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The Triumph of Injustice
How the Rich Dodge Taxes and How to Make Them Pay
Emmanuel Saez
read on October 29, 2020

It's been quite a year. After the last series of books, and given current events, I've been selfishly looking forward to a book more about brass tacks, as it were. Numbers and policy that I can understand from an "economics" perspective (i.e., equations and graphs), vs an "IPE" perspective (behavior and justice). But I should have known better than to think that any problem in the USA wouldn't trace back to social injustice, and here we go right on page 27.

As in the North, there were variations in tax policy among various states, but in general taxes in the South were more regressive. ... A fear haunted the slaveholders of the SouthL that non-slaveholding majorities would use taxation to undermine -- and eventually abolish -- the "peculiar institution". They particularly feared wealth taxation: at a time when 40% of the population in Souther states was considered property, property taxes were an existential threat for slaveholding planters. They fought such taxes tirelessly, and for two centuries wielded their power to keep taxes and public institutions archaic.

Early in the book there is a primer on the general types of taxes people pay, which I found very helpful. They are (in order of proportion of total tax):

  • Individual Income Taxes: This is what people generally think of as "taxes", and this is specifically (and exclusively) what Republicans refer to when they say that half the country doesn't pay taxes. This tax amounts to about 1/3 of total tax. This tax includes tax on wages, interest, dividents, capital gains, etc. About 63% of national income is taxed via the income tax. The rest is exempt (e.g., dividends/interest earned in tax-free retirement accounts). The income tax is progressive, though much less so today than historically. All but 7 states (including WA) have additional state income taxes, as do some individual cities.
  • Payroll Taxes: Aka social security & medicare taxes. Today SS is taxed as 12.4% of wages, for all wages up to $132,900 per year. Then it drops to zero for wages after that. This is insanely regressive. Medicare taxes are 2.9% of wages, with no cap. Note that employers functionally pay half of these taxes (you only see a 6.2% and 1.45% tax on your paycheck, respectively), but it is a direct cost for employers that otherwise could be paid as a wage. These taxes combined started out small, but now account for almost the same portion of total tax as income taxes, which has been a driver in the regressive tax shift in recent decades.
  • Consumption Taxes: This is about 50% sales taxes, and 50% license taxes (car tabs, etc).
  • Capital Taxes: This covers corporate income tax, property tax, and estate taxes. 

Other thoughts from the book:

  • Saez/Zucman say (p134) that the optimal highest marginal tax rate on the rich is around 75%. Apparently, a (un-cited) "body of work" suggests that that rate optimizes the total tax revenue collected. E.g., the lost revenue from reduced income is offset exactly by the increased revenue of the higher rate.
  • The authors advocate for a wealth tax, but I did not find their arguments for it convincing. I say that as someone desperate to tax the rich more. I just don't really like that there isn't a clean valuation system (I don't think the marginal value of the last share sold is representative of the overall value of the firm), particularly for illiquid assets. The authors put forward a system where the wealth tax can be paid using a portion of the wealth itself (e.g., shares in your private company), but now it just feels like theft. I don't know, I don't like it.

I loved, loved, loved their no-nonsense description for why we should tax the rich:

Extreme wealth, like carbon emissions, imposes a negative externality on the rest of us. The point of taxing carbon is not to raise revenue but to reduce carbon emissions. The same goes for high tax rates on the very highest incomes: They are not aimed at funding government programs in the long run. They are aimed at reducing the income of the ultra-wealthy. They prevent or impede the various forms of rent extrction associated with extreme and entrenched wealth and with the reality of the market economy in unequal sociaties. What's the point of ... earning millions by creating zero-sum financial products, of spiking the price of patented drugs, when out of any extra dollar earned, 90 cents will go to the IRS?When in place, quasi-confiscatory tax rates redistribute economic power, equalize the distribution of pre-tax income, and make the marketplace more competitive.

I'm not a tax wonk so don't have great perspective on how rare this may be, but it's soooo refreshing to see someone just say this out loud. This continues to drive me crazy w/r/t carbon taxes, where politicians need to instead sell them as "carbon pricing" or as productive revenue generating programs. I recall texting campaigns for carbon taxes in WA, where people voted no because they didn't like what the money would be spent on. AGGGH. Who cares what it's spent on?! Likewise, we spend a lot of energy hand-holding ignorant people into ideas that taxes are tied to valid programs, or the idea that we want want to punish the rich, but just want them to pay their fair share, etc. But that's not true! We should tax the rich for the single purpose of disincentivizing the rich. We want fewer rich people. I understand that this is politically poisonous to say - but damn is it nice to finally read.

Lastly, there is an accompanying website that is just fantastic:

Author Bio:

Emmanuel Saez is a Spanish-born French and American economist who is Professor of Economics at the University of California, Berkeley. His work, done with Thomas Piketty and Gabriel Zucman, includes tracking the incomes of the poor, middle class and rich around the world. Gabriel Zucman is a French economist known for his research on tax havens and corporate tax havens from his 2015 book The Hidden Wealth of Nations: The Scourge of Tax Havens.