The U.S. Tax System Today is a "New Engine of Inequality,"


Gabriel Zucman and Emmanuel Saez report on how the 400 richest Americans pay a lower tax rate, 23%, than the bottom 1/2.

University of California economists Gabriel Zucman and Emmanuel Saez Zucman detail how they found that the 400 richest Americans now pay a tax rate of about 23%, lower than the bottom half of U.S. households which pay about 24%.  

The impetus for the book was a wish to debunk a widespread belief that "nothing can be done to tax the wealthy or to tax multinational companies," Zucman told CBS MoneyWatch. Zucman and Saez have consulted on both Elizabeth Warren's and Bernie Sanders's wealth tax proposals.

"You have lots of reactions of the type, 'Oh, this is impossible — they will find ways to dodge the tax, you can't tax the rich. It'll never work'," he said. "What we want to explain is, yes, if there is a political will to address the rise of inequality, then, yes, we can do something." Its important to note that the U.S. had an average top marginal tax rate of 81% between 1944 to 1981.

Ronald Reagan began to cut taxes for the top in the 1980s and President Donald Trump's signing of the Tax Cuts and Jobs Act in 2017, have lowered how much the wealthy and corporations contribute. This comes at a time when spending is rising and our education, health and infrastructure investments need a boost. The American Dream is "not doing well."

"When you take into account all taxes paid at all levels of government — federal, state and local — it's actually not the case in the sense that total tax revenue of the U.S. is 28% of national income, and each income group pays roughly 28%, except the top 400 richest Americans, who in 2018 paid 23%." says Zucman.

"The U.S. tax system is like a giant flat tax where every income group pays the fixed rate except at the very top end of the distribution, where it becomes regressive, with lower rates for billionaires. In 2018, it's the first time that billionaires paid a lower rate than other groups of the population. It's a direct consequence of President Trump's tax reform that slashed the corporate income tax rate from 35% to 21%." says Zucman.

"You can see in the data that when the U.S. tax system was very progressive in the 1950s and 60s, economic growth was strong. The average income per adult grew at a rate of 2.2% per year on average from 1950 to 1980. Since 1980 economic growth has also been much lower — only 1.2% per year on average for adults." he says.

"The notion that high tax rates for the wealthy are detrimental to growth, this notion doesn't find much support in the data.

If you look at what has happened since 1980, for the the bottom 50% of the income distribution, there has been zero growth in pretax income since 1980. For 50% of Americans, average income was $18,000 in 1980. Today, it's $18,500." says Zucman.

"The tax system is now a new engine of inequality." he says.

"The theory behind the notion of cutting the corporate tax being a good thing for workers is that it would boost investment — that corporations would increase their stock of equipment and that it would make workers more productive, and so they would get higher wages. But when you look at the data, you don't see any increase in investments since the passage of the tax cuts. In fact, you see decline in investment. There is no evidence that the law is doing what it was supposed to do. It's not boosting investment. There is no evidence it is boosting wages. Essentially, it is a tax cut for shareholders. " says Zucman.

With Regards to Warren and Sanders Tax plans, Zucman says "Their plans are similar in the sense that they both want to introduce a progressive tax on wealth, starting above $50 million for Warren and above $32 million for Sanders. The main difference is how high the rate would go for billionaires. 

In the Warren plan, the [surcharge] rate would be 3% for wealth above $1 billion. In the Sanders plan, the tax rate goes up to 8% for wealth above $10 billion. That's the reason why, overall, the Sanders tax plan is more progressive. Under the Sanders plan, it would become hard for existing multi-billionaires to accumulate more wealth."

He is fearfull what will happen in the future if we continue on the same path. He says, "The risk is to see wealth inequality keep rising. For instance, the top 0.1% of the wealthiest Americans in 1980 owned about 7% total wealth. Today they own 20 percent of total U.S. wealth. 

If the tax system doesn't change, their share of wealth could increase to 30% to 40%. It keeps rising to previously unseen levels."

He also thinks public opinion is on his side. He says, "When you ask people — and it's true for Republicans and Democrats alike — in opinion polls, 'Should the very rich pay more in taxes and should the big corporations pay more in taxes?,' overwhelmingly they say yes."

Zucman believes we must take a stand now. He says, "The important point is: Nothing is set in stone. The choice is really ours. We can choose to go down the current path of tax avoidance and tax competition and low tax rates on the wealthy, or we can make other choices. "

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Economics, Finance and Investing