Interview: Gabriel Zucman On Taxes And Inequality In America

Gabriel Zucman, a professor of economics at the University of California, Berkeley, discusses wealth and inequality in America with Tax Notes contributing editor Nana Ama Sarfo.

Read the podcast transcript below. This post has been edited for length and clarity.

Nana Ama Sarfo: Gabriel Zucman, welcome to the podcast.

Gabriel Zucman: Thank you. Thanks for having me.

Nana Ama Sarfo: Absolutely. Tell us a little about the book. What are its most important findings on tax inequality in America?

Gabriel Zucman: What we’ve tried to do in this book is to estimate how much taxes each group of the population pays today. What’s their effective tax rate? We took into account all taxes at all levels of governments — not only federal taxes, but also state and local taxes. We find that the U.S. tax system looks like a dry and flat tax, where each group of the population — low-wage workers or the working class, the middle class, the upper middle class, and the rich — pay around 28% of their income in taxes. The very wealthy, the top 400 richest Americans, pay less than everybody else, according to our estimates. They paid 23% of their income in taxes last year, so that’s the most important finding.

Many people have the view that the U.S. tax system is highly progressive. Maybe that’s because they have in mind the federal income tax, which is progressive. But when you take a comprehensive perspective of the U.S. tax system, it does not look to be progressive. It looks like a giant flat tax that becomes regressive at the very top end.

Nana Ama Sarfo: Now, your book mentions that America used to have a robust and progressive tax tradition. What are some of the factors or events that have eroded that progressivity over time?

Gabriel Zucman: It’s very striking to see that during the middle of the 20th century, the U.S. tax system was really very progressive. The effective tax rate of the top 0.1% highest income earners was around 50% to 60% from the 1930s to the late 1970s. The working class at the time paid 15% of their income in taxes. It was a highly progressive, maybe the most progressive tax system in the world.

The reason why this has changed, it’s not a story we tell in the book, but it’s a mixture of political and ideological changes. More fundamentally, it’s the choice that’s been made by a number of governments to tolerate tax avoidance, tax evasion, and tax competition. Many people have a view that these things — tax avoidance and tax competition — are like laws of nature, and we can’t do anything against these, but it’s wrong.

When you look at the history of the U.S., you see that a number of governments have been very serious about fighting tax avoidance. President Franklin Roosevelt spent his time going on the radio shaming tax dodgers and explaining how important it was to pay taxes. Then there were choices that were made since the 1980s. When President Ronald Reagan took office in 1981, he said, ”the government is not the solution to our problems; the government is the problem.” That legitimizes the tax avoidance industry and you see a big increase in tax avoidance and tax evasion in the early 1980s. Policymakers — both Democrats and Republicans — begin to feel that it has become impossible to tax the rich and they slash the top marginal income tax rate in 1986 to 28%.

You start to see a recurring pattern. First, an outburst of tax avoidance, then policymakers feeling that it has become impossible to tax the wealthy or to tax multinational companies, and then finally policymakers slashing their rates. That’s the story of the Tax Reform Act of 1986 and in many ways, that’s the story of the 2017 Trump tax reform.

Nana Ama Sarfo: Let’s talk about solutions for this wealth inequality problem. Your book has many suggestions, including a 60% marginal income tax rate and a 3.5% wealth tax rate on large fortunes. Can you walk us through some of your ideas for addressing wealth inequality in America? And also how do you get around some of the valuation concerns that frequently appear in wealth tax discussions?

Gabriel Zucman: There are many ways to make the tax system more progressive. For instance, you can impose a more progressive income tax or a higher corporate income tax. The tax system of the 1950s and 1960s achieved this high progressivity mostly through these two instruments: a very progressive federal income tax and a high corporate tax of 50%. We think that for the 21st century, this would not be enough to restore progressivity. We think what’s required is a new instrument, a new tax, which is a progressive wealth tax.

To understand that, think about Warren Buffett, for instance. He’s worth about $80 billion, according to Forbes magazine. His true economic income is something like 6% of $80 billion, so close to $5 billion every year. But his taxable income is much, much less than that. The reason is he instructs his company Berkshire Hathaway not to pay dividends and so his only taxable income is what he sells a few shares every year and realizes a bit of capital gains. We know that his taxable income is something of the order of $10 million to $20 million. Even if you increase the top marginal income tax rate to 90%, or even 100%, it would not make a lot of difference. Buffett’s true tax rate today is something that he pays maybe $3 million in taxes out of a true economic income of $5 billion, that’s close to 0%. Even with a more progressive income tax, his true effective tax rate would still be close to 0%.

The proper way to tax billionaires is through a wealth tax, a tax on the stock of wealth itself. What would be in the base, in the case of Buffett, would be the $80 billion. It’s true that in some cases, it can be challenging to measure wealth, but in most cases it’s actually not so complicated. Buffett, again, is a good example. We know what the market value of his holdings is. About 70% or 80% of the wealth of the top 0.1% richest Americans is invested in equities, bonds, mutual fund shares, and listed securities that have a clear market value.

In the cases when there’s no clear market value, you can have the IRS try to come up with a good valuation for closely held businesses. We even make a more original proposal in the book. We’re saying, “Look, let’s say that a very rich person owns a private business. The IRS comes up with a valuation, says the business is worth $1 billion, but the taxpayer thinks this is overstated. The IRS valuation is too high. In that case what we’re saying is that the taxpayer could have the option to pay in kind with shares.” For instance, if the wealth tax rate is 3%, that taxpayer would just transfer 3% of his or her shares to the IRS, which would then sell these shares on a market creating the market value, which currently is missing.

This is just to illustrate that broadly speaking, it’s not so hard to tax wealth. In the few cases when it’s not straightforward, there are ways to innovate and there are solutions to the lack of market valuations.

Nana Ama Sarfo: Now there’s been discussion about raising payroll taxes in the U.S. in order to make Social Security solvent for future generations. Is there a better way to fix the problem or think about it based on your research?

Gabriel Zucman: The problem with payroll taxes is that they are very regressive because they are capped at something like $120,000, which is roughly the threshold to be in the top 5% of the wage distribution. That means if you have a low wage, you pay payroll taxes from the very first dollar of wage earned. But if you have a very high wage of $120,000 a year, you don’t pay payroll taxes for the most part. You do pay a bit of Medicare taxes, but most payroll taxes are capped. If you just increase the payroll tax rates without lifting the cap, this would have the effect of making the tax system even more regressive than it is today. Another way to generate more revenue to fund Social Security and Medicare would be to lift the cap on payroll taxes and to make sure that all the earnings contribute to Social Security.

Nana Ama Sarfo: You and your coauthor Emmanuel Saez are well known for advising Elizabeth Warren and Bernie Sanders on their wealth tax proposals, although you are not affiliated with either campaign. How were those relationships established and how do you view the proposals floated by both candidates?

Gabriel Zucman: My colleague Emmanuel Saez and I spent a lot of time trying to estimate the distribution of wealth in the U.S. and how much wealth there really is at the top. We have annual estimates that cover the entire population, that cover 100 percent of household wealth. These data series that we created over time, that’s the information that makes it possible to score a wealth tax and to estimate how much a wealth tax would generate in revenue. That’s the reason why a number of presidential candidates have approached us to ask us to help them develop their wealth tax plan, to concretely help them score various versions of such proposals.

For instance, how much revenue would be generated by a wealth tax that would start at $20 million in wealth or $30 million or $50 million? How would revenue change depending on the tax rate? Initially we did that kind of privately in the sense of just developing this methodology for presidential candidates. But what we’ve done now is that we’ve published everything. We’ve created a website,, where everybody can make such simulations. 

Nana Ama Sarfo: There has been considerable pushback from critics who say that creating wealth taxes or increasing the top federal income tax rate will inhibit entrepreneurship or innovation or stymie job creation. What is your response to that?

Gabriel Zucman: My response is look at the data. Look at history when the U.S. tax system was very progressive with top marginal income tax rates in excess of 90% in the post-WWII decades. Now look at innovation at the time and look first at economic growth. Average income per adults grew at 2.2% a year on average from 1950 to 1980 in the U.S. when the U.S. tax system was very progressive and the effective tax rates at the top were very high. Then the tax system has become much less progressive. Top income tax rates have declined enormously, and now look at growth from 1990 to today. From 1950 to 1980, 2.2% a year. From 1990 to today, 1.1% a year.

There is just no clear indication in the data that progressive taxation, high tax rates on the super wealthy, are detrimental for overall growth. The reason for that is because it’s not only the super rich who innovate. First of all, it’s all of us. And second, you think about what motivates people and what drives people to create businesses and new products; taxes matter a little bit. Many other things matter much more than taxation, like the quality of public infrastructure, how educated the workforce is, and whether there’s a big market. There’s no good data suggesting that wealth tax on wealth above $50 million would have any significant negative effect on growth. In fact, the more likely scenario is that such a wealth tax would have a slightly positive effect on growth. The revenue that would be generated by such a tax could be used to fund things like public childcare and family benefits, increasing overall economic activity and GDP. 

Nana Ama Sarfo: Now your book and the idea of wealth taxation in general has elicited some particularly passionate responses from billionaires in recent weeks. Were you expecting such a strong reaction to your proposals?

Gabriel Zucman: I can understand them, but it’s a bit hard to understand why they get so much attention. I think we should spend at least as much time trying to ask low-income people how they feel about potential tax changes that would actually harm them. Billionaires are doing extremely well. Their wealth has been growing much faster than average wealth in the U.S. over the last decade. Everybody understands that they are not paying a lot in taxes today. Their wealth is booming and so it’s legitimate to have a debate about how to tax them better.

If you look at the Forbes 400 richest Americans, they owned about 1 percent of U.S. wealth in 1982. Today, they own about 3.5% of total U.S. wealth. Their share of wealth has been multiplied by almost four. If there had been a wealth tax of 6% on wealth above $1 billion, which is what Elizabeth Warren is now proposing and which is very similar to what Bernie Sanders is proposing, these 400 wealthiest Americans would still have seen their share of wealth increase, just not as dramatically. Their share of wealth would have increased from about 1 percent of total U.S. wealth to about 1.5% of total U.S. wealth. Even the proposals being discussed today, although they are ambitious, they would not have reduced wealth inequality compared to what it was in the early 1980s.

The Forbes 400 2019


Nana Ama Sarfo: There are some organizations that have researched whether a VAT can replace payroll taxes as a way to raise taxes on the wealthy. What is your take on this? Is this sound policy?

Gabriel Zucman: VAT is not a good way to raise taxes on the very wealthy. When you’re extremely rich, you save almost all of your income. If your income is $1 billion, essentially almost 100% of that income is saved and the VAT is only taxing consumption. It’s exempting saving. The VAT can have some justifications. It would be better than the sales taxes that exist in the West today, which are very archaic and only tax goods, not services. It would be better to replace these archaic sales taxes by a VAT, but it’s not the proper way to tax the very wealthy. The VAT is never going to do anything to reduce income and wealth concentration. If you want to tax the very rich, if you want to reduce inequality, you can do this with an income tax and even better with a progressive wealth tax.

Nana Ama Sarfo: Lastly, your book stresses the need for international cooperation and a global minimum tax. Tell us a little bit about what that might look like. And relatedly, how would you assess the OECD on its current efforts overhaul the international corporate tax system?

Gabriel Zucman: There’s a lot that can be done unilaterally by the U.S. and by other countries. For instance, the U.S. could say, “Look, if U.S. corporations book profits in tax havens and don’t pay taxes in these countries, we are going to collect the taxes that tax havens choose not to collect.” Concretely, the U.S. could have a 35% worldwide tax rate for U.S. multinationals, meaning no matter where the profits are booked by U.S. multinational companies, they would be taxed in the U.S. at a rate of 35%. That’s something that the U.S. can do unilaterally. It doesn’t require any form of international coordination and it would remove incentives for U.S. firms to move production or to move profits to low tax places.

Now of course it’s even better if you have international coordination because if the U.S. did this move of taxing the worldwide profits of U.S. multinationals, foreign profits reflected domestic profits, then there would be pressure for some U.S. firms to move their headquarters to low tax places and that’s where international coordination is helpful. Setting a standard, a minimum tax rate, can alleviate this risk of competition for the location of headquarters and that’s why the OECD work these days, the pillar 2 of the current OECD discussion, is particularly important. For the first time we are finally having a conversation about setting minimum corporate income tax rates. The big question is going to be: What is the minimum tax rate going to be? If it’s 10% or 12.5%, which is the Irish statutory corporate income tax, it’s not binding. It’s not making any difference. But if gradually countries agree on a high enough minimum corporate tax rate of maybe 20% or 25%, that could really change the face of globalization. That could put an end to tax competition, to the race to the bottom in corporate income tax rates.

It would mean that companies would not pick the countries where they operate based on how low the tax rates are, which is the current situation, a very negative form of tax competition. But instead, if there was high enough minimum tax rate in each country, corporations would pick the location of their activity based on how good the infrastructure is, how productive the workforce is, how large the markets are. And so you would transform the current form of globalization characterized by tax competition and the race to the bottom into another form of tax competition characterized by your race to the top. Countries would have incentives to invest in public infrastructure, in education, in health, and so on. And it could really change the face of globalization and make globalization much more sustainable economically and politically.

Nana Ama Sarfo: All right. Well, Gabriel Zucman, you’ve raised a lot of really fascinating and interesting points. Thank you so much for coming on the podcast.

Gabriel Zucman: Thanks for having me.

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