One More Thing: Tax Rates and the Selectivity of Senator Warren

On September 13, we discussed taxes in our Commentary “Yes, Candidates, Word Choice Matters.” The recent publication of The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay by Emmanuel Saez and Gabriel Zucman provides an opportunity to revisit the topic. The publication is noteworthy for several reasons. But is it credible? Let’s try to be fact-based and rational.

The provocative headline of their work is the conclusion that the wealthiest Americans pay lower tax rates than the least wealthy. The work is important because it has been the basis of a flurry of subsequent articles on taxes and wealth distribution. It is also noteworthy because the authors are advisors to Senator Warren and are the architects of her wealth tax proposal.

Although both writers are professors of economics at the University of California, Berkeley, their book is far more than a body of dispassionate academic research. It is also, as its title reflects, a highly political manifesto in its conclusions. The tone and attitude throughout their work leaves the reader to wonder if the research drove the writers’ conclusions or if the politics of the writers influenced the research. Since its publication, several economists have taken issue with their approach, as described in the November 30 Economist article “Measuring the 1%.”

The writers make a crucial and highly debatable assumption that supports their conclusion about tax rates. They assume that all taxes are paid by individuals, even when the actual tax payment is made by the individuals’ employer. As a result, payroll taxes paid by the employer are attributed to the individual, resulting in a significant increase in the individual’s tax rate. In addition, they make an estimate of sales taxes paid by individuals and add this to the individual rate. Since payroll taxes phase out with income and sales taxes are a smaller percentage of the income of the wealthy, the inclusion of both pushes the rates of lower-income people to higher levels. Furthermore, when you recognize that wealthier people have less earned income and more investment income taxed at lower dividend and capital gains rates, the pattern continues.

Their political philosophy enters into the formulation of their response. They propose raising the marginal rates on the wealthy until marginal taxes collected begin to decline. They estimate this tipping point to be an average rate of 60% of income. The purpose of the additional wealth tax proposal, supported by Senator Warren, is to redistribute the wealth of those whose wealth is in the form of capital versus ordinary income. As the senator has said repeatedly, “you just can’t raise enough money by only taxing income, you have to tax wealth.”

But for this single assumption, there is no basis to their overall argument. The assumption overlooks an important distinction, however, and that is that payroll taxes represent forced savings in the form of Social Security. Everyone has an individual account and the amount you get in retirement has a relationship to the amount you pay in, whether you call it a tax or savings. In fact, in retirement Social Security replaces a far larger percentage of low-income earnings than high-income earnings, suggesting that this so-called “tax” is a far more important savings vehicle for the least wealthy.

Ironically, a final element of the work that has received no attention serves to entirely discredit Senator Warren’s repeated claim that she will finance Medicare for All without raising middle-class taxes. Consistent with their assumption that only individuals pay taxes, late in their book Saez and Zucman add health insurance premiums paid by individuals and employers to the tax burden of individuals. They refer to them as “poll taxes.” Again, since health insurance premiums are a much larger share of a low income than they are for the wealthy, they also serve to increase the “tax rate” of the least wealthy. One can only assume that Warren conveniently overlooks this component of her advisors’ thinking when she makes her claim. The fact that they have made no attempt to correct the record further challenges their claim to academic rigor.