(Bloomberg) -- As inequality surges, billionaires are under attack. At least some of the blame, or credit, can go to a 32-year-old University of California at Berkeley economist named Gabriel Zucman.
After helping his professor and mentor, Thomas Piketty, crunch centuries of inequality trends, Zucman used his data skills to discover the rich illegally hiding trillions of dollars in offshore tax havens. He then found large corporations legally stashing huge profits overseas. When the Paris-born Zucman moved to the U.S., he teamed up with Berkeley colleague Emmanuel Saez to document the ballooning wealth of the top 0.1%, which they estimated was the highest since 1929.
Now Saez and Zucman have a radical plan to reverse spiraling inequality. Their new book, “The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay,” is a 200-page argument for soaking the rich. At least two of the Democratic frontrunners are listening. Zucman and Saez have advised Elizabeth Warren and Bernie Sanders on their proposals, including their plans for an annual wealth tax.
On Monday, the day before the new book came out, Zucman sat down to explain why inequality requires making billionaires pay up. The interview was edited for clarity and length.
Q: Why write the book now? Are you trying to influence the 2020 debate?
Zucman: It’s broader than that. Many people have become convinced that it’s impossible to tax the rich in a globalized world. That’s not true. The problems of tax competition, tax avoidance, tax evasion are real. But solutions exist.
Q: You find that the U.S. tax system is much less progressive than many assume. What was your conclusion?
Zucman: We find that pretty much all income groups pay roughly 28% of their income in taxes. The working class pays a bit less, around 25%. The upper-middle class pay a bit more, but pretty much all income groups pay close to 28%. The only notable exception is the 400 richest Americans. As a group, they pay 23%, the lowest effective tax rate. We did this computation for each year all the way back to 1913, and find that 2018 is the first and only time that billionaires paid less than all other income groups. That’s a direct consequence of the Trump tax reform, which slashed the corporate income tax rate.
Q: Your conclusions surprised people, including some more established economists, because you measure taxes differently from the way the government does. What’s the difference?
Zucman: What we do is we allocate all tax revenue collected at all levels of government, federal plus state plus local. And we take total U.S. national income, and distribute it across the population. Other estimates are the distribution of federal taxes. State and local taxes are regressive, because they are mostly consumption taxes. They fall more on the poor than on the rich. Also, other data sources never look at what happens within the top 1%. We go all the way up to the top 400 richest Americans.
Q: You also have a broader definition of income, right? You’re saying billionaires get certain income that they’re not reporting to the Internal Revenue Service.
Zucman: The very rich can earn a lot of economic income while reporting very little. One striking example is Warren Buffett. He is worth $80 billion, and his true economic income per year is something like 6% of that, close to $5 billion. And yet what he reports in his tax returns -- and we know this because he discloses this himself -- is taxable income on the order of $10 million. The reason is that he owns Berkshire Hathaway (NYSE:BRKa), and he instructed the company not to pay dividends. So the only taxable income he gets is when he sells a few shares and pays taxes on this realized income. That’s a rate of essentially 0%. Mark Zuckerberg and Jeff Bezos are in the same situation. There are also billionaires who have high tax rates, but some have very, very low rates.
Q: How did we get here?
Zucman: The U.S. used to have one of the most progressive tax systems in the world. From the 1930s to 1981, top marginal income tax rates averaged close to 80%, and were as high as 91%. The corporate tax rate was 50%, and the top estate tax rate was close to 80%. When you say that, people often answer that there were so many loopholes that nobody paid these rates. In the book, we recompute the statistics all the way back to 1913 and find that, no, in actual fact the effective tax rate on the rich was really very high in the middle of the 20th century. For the top 0.1% the effective tax rate was as high as 60%, and for the top 400 Americans as high as 70% in the early 1950s, when the corporate income tax generated as much revenue as the individual income tax, about 7% of national income.
Today it’s 1%. And the corporate tax is the main tax paid by the very wealthy because, taking again my example of Buffett, even if he instructs his company not to pay dividends, it has to pay the corporate income tax. It’s a kind of minimum tax on the affluent. The decline of the corporate tax is the main driver in the decline of tax progressivity.
Q: What happened to corporate taxes in the U.S.?
Zucman: What’s happened is a big increase in tax avoidance, the rise of profit shifting to tax havens. Today U.S. multinationals book 60% of their non-U.S. profits in low-tax places -- in Bermuda, Switzerland, the Cayman Islands, Ireland -- where they face effective tax rates of between 0% and 5%.
Q: The OECD recently proposed rules that would change how profits are allocated between countries. What do you think?
Zucman: It’s a step in the right direction, but missing a very important thing: What’s the tax rate to apply to these profits? It’s high time for these international organizations to talk about rate harmonization and minimum country-by-country taxes. In the book, we say corporate taxes should be taxed at a minimum rate of 25% in each country, to end this race to the bottom. If all countries had the same tax rate, corporations would go where the workforce is productive, where infrastructure is good, where people are happy at work and qualified. Countries would compete positively, not negatively like today.
Q: You define the “working class” in your inequality research as the bottom half of the U.S. by income. How have they been doing?
Zucman: Very poorly. Their average pretax income today is $18,000 per adult. In 1980, adjusted for inflation, it was $18,000. So half of the population has had basically zero economic growth over more than a generation. At the same time, income at the very top has been increasing enormously.
Q: Along with your book, you launched a website this week that lets users assess the effects of various tax plans. Under Bernie Sander’s tax proposals, billionaires could face effective rates of 97.5%, versus 62% under Warren’s policies and 23% now under Trump’s tax reform. What about the argument that by putting these super high taxes on the wealthy, you’re putting them on so-called “job creators” and you’re going to hurt the economy?
Zucman: You have to look at the data. How was the economy performing in the 1950s and 1960s, when top tax rates were very high? And how has it been performing more recently? What you see is average income per adult grew 2.2% from 1950 to 1980. And since 1980, it’s grown 1.2% a year on average. So it’s been almost divided by two.
The way that today’s rich countries have become prosperous and wealthy is not by granting low tax rates to billionaires. It’s by investing in the education and the health and the well-being of everybody. Also, extreme wealth concentration means an extreme concentration of power. It means the ability to influence policy making and markets, to buy new entrants, to fight the IRS, to solidify established monopoly positions. If you reduce the wealth of the wealthy, you reduce their influence on policy making and you protect democracy. That’s a very old argument that’s always been at the center of tax debates in the U.S., which thought of itself very much in reaction against the highly unequal European countries in the 19th century and early 20th century.
Q: Why do we need a wealth tax? Aren’t there other ways to fight inequality?
Zucman: Yes, there’s no magic bullet. You need a combination of tools, like fixing the corporate tax and more progressive income taxation. But the wealth tax is necessary to properly tax the super-rich, because many of them as we discussed earn a lot of economic income, but little taxable income.
Q: There are practical concerns about a wealth tax, about its constitutionality and also about how you value fortunes. A good example is WeWork, which seems to have a wildly different value from week to week. How would you tax a stake in WeWork under a wealth tax?
Zucman: First of all, most of the wealth of the top 0.1% is in listed securities and bonds and other forms of wealth that have clear market values. The only difficult thing to value is shares in unlisted or private or closely held businesses. The proposal we are making in the book is the IRS would try its best to come up with a valuation by looking at comparable listed firms. If people disagree, they would always have the opportunity to pay in kind, with shares. The point is not for the government to control businesses. The point is to create a market that’s missing and then to auction the shares to generate tax revenue.
Q: Trump’s campaign seems to be gearing up to make the 2020 elections a battle over “socialism.” Sanders calls himself a socialist, while Warren says she’s a capitalist. How do think about this debate?
Zucman: These debates are mostly about semantics. On many policy areas, Warren and Sanders are pretty similar. A market economy is a good way to produce goods and services, but it needs to be regulated, and in particular through the tax system. Otherwise it tends to generate extreme levels of inequality that then at some point conflict with democracy and our meritocratic ideals.
