Tax the Rich But Leave the Ultra-Rich Alone

At The Conversation Gabriel Zucman and Emmanuel Saez react to the Democrats’ tax plan. Here’s the meat of the piece:

In 1950, when looking at all federal, state and local taxes, the top 0.01% of earners paid almost 70% of their income in taxes. In the postwar decades, corporate profits – the main source of income for the rich – were subject to an effective corporate tax rate of 50%. Meanwhile, the rich were subject to high tax rates on wages, dividends, interest and income from partnerships.

The progressivity of the U.S. tax system has dramatically declined over the past seven decades. The upshot is that for most income levels the U.S. tax system now resembles a flat tax that becomes regressive at the very top end, meaning the super-rich pay proportionately less. Today, virtually all income groups pay roughly 28% of their income in taxes – except for the 400 richest Americans, who each own more than $2 billion in wealth today and pay around 25% in taxes.

Working-class and middle-class Americans pay a substantial amount of taxes because of payroll taxes, which are high and barely affect the rich, and state and local sales taxes, which are regressive – they take a bigger chunk out of a smaller wage than out of a large income. Even households that pay no federal income tax because of low earnings hand over a percentage similar to that of wealthier households, because of these other taxes.

The super-rich’s low tax rates of today are in part aided by the collapse of federal corporate taxation. In the 1950s, 5% to 7% of national income came from corporate taxes. By 2018, that figure had fallen to just 1.5%.

The effective tax rate collapses for billionaires further because they can avoid reporting individual income by instructing their companies not to pay dividends and holding on to their shares without realizing their gains.

and here’s their conclusion:

The proposal unveiled by House Democrats would increase taxes on millionaires significantly. But it would largely leave billionaires off the hook, despite the explosion of their wealth during the pandemic. More ambitious proposals in the Senate would tax their unrealized capital gains. In our view, this would be a bold addition that would help the United States reconnect with its tradition of tax justice.

Drs. Zucman and Saez are both French which renders all of their instincts about the United States wrong. There is a simple way to make the U. S. system of taxation more progressive: subject all wage income to payroll taxes.

I do find the term “tax justice” amusing. A flat tax, i.e. subject everyone’s income to a single tax rate without any deductions would be just. Taxing the rich is expedient. As the bank robber Willie Sutton said when asked why he robbed banks, it’s where the money is. By what definition of justice is a 70% effective tax rate just and how does that differ from expedience?

They must surely know corporate taxes are inefficient. They fall on employees in the form of lower wages and customers in the form of higher prices. Besides the U. S. corporate tax rate is just a little below that of Germany or France, practically identical to that of Canada, and higher than that of the UK. The main effect of raising U. S. corporate taxes is neither to raise revenues nor to increase income equality but to offshore corporate headquarters.

Neither of those measures would touch the ultra-rich who have proven very difficult to tax not just in the U. S. but in European countries as well, most of which have abandoned the wealth taxes they once used. Our problem is not the ultra-rich but the Congress. They know which side their bread is buttered on. Higher marginal taxes on the rich are unlikely to raise much revenue or improve income equality but they will increase the opportunities for graft in various forms.

My own preferred strategy for improving income equality is not by increasing the marginal tax rates on either the well-to-do or the rich but by improving the lots of the ultra-poor in the United States and for goodness sake not importing more poor people into the country. A little back-of-the-envelope calculation should illustrate pretty clearly to you how that renders greater income equality impossible.

The United States has political, social, and geopolitical problems that would give the French nightmares. Policies that might be good for France are not the right path for the U. S.