed that progressive taxes would deal with an “undemocratic concentration” of wealth. Personal income taxes were high for a tiny minority during the post-World War II decades, when, Saez and Zucman show, corporate taxes took more money from the rich. In the late 1950s and the 1960s, they conclude, corporate taxes contributed some 4% to 5% to national income; today, they contribute merely 1%.
Saez and Zucman quote former president Donald Trump, who, when criticized for paying almost nothing in taxes, said, “That makes me smart.” The authors present Trump as embracing a common ideology: that individuals need obey only the minimum legal requirements and that the neoliberal duty to maximize shareholder returns overshadows national interest or moral obligation.
Saez and Zucman characterize political culture and signals from Washington, DC – in terms of priorities and funding cuts – as contributing to a favorable environment for tax dodging. They reveal that Congress has cut the Internal Revenue Service’s budget by 20% since 2010, and that the tax-avoidance industry of attorneys, accountants and lobbyists is now worth billions of dollars.
Saez and Zucman tell how, in 2019, 60% of the profits made by US multinationals abroad were booked in low-tax countries. Companies move paper profits, the authors disclose, to branches or shell companies in low- or zero-tax countries. One example: In 2017, Google made $22.7 billion in revenue in Bermuda on little activity there.
A Wealth Levy
Zucman and Saez argue that a tax of 2% on wealth above $50 million and of 3% on wealth above $1 billion would raise an amount equivalent to 1% of GDP.
A wealth tax will never replace the income tax; its goal is more limited: to ensure that the ultra-wealthy do not pay less than the rest of the population.…It’s the super rich – most of whom own a lot of wealth but have little taxable income – for whom a wealth tax is essential.Emmanuel Saez, Gabriel Zucman
Economists, the authors believe, should look to history to see that a democracy can choose a tax system that creates a more healthy and equitable economy.
Zucman and Saez argue articulately for a fairer tax system, one in which – to put it simply – those who earn more pay more. They find the current practice of tax-avoidance enabling to be obscene and a great affront to working Americans. Sadly, the authors also see little will in the body politic to take tax shields away from the superrich. The authors are not ideologues, and their views should not necessarily repel those on either end of the political spectrum. Zucman and Saez present themselves primarily as concerned citizens. Though they deal with mind-numbing statistics and numbers, their writing is lively and compelling. Thoughtful readers will retain and consider their arguments.
Other works on the economic system and taxation include Capital in the Twenty-First Century by Thomas Piketty, The Wealth Hoarders by Chuck Collins and The Code of Capital by Katharina Pistor.