How Progressive is the U.S. Tax System and How Progressive Could It Be?

“The United States’ move from having one of the most progressive tax system in the world to a system of giant flat tax is a story about changing norms, culture and politics, as much as it is about economics,” said Gabriel Zucman, the UC Berkeley economist.

Zucman was visiting on October 28 to discuss findings from his new book, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay (co-authored with Emmanuel Saez, also of UC Berkeley). SIPA’s Wojciech Kopczuk was on hand to offer a contrarian view and discuss the challenges of introducing a progressive tax system.

The debate, which filled the room with economists, policy practitioners, and students, was sponsored by the Center on Global Economic Governance and the Program for Economic Research. Suresh Naidu moderated.

In the book, Saez and Zucman (who worked on Senator Elizabeth Warren’s wealth tax proposal) trace the history of personal and corporate taxation in the United States and offer a comprehensive view of America’s tax system.

The authors first constructed new statistics about how much different income groups paid in taxes at all levels (local, state, and national) from 1913 to 2018, the first year after the most recent tax reform.

The book then proposes “some elements for a new 21st-century tax system that would reconcile globalization with progressive taxation,” Zucman said.

Zucman cited as especially important their newly developed website, Tax Justice Now, which allows people to simulate their own tax reform. Such tools, he added, are critical for democratic deliberation about fiscal issues.

Commenting on how the ultra-rich have seen their taxes shrink to levels last seen in the 1920s, Zucman said “today, the top 400 wealthiest Americans… pay a lower tax rate than the bottom 50 percent of the working class or the middle class”.

Zucman said there are three main drivers of this cessation of tax progressivity in the U.S. tax system.

“One is the collapse in capital taxation itself, essentially reflecting changes in politics and ideology. The second is the choice to tolerate certain forms of tax evasion, letting avoidance fester and slashing rates. The third is globalization in its current form which is characterized by tax competitions,” he said.

The reform that Zucman and Saez propose is similarly three-pronged.

“One, reconcile globalization with tax justice to stop corporate tax evasion and tax competition…. Second, protect democracy by taxing extreme wealth,” he said, noting that the United States had actually pioneered imposition of a wealth tax in the 17th century. “The third aspect is to fund a social state through income taxation.”

Ending his presentation, Zucman said that “the widely held view that technical or external constraints make tax progressivity impossible… is wrong. There is technically nothing about globalization that prevents progressive taxation, tolerating tax avoidance or tax evasion.

“These are choices that governments make,” he continued. “Sometimes they facilitate this, sometimes they don't”

Zucman added that economists have a role to play in tax policy reform.

“One is showing the multiplicity of possible policy futures. Second, if there is a democratic demand for progressive taxation, we economists can help make that happen and make taxes work.”

As he has done before, Kopczuk addressed the methodological and practical difficulties in both measuring how progressive a tax system is and making alterations that many perceive as radical.

Alluding to consistency issues with the data, Kopczuk said that economists must be intent on getting precise estimates and careful about documenting the level of uncertainty. Given the importance and visibility of the numbers being presented, he took issue with the notion that the data presented is the best available evidence in the field.

“Since the measures of progressivity rests on so many assumptions,” said Kopczuk, “measures of certainty about the conclusions such as confidence bands and standard errors must have been constructed before having a serious conversation about tax system reform.”

— Shalini Seetharam MPA ’20