Who benefits most from the tax system? What did the Trump tax cuts achieve? How do taxes affect inequality? What’s the relationship between taxes and democracy?

Tax policy seems like it was designed by, of, and for the rich. But, as our guest today Gabriel Zucman points out, the US tax code was once a vastly different beast.

Zucman is  an associate professor of economics at UC Berkeley, director of the Center on Wealth and Income Inequality, and economic advisor for two 2020 presidential campaigns. His latest book The Triumph of Injustice: How the Rich Dodge Taxes and How to Make them Pay, co-written with UC Berkeley economist Emmanuel Saez, documents the dramatic transformation of the US tax code. In less than a lifetime, Americans exchanged the most progressive tax system in the world—a tax system with marginal income tax rates as high as 94 percent for the highest earners—for one where the 400 wealthiest members of society pay a lower tax rate than any other income group.

Zucman’s work is clear. Tax dodging” and the current iteration of the tax system—from income and payroll taxes to sales and property taxes—are not inevitable outcomes, but deliberate choices made by policymakers to privilege the interests of wealthy Americans and multinational corporations. If you believe this theory, it follows that we can and should make better choices in the future. For a preview of what these choices might look like and an outline of how we can design a progressive tax system for the twenty-first century, tune in to this conversation between Khalid Kaldi (MPP ’21) and Gabriel Zucman.

If tax policy brings you joy, check out:
-    Tax Policy Simulator
-    60 Profitable Fortune 500 Companies Avoided All Federal Income Taxes in 2018, Institute on Taxation and Economic Policy (Report)
-    Combating Inequality Conference (Video)

Transcript

Khalid Kaldi: In fiscal year 2018, FedEx netted more than a billion dollars in profit and legally paid zero dollars in taxes. Zero dollars. Can you guess why? 

Reporter 1: Three years since Donald Trump's tax plan became law and one major American corporation has cut its tax bill down to nothing.

Reporter 2: The New York Times Sunday reported that FedEx paid zero dollars in taxes in 2018, citing financial records as thanks to the Trump administration's tax cuts, which the Times says the company lobbied heavily for. The report also said FedEx's one point six billion dollars in tax savings, didn't go into investments. It went directly to shareholders. 

Khalid Kaldi: This dazzling display of tax dodging involves not only FedEx, but at least 59 other massively profitable companies that in 2018, collectively received four point three billion dollars back from the IRS.

Gabriel Zucman: This process of declining tax progressivity has started in 1980s, but the Trump tax reform of 2017 has been the nail in the coffin. And the direct consequence of that reform is, for the first time, in 2018 in the U.S. tax system is not progressive anymore. 

Khalid Kaldi: That's UC Berkeley economist Gabriel Zucman. And he thinks the U.S. tax system has failed. 

Gabriel Zucman: The problem obviously with the current U.S. situation. In 2018, for the first time over the last century, the last hundred years, billionaires have paid a lower tax rate, all taxes included, than any other social group, than the working class. And that's a new thing. 

Khalid Kaldi: It's a new thing that the tax code favors corporations like FedEx and the wealthy few. Believe it or not, Uncle Sam actually has a longstanding tradition of using the tax code to make sure the richest among us don't hoard all of the gains from economic growth. 

Gabriel Zucman: The US used to have the most progressive tax system in the world, not only on paper, on paper, it looked very progressive with the margin income tax rates of more than 90 percent in the post World War Two decades and the estate tax rates of 80 percent. Corporate tax rates of 50 percent. But also in actual facts in the sense that the rich in the middle of the 20th century from 1930s through the late 70s, did pay a high fraction of their income in taxes with effective tax rates of 55, 60 percent for the highest earners. And that's, that was a reality. 

Khalid Kaldi: In today's economy, heavy taxes on the rich like those of the mid 20th century might seem excessive. But the sky high rates were a way for the federal government to check wealth concentration. The tax system did more than just raise revenue. It held back inequality. From the Goldman School of Public Policy and the Berkeley Institute for Young Americans, I'm Khalid Kaldi and this is Talk Policy To Me. This week on the show, we're talking about how billionaires are a choice and how inequality is not inevitable. In short, we're talking about how tax policy shapes the distribution of wealth. The argument for tax cuts for the wealthy goes like this. If the rich have more to invest, the economy will grow and that money will trickle down and all will prosper. 

Gabriel Zucman: The big decline in tax progressivity that happened starting in the 1980s was predicated on the notion that eventually it would benefit the rest of society. It would increase working class incomes and middle class incomes would trickle down to the rest of the population. 

Khalid Kaldi: Maybe you believe in this trickle down theory. Or maybe you don't. But it turns out, there's a way to empirically test whether this hypothesis is fact or fiction. 

Gabriel Zucman: Now, almost four decades after the start of this process, we can look at the data and we can ask. Okay. What's the evidence about growth and what is the evidence about who's benefited from economic growth? So if we start with just aggregate growth, here's what we see. From 1950 to 1980 when the tax system was very progressive, very high capital taxation in particular, GDP per adult grew at an average rate of 2.2 percent per year. That's 1950 to 1980. Now look at the past 30 years from 1990 to 2020. Tax rates have been much lower. The tax system has been much less progressive. GDP growth per adult has been 1.3 percent a year. So growth has been much lower. Second, you look at who's benefited from economic growth. Now, if you decompose this 1.3 percent and you tried to compute it for each group of the population. Here's what you see. For the bottom 50 percent of the income distribution for the working class, there's been essentially zero growth since 1980. That is in 1980, the average working class income was eighteen thousand dollars per adult, adjusted for inflation, and today it's eighteen thousand five hundred dollars per adult. Okay, so that's, you need to realize this, that is extremely important and very striking. Half of the public, for half of the population, the average income today, before taxes and government transfers is eighteen thousand five hundred dollars per adult. First, it's low. It's very low. And second, it has not increased at all since 1980. And this, to me at least, is evidence and I think compelling evidence that the massive changes that have happened in 1980 is not only in terms of progressive taxation, but everything that came with that, changes in access to happen to the cost of higher education, changes to the minimum wage, financial deregulation and changes to antitrust enforcement. All of these changes, these stone tools, what you could call market fundamentalism has not benefited the working class or even the middle class in any measurable way. 

Khalid Kaldi: The truth about trickle down economics is that it's all about one thing, power. We live in a world where wealth equals influence. So the richest Americans profoundly shape the ideological framework of our political system to expand and maintain their wealth. UC Berkeley economists Emmanuel Saez and Gabriel Zucman emphasized this idea in their new book. It's called The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay. One of the world's leading experts on wealth concentration, Gabriel Zuckerman says his interest in the link between tax policy and inequality goes back to his early 20s. He had just begun an internship at a bank in Paris during the financial crisis, and he was stunned by the ways bad policy choices hurt millions of people. 

Gabriel Zucman: When Lehman Brothers filed for bankruptcy on September 15, 2008, I was 21. I was starting my professional life and was doing an internship actually in a bank in Paris, trying to do macroeconomic research, explaining to people in the venture industry what was going on. And I realized two things. One is that the economy is very important. A financial crisis exists. Inequality, what governments do. What happens when bad policies are implemented or good policies can have a dramatic impact on the well-being of millions or billions of people. And the second thing I realized is if I want to understand what's going on, I cannot do that, if I work, for instance, in the bank or if I have to produce research every day on notes for clients or work, you know, in a hurry. If you want to understand and make a difference, need to take the time to do research and theres a lot of value in doing this. And that's the luxury of being an academic, is that you're paid to spend your time trying to get to the bottom of things. I was spending several years trying to measure wealth inequality, for instance, in the U.S. or trying to design better tax policy. That's how you really can make a difference. 

Khalid Kaldi: To Professor Zucman, economics is like plumbing. It's a simile that comes from a now famous paper published in 2017 by Nobel economist Esther du Flow. She said, as economists help governments design new policies, they should adopt the mindset of a plumber. 

Gabriel Zucman: That's exactly the mindset that I share, and I think it works particularly well for tax policy, for taxation. You have leaks in the tax system, things that were well, things that don't work well. And where economists like me can can be useful, can make a bit of a difference is by helping fixing the leaks, fixing the tax system, designing taxes that will work in the sense that tax avoidance would be reduced to a minimum and tax evasion and tax competition would be limited. A tax system that works for everybody. 

Khalid Kaldi: In his words, Professor Zuckerman's work is about, quote, chasing wealth and income, present and past, onshore and offshore. Unquote. Because from Singapore to Bermuda to Ireland and the Cayman Islands, corporations and wealthy individuals hide their money across the globe in elaborate ways to avoid paying their share of taxes. 

Gabriel Zucman: If I've learned something by studying tax evasion over the years, it's probably this is that tax evasion is not a psychological thing. It's not that people wake up in the morning and think, oh, look, I'm going to evade taxes because taxation is theft and I don't want to pay taxes. I don't think that's how it works. For the very wealthy, the way it works is there is a supply of tax evasion services. There is an industry, bankers, lawyers accountants create people who create shell companies and trusts. And so that's an industry. And if you're very wealthy, they're going to call you and. No, no, they don't. They don't call me a day. I don't think they call you. They call people who have, let's say, more than 50 million dollars in wealth, what they call ultra high net worth individuals, and they sell them tax avoidance and sometimes tax evasion services. So it's it's driven by the supply. So if you regulate that industry. For instance, if you make it more costly and more risky for banks to break the law to help people evade taxes, if you're saying look, if you're found helping people evade taxes, you will be put out of business. We would withdraw your banking licenses. If you do that, you can, you can reduce the supply of tax evasion quite dramatically. 

Khalid Kaldi: Before we dive any deeper, let's make some of these terms more concrete. What's tax avoidance and how does it differ from tax evasion? The key distinction is legality. Tax avoidance is about reducing the amount of taxes you owe using legal loopholes in the tax code. Tax evasion, on the other hand, is about lying or hiding information to dodge a tax liability. And it's illegal, legal or not. People find all sorts of ways to get out of paying taxes. This might seem inevitable. It might seem like an inescapable fact of economic life. But Professor Zucman disagrees. He argues tolerating these shenanigans is actually a deliberate choice. 

Gabriel Zucman: Tax avoidance, tax evasion. These are not laws of nature. These are not psychological constants or things that exist like the stars. They depend essentially on what policy makers choose to do. So whether they choose to create loopholes to start with, in the law, exemptions or certain assets or lower rates for certain assets, whether they choose to invest in tax capacity, in collecting the information, whether they invest in auditing, making sure that a high fraction of very wealthy taxpayers would be regularly audited, whether they invest in creating the social norms, whether they tried to regulate or not, the industry that creates tax dodges that supplies tax avoidance services. 

Khalid Kaldi: We have the tools to make the rich pay what they owe, but we don't put these tools to work. Or to be more precise, those in power have chosen not to put these tools to work. And the decision making process hasn't been democratic.

Gabriel Zucman: For a lot of the declining tax progressivity has not been transparent. So, for instance, the estate tax used to collect a lot of revenue in the 1970s and today collects much less revenue. But that decline is due to changes in the law, in increasing the exemption threshold and then declining tax rate. But actually most of the fall is not due to this is due to changes in enforcement, non-democratic, nontransparent, obscure changes in how many people are audited. In 1970s, more than 50 percent of the top estate tax returns were audited, more than half. Today, it's about 8 percent of them. In 1970s, the tax authority fervor was much more aggressive in challenging the valuation discounts that the tax payers claimed in challenging the tax dodges in general that we are used to to avoid the estate tax. And today, these dodges are much more tolerated. 

Khalid Kaldi: Zucman says, this passivity is part of a larger project that works to slash taxes under the pretense that taxing the super rich is impossible. If recent data paint a picture of severe inequality, Zuckerman looks to the past to understand how the tax system used to regulate wealth and share the fruits of economic growth. America, he says, invented progressive taxation, and it's a tradition that has largely been forgotten. 

Gabriel Zucman: If you look at U.S. history, the notion that the tax system is important has a role to play, to regulate inequality is actually deeply rooted in American society. So the United States invented the quasi-confiscatory top margin income tax rates of 90 percent or more. For instance, there is a very famous speech by FDR, again in Congress in 1943 where he goes to Congress and he says, look, I think that no American should have an income, after paying taxes, of more than twenty five thousand dollars of the time, the equivalent of a few millions of today's dollars. Therefore, I propose a 100 percent top marginal income tax rate on any dollar above twenty five thousand dollars. And people in Congress hesitate a little bit to think 100 percent, maybe it's a be too much. And they agree on 93 percent, which when you think about it, is not very far from 100 percent. And then for several decades, this is the norm. More than 90 percent top marginal income tax rates. And the reason why I'm telling this story is that because when you hear it, you understand very simply that, of course, the the rationale for these very high top marginal income tax rates was not revenue collection. The idea was very clear, it was regulate inequality. I think that no American should have an income after paying taxes of more than twenty five thousand dollars. And that's a uniquely actually American interest makes it a British idea in the sense that no continental European country ever had such high top margin income tax rates. Neither France nor Spain or Italy. Germany did had 90 percent top margin income tax rates between 1945 and 1948, when it was the United States that made tax policy in Germany when Germany was occupied by the U.S. after World War Two. But apart from that, no continental European country ever did that. That's a U.S. idea. And that's linked to this belief that's very deeply rooted in U.S. society, that excessive income and wealth concentration is a bad thing in itself, is corrosive for democratic institutions, for the social contract. It's an idea that you find as far back as the American Revolution. And you you read, you know, some of the founding fathers, even people who are heroes for today's conservatives. And you like James Madison, you know the father of the Constitution. And he says excessive wealth concentration is extremely bad, is as bad, is as corrosive for a republic as being in a state of war. That's his words. You know, these are very strong words. And this corresponds to this idea that the U.S. was invented, was created in part in reaction against the highly unequal aristocratic societies of Europe in the 18th century and from the 18th century to at least the New Deal in the middle of the 20th century, Europe was seen as an anti-model, a kind of oligarchy anti-model. And that was always this fear in U.S. society of becoming as unequal as European countries. And that's the reason why this idea that you know, theres a need to use a tax system to regulate inequality so strong in the US. That's a tradition that's that's been largely forgotten since the 1980s. Now, for most people in the U.S., they view Europe in the other, in the opposite way. Now they consider that Europe is too equal and an anti-model, but for the opposite reason. But what we're trying to do in the book is to help Americans reconnect with their own tradition, with their own history. Sometimes people tell me, are you trying to import, you know, French ideas in the U.S.? Is it kind of French socialism? It kind of really misses the point. And the point is, no look. France never did that. This is you. This is the United States that did that for good reasons. 

Khalid Kaldi: When we come back, Professor Zucman describes what it might look like to build a 21st century progressive tax system. 

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Gabriel Zucman: In my view, 21st century tax system has essentially two taxes, a progressive income tax and a progressive wealth tax and the rest is not necessary. So for instance, right now the U.S., like many countries, has many consumption taxes, sales taxes, excise taxes. So some of these, let me just mention one exception. Some of these taxes are necessary, the taxes on fuel, on tobacco, on alcohol, you know, externality correcting excise taxes are important. And of course, carbon taxes are importtant. So there is scope and there is a rationale and there is a justification for keeping some consumption taxes. Some of them should, in fact, be increased. But all other forms of consumption taxation or the big value added tax that exists in the rest of the world, it's not clear that they have a good justification in the sense that okay they do generate a lot of revenue, but in a very regressive manner because the rich consume only a fraction of their income and the poor consume a lot and sometimes more than a hundred percent of their income. So these taxes are very regressive. The proposal that we make in the book is that all these sales taxes should be abolished and you replace this by just income taxes and wealth taxes. There is already a wealth tax in the US, which is the property tax. If you own a house, you have to pay property taxes. If you own a business, you have to pay property taxes on business assets. These property taxes are actually pretty large, collect quite a lot of revenue, but they're very archaic and unsatisfactory for two main reasons. One is that they're only on non-financial assets, you know on buildings and houses, and they exempt financial assets. And you know, what the wealthy have is essentially financial assets. And what the middle class has is essentially houses. And so these property taxes are very regressive and now big for the middle class, low or zero for the very wealthy. And the second part is that you can deduct debts. So someone, you know, who has a house worth two hundred thousand dollars and a mortgage of two hundred thousand dollars pays the same as someone who has a house with two hundred thousand dollars and no mortgage, which is very unfair. You know in one case that person has zero net wealth. In the other case that person has two hundred thousand dollars in net wealth. And so the idea is, or these archaic forms of wealth taxation that exists today need to be replaced by just one progressive tax on all of net wealth all financial and non-financial assets, net of debts with a progressive rates schedule. So it would actually reduce wealth taxation for the middle class, who in effect wouldn't have to pay wealth taxes anymore and just increase wealth taxation on the very wealthy, who today do not be wealth taxes and the income tax can be expanded and can be made more more progressive and for instance, it's already possible to replace the current insurance premiums that exist today that fund private health insurance system in the U.S. by income taxation. It would make a huge difference because the way that health care is is funded today for the private portion, so not Medicare and Medicaid, but for health care that people get through their employers, is through insurance premiums that are essentially a fixed amount per head. So the secretary pays the same as as the executive, thirteen thousand dollars. Part of it is paid by by the employee itself. Another bigger part is paid by the employer. But in both cases, these are taxes that reduce wages. These are all taxes on labor that reduce wages for low wage workers dramatically. In fact, the, the rise of these health insurance premiums is one of the big reason behind the stagnation of wages for the working class, for the middle class, just because a bigger and bigger fraction of labor compensation is paid immediately in the form of health insurance premiums. And what we are saying in the book is, look, you can replace all of these things, these premiums which are keen to use head tax, the most regressive type of tax, by taxes based on income, based on your ability to pay. And if you do that, that would lead to the biggest increase in take home pay in a generation for the vast majority of the population. 

Khalid Kaldi: Zucman's ideal tax system is actually much simpler than the one we currently have. And at its core lies a wealth tax, which is an idea shared with two presidential candidates, making it one of the hottest policy debates of the 2020 cycle. While the left wing of the Democratic Party, like Elizabeth Warren and Bernie Sanders, make the case that we need to tax the rich. The centrist wing like Joe Biden and Amy Klobuchar argue that instead of adding new taxes, there are better already existing ways to improve the tax system. 

Gabriel Zucman: I think it is correct that there are many ways to improve existing taxes and to strengthen enforcement. And that starts with increasing the IRS budget, which has been declining so much over the last 10 years, and there are loopholes that are well known and that needs to be that need to be closed. And so all of that is correct, and at the same time, it's not enough because you close the loopholes, you increase enforcement, reduce tax evasion and then you can go on taxjusticenow.org and you can see, what effect does this have? Exactly how much revenue does this generate? How does that change the progressivity of the tax system? And it would do nothing essentially for the billionaires. We talked about how billionaires today have a lower effective tax rate than other groups of the population. And the reason why they have a low tax rate is not so much they're exploiting loopholes, it's not so much that they're evading taxes like crazy. Some of them do. But that's not the main reason. The main reason is that when you're extremely wealthy, it's possible to own a ton of wealth while having little taxable income. And that's legal. And you take Warren Buffett, for instance, he's worth 80 billion dollars. He's the main shareholder of Berkshire Hathaway. He instructs Berkshire Hathaway not to pay dividends. And so his only taxable income, he doesn't receive dividends, his only taxable income is when he sells a few shares every year. So he chooses essentially how much income he has to report for tax purposes, how much income he realizes. And we know because he discloses this himself, that his taxable income is of the order of 10 to 20 million dollars. He pays twenty three, twenty four percent on that. So let's say four or five million dollars and you compare that five million in taxes to 80 billion in wealth. You see he pays essentially nothing. And you can close loopholes, you can fix income tax again, increase the taxation of capital gains. It's not going to make any difference. Maybe you tax Warren Buffett's capital gains up to 100 percent, OK? He would pay 20 million, which would still essentially be zero percent compared to his wealth. That's why if you want to change things at the very top for billionaires, the proper way to tax billionaires is a wealth tax. And there's no compelling alternative to the wealth tax. 

Khalid Kaldi: In the 1990s, policymakers in over a dozen European countries started experimenting with wealth taxes. But since then, all but four, Spain, Norway, Switzerland and Belgium, all but these four got rid of their wealth taxes because they found them hard to enforce. Critics in the U.S. frequently cite these examples as reasons why wealth taxes are a bad idea. But Zucman says wealth taxes in Europe failed only because they weren't designed to succeed. 

Gabriel Zucman: It is true that the European experience with wealth taxation was a failure. And in my view, a major intellectual and political failure. But this is for reasons that are preventable and that though I think now well understood. Reason number one is European countries tolerated and still tolerate tax competition. If you're a wealthy French resident, for instance, and you want to avoid the French wealth tax, it's very easy. You move to Switzerland, neighboring country, you move to Belgium, 90 minutes train ride from Paris, and that's it. You don't have to pay taxes anymore in France. The U.S. is different. Taxation in the US is based on citizenship. Even if you move out of the US, the taxes follow you, completely different situation. Second problem, European countries were very weak when it comes to tax enforcement. They tolerated tax evasion, you had numerous cases of very wealthy people hiding assets in Switzerland in tax havens like that. The U.S. has been much more aggressive in terms of collecting information from foreign banks, especially since the Foreign Account Tax Compliance Act of 2010. And a third and probably the most important reason, and I'll end here, is that the European wealth taxes that existed, and it still exists in three countries, started way lower the wealth distribution. The exemption threshold was about one million dollars, which created problems because then you had people who said, look, I have just, you know, a house and a small business and have a bit more than a million and I'm not super rich and I don't have enough liquidity to pay for the wealth tax. In response to that, lots of exemptions and deductions were introduced throughout the year. There was a lot of lobbying, which eroded the base, made the wealth tax pretty unequal, being the nature of your wealth you are taxed more or less. The U.S. proposals Bernie Sanders starts at thirty two million dollars, Elizabeth Warren at fifty million dollars, which would make it way harder for people to say that they do not have enough liquidity to pay for tax because you have 100 million or 70 million. It's obvious that you're very rich and that you can pay five hundred thousand dollars, no extra tax. So that's the main difference. And that's why I'm much more optimistic about the feasibility of wealth taxation in the U.S. and people who have a very naive and superficial reading of the European experience and say it's not possible. 

Khalid Kaldi: The wealth tax is Professor Zucman's most talked about idea, but it might not be the most important takeaway from his work. To me, it's comforting to know that extreme inequality isn't the law of nature. It's a policy choice. Today, our government tolerates injustice, but collectively, we can make other choices. Gabriel Zucman advised Bernie Sanders and Elizabeth Warren on their wealth tax proposals. He is an associate professor of economics at UC Berkeley and the coauthor of The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay. Talk Policy To Me is a production of UC Berkeley's Goldman School of Public Policy and the Berkeley Institute for Young Americans. For Show Notes, visit TalkPolicyToMe.org. Music heard on today's episode is by Pat Mesiti-Miller. Our executive producers are Bora Lee Reed and Sarah Swanbeck. Michael Quiroz is our audio engineer. I'm Khalid Kaldi. Thank you. And be well.