For the past few decades, the Democratic Party has ceded the tax debate to Republicans, failing to put forward a truly progressive vision for taxation. According to economists Emmanuel Saez and Gabriel Zucman’s new book, The Triumph of Injustice, the result is a country whose tax system looks very much like a plutocracy.
In their book, Saez and Zucman find that today the top 1 percent earns nearly twice as much of the share of the national income as the bottom 50 percent. Yet currently the 400 richest Americans have lower tax rates than the bottom 50 percent of income earners. And the ultrawealthy aren’t even paying what they owe: In 2018 most income groups evaded taxes at a steady rate of a bit more than 10 percent, while the top 400 Americans evaded 25 percent of their taxes owed. And in the same year, for the first time in modern US history, capital income was taxed less than labor income.
These realities are why one of the main battles emerging in the progressive wing of the Democratic Party has centered on the best way to tax the wealthiest Americans. For Elizabeth Warren’s presidential campaign, one of her first defining policy proposals was a 2 percent wealth tax on household assets worth more than $50 million and 3 percent over $1 billion. “It’s time to fundamentally transform our tax code so that we tax the wealth of the ultrarich, not just their income,” she declared when she released the plan in January.
By September, Bernie Sanders released his own plan to tax wealth, which went further than Warren’s, starting with a 1 percent wealth tax on those with a net worth above $32 million and reaching 8 percent on households worth more than $10 billion. In November, Warren’s Medicare for All plan doubled the top rate of her wealth tax, to 6 percent for those above $1 billion. As Zach Carter wrote at HuffPost, “Adding wealth to the list of taxable items could prove as socially transformative as the introduction of the income tax in 1913.”
Saez and Zucman, both professors at the University of California, Berkeley, are at the center of this debate, having advised Sanders and Warren on their tax plans. Their new book challenges many of the assumptions about the immutability of the country’s tax system, drawing on historical parallels to outline clear proposals for the future. “There is nothing inherent in globalization that destroys our ability to tax big companies and the wealthy,” Saez and Zucman write. “The choice is ours.”
I spoke to Zucman last month about his new book, the tax plans put forth by 2020 presidential candidates, and how our plutocratic tax system is not a fact of life but a matter of political will. This interview has been condensed and edited for clarity.
Clio Chang: Conventional wisdom states that the US tax system is generally progressive. Your book argues otherwise—that in reality the US has a flat tax that becomes regressive at the very top. Can you explain how you and Emmanuel Saez came to this conclusion?
Gabriel Zucman: What we did was measure 100 percent of tax revenue in the US—that is, all taxes paid at all levels of government: federal, state, and local. In total, all of this amounts to 28 percent of US national income. What we found as a result is that pretty much all income groups pay around 28 percent of their income in taxes. The working class basically pays less at around 25 percent, the middle class pays more at around 28 percent, and the upper middle class a bit more but without much variation, except at the very, very top. When you look at billionaires, or at the top 400 richest Americans, for them, the tax rate falls to 23 percent, so they have a lower tax rate than all other income groups. That’s why we summarize the findings by saying the tax system, with everything included, looks like a giant flat tax that becomes regressive at the very top.
CC: Many other economists who have studied the tax system have not come to this conclusion. What are the main differences in your calculation that led you to it?
GZ: The main difference is that we include all taxes and not only federal taxes. Federal taxes are more progressive than state and local taxes. States and local governments rely a lot on consumption, sales, and excise taxes, which are extremely regressive. The other difference is that official government agencies, like the [Congressional Budget Office] or the Joint Committee on Taxation, never look at what happens within the top 1 percent, so they can’t see the decline in tax progressivity at the top, and they don’t publish data on that. To see the tax system become regressive, you need to look at the very top.
One might ask, “Why is this important? Why do we care about the 400 richest Americans?” Well, they own a significant proportion—3.5 percent—of wealth. You also have a number of proposals by presidential candidates today that would target that group. So we wanted to know how much taxes they are paying today.
CC: Tell me briefly about the alternative tax system you propose in your book and how it would make the tax system truly progressive.
GZ: There are a number of components to it. One is to fix the corporate tax. It’s important to fix the corporate tax because if you have a low rate like the current 21 percent, you cannot have a well-functioning progressive income tax. If you have too big of a gap between corporate tax rates and the top individual income tax rates, then the wealthy incorporate and earn income through corporations, taxed at 21 percent, thus avoiding the progressive income tax.
So a key component to our plan is that we have to fix the corporate tax and increase it. The way we do that is by saying we’re going to make sure national companies cannot avoid it. In the current system they can avoid it by booking profits abroad in low- or zero-tax places like the Cayman Islands. Our plan essentially says if some book profits abroad, the profits are going to be taxed in the US. For instance, if a US company books $1 billion in profits in Ireland, which taxes that at 2 percent and the US rate is 35 percent, then the US would collect the missing 33 percent on the $1 billion booked in Ireland. If you do that, you remove any incentive for companies to book taxes in low-tax countries, and then you remove incentives for tax havens to offer low tax rates in the first place. Once you fix the corporate tax, you can then also have a more progressive income tax. In our plan, we have a top marginal income tax rate of 60 percent for the top 1 percent.
CC: And where does a wealth tax fit into all of this? Why is it essential to your plan?
GZ: A wealth tax is necessary because a number of very wealthy individuals have a lot of wealth while reporting and realizing little taxable income. Take the case of Warren Buffett. He’s worth $80 billion today, and his true economic income is something like 6 percent of his wealth, so around $5 billion, but because he instructs his company Berkshire Hathaway not to pay dividends, his taxable income is very low. Basically, what Buffet and other people in his position do is he sells a few shares every year, realizes gains on those shares, $10 million or $20 million, and then pays a little bit of taxes on that. And you see that even if you increased the top marginal income tax to 90 percent in the case of Buffett, it would not make any significant difference to his tax bill. That’s the reason we need a wealth tax.
CC: What does your tax plan have to do with a universal health care program?
GZ: The way that health care is funded today is very unequitable. For people who get health insurance through employers, health care is funded by insurance premiums that do not depend on income. A secretary pays literally the same as an executive. It’s a huge cost because health care is so costly in the US. Today the average [annual] premium for workers covered through their employers is around $13,000. It’s what you could call a private head tax that almost all workers today pay, and that’s not sustainable. Our new tax plan would help address that inequality, replacing this private head tax with taxes based on income. By replacing private health insurance premiums with an income tax, you could have the biggest wage increase in a generation for the middle class.
The way this would work is this: Right now, if you’re employed by an employer that has more than 50 full-time workers, your employer has to provide you with health insurance. The cost of that is reported on W-2 forms. Anybody can see that it costs a lot of money, around $13,000. So what we’re saying is that this $13,000 should be added to wages. Let’s assume there’s a Medicare for All bill that passes. In year one, what your employer used to pay, some $13,000, is now added to your wage. So someone who had a wage of $50,000 now has a wage of $63,000. That person would have to pay a bit more in taxes, but for the vast majority of workers, the extra tax would be much less than the extra wage.
CC: How do plans put forward by 2020 candidates like Bernie Sanders and Elizabeth Warren compare, both to your plan and with each other?
GZ: In terms of the wealth tax, now the plans are similar. Initially, Warren’s wealth tax was 2 percent above $50 million, 3 percent above $1 billion. Now it’s 2 percent above $50 million and 6 percent above $1 billion. The Sanders wealth tax starts at $32 million, and the top rate is 8 percent above $10 billion—not much of a difference there. The Warren corporate tax is actually the one we describe in our book. Our idea for how to fund Medicare for All, though, has not been discussed a lot yet.
CC: And you would fund Medicare for All with a new income tax?
GZ: Yes, a new income tax that’s very broad, not only on wages but on all forms of income, including corporate profits, etc. Warren’s plan converts the premiums paid by employers into a tax, so it’s converting the private head tax into a regular public head tax, which in our view is not the most progressive way to do the transition to Medicare for All. The current funding mechanism for private health insurance is very unfair, and on that particular aspect, the Warren plan would not depart much from the current funding (although it does introduce very progressive taxes elsewhere, making the tax system overall much more progressive).
Sanders’s current funding plan has a bit more progressivity, in the sense that it funds Medicare for All with a payroll tax and an income tax. But the idea that insurance premiums as reported today in W-2 forms should be converted into permanent wage increases for workers in year one of a Medicare for All transition—no candidate has yet formulated that idea very clearly. In our view, it’s key for the success of Medicare for All because it would show very concretely to voters how much they have to gain. It would be very visible.
CC: Because otherwise, money for health insurance is being taken out but people don’t understand it as a tax?
GZ: Yes. Right now you have an average of $13,000 per worker going to health insurance companies, no matter what your wage is, and that’s what we want to change. Instead of every worker sending $13,000 for their health care, low-wage and medium-wage workers would send much less than $13,000, and the very rich would send more. For 5 percent of the population, income after tax would fall, but for the bottom 95 percent, take-home pay would actually rise significantly.
CC: Switching gears a bit—one of the main arguments of the book is that tax avoidance and evasion by the extremely wealthy who can afford to spend millions on tax lawyers is not a fact of life but a policy choice. You point out that proliferation of an industry explicitly built to help the wealthy dodge taxes is a pretty new phenomenon. Tell me about how tax avoidance became the norm and how policy can fix it.
GZ: The choice to tolerate tax avoidance, tax evasion, tax competition—it’s a political choice. The turning point is Ronald Reagan. When he gave the famous speech that “government is not the solution to our problem; government is the problem,” it legitimized the industry that helps people avoid taxation. Before Reagan, that industry—the market for tax avoidance and tax evasion services—was considered repellent. If there’s a political will to make progressive taxation work, the tax avoidance industry can be regulated. Right now it’s driven by the supply. If you’re wealthy, wealth managers are going to call you, and they’re going to try to sell you some services. That’s how these things work, and so if you reduce the supply, if you regulate the supply of tax evasion services, you can reduce tax evasion dramatically.
CC: Another argument you make is that income taxes should be used as a way to reduce inequality and not only to collect revenue—like a carbon tax, which seeks to reduce emissions. This seems like a straightforward idea but is antithetical to what has been the norm since the Reagan era. Do you think this idea will be difficult to get across today?
GZ: It’s a very American idea, in fact. We tell the story in the book of the famous speech by Franklin Roosevelt in 1942, when he goes to Congress and says, “Look, I think nobody should have an income, after paying taxes, of more than $25,000,” which is equivalent to $1 million in today’s dollars. “Therefore, I propose a 100 percent top marginal income tax rate on income above $25,000.” And of course, with a 100 percent tax rate, the idea is not to collect revenue. It was obvious that the point was to regulate inequality and to reduce the concentration of pretax income. Congress hesitated a little bit, but then they agreed on a 94 percent marginal income tax rate, which is not very far from 100 percent. And then the rate remained roughly around 90 percent for several decades
The reason for that policy was to use the tax system to reduce income and wealth concentration. This idea that excessive income and wealth inequality is a bad thing in and of itself is deeply rooted in the US, which was created in part in reaction against the highly unequal and aristocratic European societies of the 18th century. One powerful way to regulate that inequality is with sharply progressive income taxation on very high incomes. What we’re trying to do in the book is to help the American public reconnect with this tradition. What we’re saying is, “Look, that’s your history.”
CC: Do you see a political appetite coming back for viewing taxes in this way?
GZ: Yes. Look at opinion polls on wealth taxation. When voters are asked, “Do you support a tax on wealth above $50 million?” a big majority of the electorate says yes. Even before you tell people about how the money would be used, just the idea of increasing taxation on the very wealthy, of having a more progressive tax system is very popular. It’s not a new thing. It’s something that’s a constant in opinion polls, at least as far back as the 1990s. If you ask people, “Do rich people pay enough in taxes?” a majority of Americans say no. “Do corporations pay enough in taxes?” A majority of voters say no.
So what is striking is the huge disconnect between the demand for progressive taxation and what is offered not only by the Republican Party, which obviously has been running on a platform that cuts taxes for the wealthy, but also by the Democrats, who were very reluctant in authoring a really progressive tax policy platform. What we’re witnessing today is the Democrats moving toward voters and the electorate and now trying to meet this demand for a more progressive tax system.
CC: Something that I didn’t know before reading your book was the economic substance doctrine, which states that any transaction that has no purpose besides the reduction of tax liability is illegal. Yet we still have wealthy people, such as Donald Trump, being cheered on when they brag about how they’re “smart” to evade taxes. This really underscores the idea that changing our tax system isn’t just a matter of white papers and policy but of political will.
GZ: It’s true. The economic substance is a good illustration of this, in the sense that you have lots of transactions that are conducted today that have no substance. So for instance, creating shell companies in Bermuda where nothing happens and booking profits there, such as in the case of Google, which made almost $20 billion in revenue two years ago in Bermuda. This is all tolerated. But this could be challenged in courts if there was more political will to do so. There’s no substance there. These transactions have the sole purpose of avoiding taxes. Therefore, they are illegal. The choice was made not to enforce the economic substance doctrine or to enforce it selectively, in some cases and not others. But it’s easy to see how quickly this could change, how when politics and when ideology change, you can enforce a progressive tax system.