How the Rich Dodge Taxes and How to Make them Pay
As the adage goes, ‘nothing can be said to be certain except death and taxes’.
However, for the corporations and the wealthy, there is no certainty about paying taxes at all. In 2018, for the first time in the history of the United States, the elite of the ultra-billionaires paid a lower effective tax rate than the working class (Saez et al., 2019, p.21). The term, effective tax rate, is used in financial reporting to measure the total tax paid as a percentage of the company's accounting income, instead of as a percentage of the taxable income. Economists Saez and Zucman, together with their colleague Thomas Piketty, have been at the forefront of the debate on surrounding the growing inequalities in American society regarding effective tax rate. In their new volume, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, they present the calculations which show how ultra-billionaires are paying a lower effective tax rate than the working class. This work was so influential that Zucman recently earned himself the cover of Bloomberg Businessweek magazine with the nickname ‘wealth detective’.
In their most recent j’accuse, they analysed the effective tax rates paid by Americans throughout history. They found that in 2018, the 400 wealthiest families paid an unprecedented 23% on their annual income. That is more than a whole percentage point lower than the rate paid by the less wealthy half of the country's citizens, which stood at 24.2% (Saez et al., 2019, p.122). Saez and Zucma attribute this in part, to the vast tax reform carried out under Donald Trump's administration through 2017. This lowered the impact of the Exchequer on the wealthiest sections of the population through reduction in inheritance tax rates and tax exemptions for specific businesses (ibid. p.73).
Fiscal inequality in the United States has worsened significantly over the past decades. From the 1960s to the 1980s, the effective tax rate paid by the richest 400 families fell from 57% to 47% (ibid. p.33). For the poorest half of the population, however, it remained relatively unchanged.
Y-Axis: Average Effective Tax Rates
Figure 1: U.S. Billionaires vs. Working Class’ Average Effective Tax Rates
These statistics have helped galvanize the Democrat Party, prompting lawmakers to call for a complete overhaul of how America thinks about taxation. Every major Democratic presidential candidate has proposed trillions of dollars in tax increases for the rich to pay for government programs to help reduce inequality, like affordable housing, debt-free college and universal health coverage (Rehmann, 2016, p.10). While we must make income taxes more progressive, that alone will not straighten the United States’ slanted tax code or their lopsided economy. This can be seen clearly if we consider two people: an heir with $500 million in yachts, jewellery and fine art, and a teacher with no savings whatsoever. If both the heir and the teacher were to bring home $50,000 in labour income next year, they would both pay the same amount in federal taxes, despite their vastly different circumstances. Increasing income taxes will not address this fundamental problem.
A potential policy that might work to reduce this inequality, is a wealth tax. As Yglesias explains it: “the mere existence of the wealth tax would, on the margin, encourage wealthy individuals to dissipate their fortunes on charitable giving and lavish consumption. If you try to hoard wealth the government is going to tax it, so you might as well spend it” (Golshan, 2019). Wealth tax is an individual tax applied not on income or a transaction, but on wealth. This would be based on the value of all or part of a person's assets. Currently, this system is only applied at the national level in a few countries around the world, with ‘only 4% of taxation worldwide come[ing] from wealth tax’ (Oxfam, 2019).
Prominent Democrat Elizabeth Warren proposes an Ultra-Million Tax on the wealth of the richest Americans. Her proposal applies only to households with a net worth of $50 million or more – roughly the wealthiest 75,000 households (Saez et al., 2019, p.15). Households in this top 0.1% would pay an annual 2% tax on every dollar of net worth above $50 million and a 6% tax on every dollar of net worth above $1 billion. Because wealth is so concentrated, this small tax would bring in $3.75 trillion in revenue over a 10-year period (ibid. p.17).
The greatest injustice of the U.S. tax system today is its regressivity at the very top: billionaires in the top four hundred pay less (relative to their true economic incomes) than the middle class. This regressivity is the consequence of the erosion of the corporate and estate taxes. Thus, a wealth tax is likely to be the most direct and powerful tool to restore tax progressivity at the very top of the distribution.
Golshan, T. (2019). Bernie Sanders Wealth Tax Proposal, explained. VOX Media (Online).
https://www.vox.com/policy-and-politics/2019/9/24/20880941/bernie-sanders-wealth-tax-warren-2020 [Accessed: 23 October 2020]
Moretti, E., & Wilson, D. J. (2019). Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra Wealthy. National Bureau of Economic Research (Online).
[Accessed: 23 October 2020]
Oxfam. (2019). 5 Shocking facts about extreme global inequality and how to even it up (Online). Available at:
https://www.oxfam.org/en/5-shocking-facts-about-extreme-global-inequality-and-how-even-it [Accessed: 24 October 2020]
Rehmann, J. (2016). Bernie Sanders and the hegemonic crisis of neoliberal capitalism: What next?. Socialism and Democracy, 30 (3), 1-11.
[Accessed 28 October 2020]
Saez, E., & Zucman, G. (2019). The triumph of injustice: How the rich dodge taxes and how to make them pay. 1st ed. NYC: WW Norton & Company.
Saez, E., & Zucman, G. (2019). How would a progressive wealth tax work? Evidence from the economics literature. Unpublished paper (Online).
[Accessed: 27 October 2020]