Saez and Zucman Support Trump’s Tax Reform

I am quite confident that Drs. Saez and Zucman would be quite outraged at the interpretation of their latest op-ed in the New York Times of my title above but bear with me. In the op-ed they conclude that when local, state, and federal taxes are all taken into account the overall U. S. tax system is regressive:

America’s soaring inequality has a new engine: its regressive tax system. Over the past half century, even as their wealth rose to previously unseen heights, the richest Americans watched their tax rates collapse. Over the same period, as wages stagnated for the working classes, work conditions deteriorated and debts ballooned, their tax rates increased.

Stop to think this over for a minute: For the first time in the past hundred years, the working class — the 50 percent of Americans with the lowest incomes — today pays higher tax rates than billionaires.

The full extent of this situation is not visible in official statistics, which is perhaps why it has not received more attention so far. Government agencies like the Congressional Budget Office publish information about the distribution of federal taxes, but they disregard state and local taxes, which account for a third of all taxes paid by Americans and are in general highly regressive. The official statistics keepers do not provide specific information on the ultra-wealthy, who although few in number earn a large fraction of national income and therefore account for a large share of potential tax revenue. And until now there were no estimates of the total tax burden that factored in the effect of President Trump’s tax reform enacted at the end of 2017, which was particularly generous for the ultra-wealthy.

which is followed by a bizarrely formatted table which does not support their claim:

Unless I’m misreading that table it can be summarized as pointing out that our system is slightly progressive right up to the highest income earners at which point it becomes slightly regressive, due to the payroll tax. If the cap on FICA were raised to include all wage income, for example, all other things being equal our system would be quite progressive. I have supported raising the cap on FICA so that wage income right up to the threshold wage of the top 1% or income earners (presently $389,000) is subject to the tax. That’s a lot better than European countries in which the construction of their value-added taxes make their tax systems very regressive.

There are all sorts of flaws in their analysis but I will focus on just two. As I said you cannot evaluate a tax system based on rates. How you calculate income is where the real action is. When you add all transfer payments to income, our system is shown to be somewhat more progressive.

The second is that the United States does not have a tax system. It has tax systems. Thousands of them. In Illinois alone there are almost 7,000 independently taxing bodies. I can only speculate that there are tens of thousands of them in the United States as a whole.

Which brings me to the title of my post. Presumably, the authors support one aspect of Trump’s recent tax reform: the limitation on deductibility of state and local taxes. That tends to increase the tax liability of the highest income earners and, consequently, increases their taxes as a percentage of income. It also provides a political incentive for states to reduce their taxes, a major source of the inequity they point out.

I would claim that, other than FICA, most of the inequity in our “tax system” is on the part of a handful of high tax states. I would like to see an updated analysis on a state by state basis that considers income regardless of source.

Drs. Saez and Zucman have a plan:

Take big corporations. Some countries may have an interest in applying low tax rates, but that’s not an obstacle to making multinationals (and their shareholders) pay a lot. How? By collecting the taxes that tax havens choose not to levy. For example, imagine that the corporate tax rate in the United States was increased to 35 percent and that Apple found a way to book billions in profits in Ireland, taxed at 1 percent. The United States could simply decide to collect the missing 34 percent. Apple, like most Fortune 500 companies, does in fact have a big tax deficit: It pays much less in taxes globally than what it would pay if its profits were taxed at 35 percent in each country where it operates. For companies headquartered in the United States, the Internal Revenue Service should collect 100 percent of this tax deficit immediately, taking up the role of tax collector of last resort. The permission of tax havens is not required. All it would take is adding a paragraph in the United States tax code.

The same logic can be applied to companies headquartered abroad that sell products in America. The only difference is that the United States would collect not all but only a fraction of their tax deficit. For example, if the Swiss food giant Nestlé has a tax deficit of $1 billion and makes 20 percent of its global sales in the United States, the I.R.S. could collect 20 percent of its tax deficit, in addition to any tax owed in the United States. The information necessary to collect this remedial tax already exists: Thanks to recent advances in international cooperation, the I.R.S. knows where Nestlé books its profits, how much tax it pays in each country and where it makes its sales.

Collecting part of the tax deficit of foreign companies would not violate any international treaty.

I think they’re wrong in that last assertion but I have a question. How would they collect from Chinese companies? Sue? There is no such thing as a system of international system of civil law. And China does not have a robust system of civil law. The ability of foreign companies or even foreign governments to sue Chinese companies in Chinese courts is extremely limited.

Sue in American courts? How would they enforce the judgments? Seize the assets of those companies held in the United States? How much do those amount to? I would suggest that they come nowhere near covering the amounts that would be involved.

13 comments… add one
  • steve Link

    “How you calculate income is where the real action is. When you add all transfer payments to income, our system is shown to be somewhat more progressive.”

    But then you also need to account for total income of the wealthy. There are many loopholes, legal and illegal (see the Panama papers, Swiss accounts) where the wealthy have income that is not taxed. Company cars, phones, private gym memberships add up also.

    “Presumably, the authors support one aspect of Trump’s recent tax reform: the limitation on deductibility of state and local taxes.”

    They probably do since state and local taxes includes property taxes and sales taxes. So if you look at high tax states like Louisiana, California,Tennessee and Texas (per the Tax Foundation) they may have a low income tax but other taxes to make up for the lower income tax. Those are also deductible, up to the $10,000 limit.


  • But then you also need to account for total income of the wealthy

    I agree.

  • Guarneri Link

    “…the wealthy have income that is not taxed. Company cars, phones, private gym memberships add up also.”

    I hate to break it to you but you are trafficking in third and fourth order effects. I’m wealthy. I have no company car, phone or gym membership. Last time I had a company car and phone, 25 years ago, I was making $50K per year and had a net worth less than $100K. These are primarily perks for the middle to upper middle class. Some private business owners as well.

    As a concept I have no issue with counting perks as income, but you really are not taxing the wealthy. Taxes always migrate down towards the Average Joe, despite intentions. It reduces you to petty bickering, not really maximizing tax revenue.

    More later.

  • I would also add that federal regulations tightened up on those perks decades ago. Forty years ago they might have amounted to something but not so much anymore. Nearly all such perks nowadays are de minimis fringe benefits—of such negligible value they don’t need to be declared.

    The IRS has been scrutinizing such things pretty closely for 35 years. That’s why the three martini lunch is a thing of the past—it isn’t deductible any more.

  • Guarneri Link

    It gets worse. As a partner in an LLC I’m self employed. I pay both the employer and employee share of payroll taxes. My benefit does not go up.

    I know its tempting to yell eat the rich, but its not productive.

  • steve Link

    Yes, they made it harder to take advantage of a lot of perks and some are gone entirely. Anyone on their own business pays both sides of payroll taxes. We do. The point is that the wealthy will find ways to hide income from the illegal (Panama papers) large scale amounts to the trivial (for them) amounts involved with a phone.

    “I know its tempting to yell eat the rich”

    Dont think anyone here says that. What we point out is that the rich arent paying so much more taxes as they claim. Cutting taxes mostly makes the wealthy richer and doesn’t do much for the rest of us.


  • Guarneri Link

    No one advocates tax fraud. But it’s not big enough to move the needle materially and it’s the natural byproduct of complex and lobby friendly tax regulation. (I’m always on extension. I just got my 2018 final return. 176 pages. Relatively light compared to recent years. And no loopholes. ) Gnash your teeth if it comforts you but better to seek drastic simplification of the code and keep to rates that don’t initiate the natural pushback of people with access to influencers.

  • Grey Shambler Link

    “keep to rates that don’t initiate the natural pushback of people with access to influencers.”
    What percentage of federal net income tax do you guess people with large incomes would pay without resorting to schemes? I mean offshore offices and Bahamian accounts. What is reasonable to pay for the use of public infrastructure and defense?

  • steve Link

    Research to date has shown that the wealthy are more likely to cheat on taxes, and most everything else. So while many will pay taxes at the same rate as the rest of us there would also be many who would continue to use their influence to pay as close to zero taxes as possible. Remember how we got the AMT.


  • TarsTarkas Link

    Oh, hell, let’s just take everybody’s money and dole it out equitably or according to need. That style of wealth redistribution worked so well in the past, it’s time to do it again.

    The article cited, like so many others like it, boils down to ‘I don’t like who’s wealthy and who’s not, I want the monies distributed to who I think ought to have it.’ Social engineering through taxation is stupid and wasteful, and benefits best those who write or administer tax law.

  • Guarneri Link

    “Research to date has shown that the wealthy are more likely to cheat on taxes,”

    LOL Yes, waiters and waitresses faithfully report all their income. Dog groomers faithfully report all their income. Hair dressers faithfully report all their tips. Handymen report all their income. Nail salon workers report all their income. Flee market participants report all their income. Those $25 lottery ticket winners report all their income…….etc etc etc

    That’s why they all like to get cash. That’s why a nail salon owner bought a piece of stereo equipment from me and pulled out a wad of cash the likes I’ve never seen before to pay me. (snicker)

    Jesus H Christ, steve. You say some of the dumbest things sometimes.

  • TastyBits Link

    Rather than a Value Added Tax (VAT), you need a Value Exchange/Transfer Tax (VET or VTT). Everytime anything of value is exchanged, it is taxed, and the tax is a percentage of the value received.

    The income, capital gains, and sales taxes would be eliminated. Since all exchanges for all participants would be taxed, the tax will be highest for those making the most transactions. I think it would be progressive, but it would need more thought.

    Costs and taxes cannot just be passed along to the consumer. For a PE investor and an ER doctor, a $40.00 Snickers bar may be no big deal, but for me, it is a little out of my price range.

    I think it would drive companies to in-source, and it should encourage vertical integration.

  • steve Link

    Nice Drew. As we all know the plural of anecdote is data. Sure you didnt start out in the social sciences instead of engineering?


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