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.