The Taxmen
UC Berkeley economics professors Emanuel
Saez and Gabriel Zucman have written a social democratic screed against
economic inequality and a concomitant plea for confiscatory taxes on the super-rich.
That is taxation not to raise revenue, but rather to reduce the number of
billionaires. It is no accident that they have advised both Elizabeth Warren’s
and Bernie Sanders’ presidential campaigns.
Their discussion involves a data heavy
look at the overall U.S. tax system that includes federal, state and local
taxation. They conclude that from 1950-1980 the tax system has gone from a
progressive one to a largely flat tax system with mildly regressive aspects at
the top end. They use adjusted gross income as the basis for their tax rates
among the various income groups. By using that metric they exclude transfer
payments which bias the results. Further that ignores the very large charitable
contributions made by the super-rich which reduces their effective tax rates as
defined by the authors. Had they not
made those contributions I would assume that the apparent regressivity would
give way to progressivity.
What Saez and Zucman get right is the
need to crack down on corporate tax havens that allow for the transfer of
income from high tax to low tax jurisdictions. The tax allocations performed by
multi-national corporations have been elevated to a high art by the global
accounting firms. Thus it makes a lot of sense to form a global compact to
limit this behavior and establish a minimum corporate tax on the order of
20-25%.
Domestically they advocate increasing
the corporate tax back to the 50% heyday of the 1950s and increasing the top
individual rate to 60 %( federal and state). On top of that they propose a 6%
national income tax on all income, but they would eliminate state and local
sales taxes. On the individual level they would characterize capital gains and
dividends as ordinary income while indexing gains to inflation. Because they
are French I would characterize their pies de resistance a wealth tax on the
order of 2-3% for the richest Americans. As noted above that tax is not for
revenue, but rather to penalize and to reduce the number of super wealthy
people. My simple question is how is the confiscating of 2-3% of someone’s
wealth each year bear any relationship to justice? Think of a large farm where the
government takes 20-30 acres away each year from the farmer without
compensation. That would be a taking pure and simple.
The authors propose using all of the
revenue generated from there overhaul of the tax code to fund child care,
pre-K, free college and Medicare for all. It sure sounds like Bernie and
Elizabeth.
What the authors ignore are the second
order effects of their ambitious plan. The stock market would meltdown under
the weight of lower after tax corporate profits and the forced selling of
shares by the super-rich. With that the already shaky finances of public
pension plans would crater and the private retirement savings of millions of
Americans would take a severe hit. What would they recommend? The answer is
obvious: a bailout.
Instead of their meat ax approach to the
tax code a scalpel would achieve much of what they desire. A moderate increase
in upper-income tax rates, elimination of the capital gains treatment of
carried interest, elimination of 1031 exchanges for real estate transactions
and increasing the corporate income tax rate from 21% to 25%. Such a program
wouldn’t cure their bloodlust for billionaires, but would reduce inequality
without wrecking the economy.
There is one major factual error in the
book. The authors state that the top rates for ordinary income and capital
gains taxation are 37% and 20%, respectively. That is wrong. The Obamacare
taxes make the high income top rates for ordinary income and capital gains,
39.6% and 23.8%, respectively. They are also wrong in attributing the growth in
tax shelters following the 1981 Reagan tax cuts to the genius of the tax
avoidance industry. That is not quite true. It was the increased depreciation
allowances of the Reagan tax cuts coupled with the Garn-St. Germain Act
deregulation of the savings and loan industry that enabled the tax shelter
industry to flourish. It was given to them on a silver platter. Lastly they note
that stock buybacks were illegal prior to 1982. That is not true. Buybacks were
legal, but they were highly restricted.
Saez and Zucman have offered up a
serious, though dubious in my opinion, proposal for radical tax reform.
Credible responses are necessary especially if either Warren of Sanders become
the Democratic nominee for president.
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