Emmanuel Saez and Gabriel Zucman’s The Triumph of Injustice: How the Rich Dodge Taxes and How To Make Them Pay will make you angry. If you want to get a better understanding of what we on the left are actually talking about when we talk about wealth inequality, you should read it. It will show you how taxes work and who pays them, and you’ll come away thinking more clearly about concepts like “redistribution” and “progressive taxation.”
Saez and Zucman destroy some important myths about taxation. One of the helpful things they do is look at all taxes together, so that we can better understand what we’re paying in total. This makes it easy to understand why Mitt Romney’s comment that 47 percent of Americans pay no federal income tax was both technically true and also misleading and despicable. Everyone pays taxes. Saez and Zucman break it down so that we can see what kinds of taxes people pay in total, both federal and state:
The x-axis here shows percentiles: So P0-10 are the poorest 10 percent, etc. On the right, Saez and Zucman have broken things down further so that you can see how this changes for the very richest. As you can see, rich people tend to pay a greater percentage of their income in income taxes while poor people pay more of it in payroll and consumption taxes. But here’s one of their striking findings: The rich do not pay a greater percentage of their income in taxes than the poor, and the very rich actually pay less of a percentage of their income than the poor. Warren Buffett pays less of a percentage of his income than I do, even though 25 percent of his income means much less to him than 25 percent of my income means to me. Saez and Zucman therefore argue that the U.S. tax system is quite obviously regressive, since billionaires pay lower tax rates than the working class.
In fact, drawing our attention back to the “working class” is one of the values of the Saez-Zucman book. They say that among the 122 million adults in the lower half of the American income distribution, the average annual income is $18,500, before taxes and transfers. People talk a lot in politics about the supposed “vanishing middle class,” but Saez and Zucman say that “the striking fact about the American economy is not that the middle class is vanishing. It’s how little income the working class makes.” (This, by the way, is why young people are not very open to free market arguments about how “capitalism creates prosperity.” Millions and millions of people can see with their own eyes that their pay is low. It’s worthless to tell someone earning $8 an hour—nearly 200,000 workers here in Louisiana would see a pay rise if the minimum wage were $8.50 instead of $7.25—that this system is fair and is creating prosperity. You can’t fool them. They can see your cars.)
A critical point Saez and Zucman make is about the impact of health insurance. They show very effectively why it’s so objectionable for people like Pete Buttigieg and Joe Biden to tell voters that “Medicare for All will raise your taxes.” Saez and Zucman encourage you to think of your health insurance as a “tax” you are already paying. You’re just paying it to a for-profit corporation instead of to the government.
Buttigieg and Biden are encouraging you to ignore the giant amount of money you spend on private insurance. Their framework is deeply conservative: Money to the government is a bad Tax but money to corporations is good. Saez and Zucman, like Bernie Sanders, say what we need to do is look at the bottom line: If we switched health insurance from a tax you pay for private insurance to a tax you pay for socialized insurance, you would almost certainly save a lot of money without losing anything in services, because for-profit insurance is not designed to give you as much healthcare as you need, it’s designed to soak you for as much of your paycheck as possible. Saez and Zucman say that if we use an income tax to pay for healthcare, over 90 percent of workers who currently have employer-sponsored health insurance would come out ahead.
One valuable contribution Saez and Zucman make is in their extensive discussion of tax evasion/tax avoidance by the rich. We almost treat it as a joke: Everyone knows that Google is not actually based in Bermuda, even though it shifted $23 billion there in 2017. Today, “close to 60% of the—large and rising—amount of profits made by US multinationals abroad are booked in low-tax countries,” primarily Ireland and Bermuda. Saez and Zucman say that we need to stop treating this as inevitable. In fact, it’s criminal. It’s simple tax evasion. Google knows that it should actually be paying tax on this money under U.S. law, so it is fraudulently pretending that it makes its money somewhere else. This shouldn’t be considered “using a loophole,” it should be considered “violating the law,” because it requires defrauding the government. “Ah, but we’re technically based in Palau.” Technically my ass. You’re not based there. It doesn’t count. If you ask Google why it has billions of dollars in Bermuda, there is only one answer: to avoid paying the taxes it would owe if it told the truth about where it made its money. The rich always try to draw a distinction between “tax avoidance” (taking advantage of legal loopholes) and tax evasion (“not paying the taxes you are legally required to pay”), but the whole point of stuffing wealth in Panama and the Cayman Islands and pretending you’re headquartered in a place where you just have a P.O. Box is “not paying the taxes you are legally required to pay.” Shell corporations are shells, i.e. fake, fraudulent, a lie. We need to stop treating Apple’s constant elaborate attempts to avoid contributing to the tax base of the companies it operates in as anything other than a crime.
Now, you might say “well, under existing U.S. law…” But let’s remember how law works: Law is vague and slippery, that’s the entire reason why these companies are able to craft elaborate excuses for not paying their fair share. Law also empowers prosecutors and judges. In fact, the job of a good judge is to enforce justice and the principle of the law. If the attorneys for a company have found some badly worded part of the tax code they think they can take advantage of, but it would result in billions being kept out of the public treasury that belongs there, judges need to prioritize fairness over technicalities that create obvious lies and absurdities. If Barack Obama had gotten serious about cracking down on corporate tax evasion, if he had threatened some prosecutions, you might see some corporate behavior changing rapidly.
Making corporations pay the tax they’re already supposed to pay could bring in hundreds of billions of dollars. Remember what this means. Here’s a recent report on the Detroit school system:
Most of its buildings are broken, but it can’t collect a single penny of taxes to address nearly $543 million in needed repairs. Inoperable boilers. Corroded plumbing fixtures. Missing ceiling tiles in classrooms. Exterior walls with cracks. Roof leaks. Incomplete fire alarm systems. Electrical panels in classrooms known to be fire hazards.
$543 million. An impossible sum for Detroit, but absolute peanuts for America’s largest corporations and most disgustingly rich billionaires.
Saez and Zucman propose a new wealth tax, taxing dividends and capital gains, a 30 percent effective corporate tax rate, and an increased income tax, which they say can be used to fully fund universal health care, universal public child care and education, free tuition at public universities, and the elimination of regressive sales taxes. (Their wealth tax is quite modest. People who are billionaires would still be billionaires, but multi-multi billionaires would just become multi-billionaires. Mark Zuckerberg, for instance, would be worth $21 billion instead of $61. Is having to live life with only 20 billion dollars unjust?) Of course, one of the main points raised in response to proposals like these is: It won’t raise the expected revenue, because the wealthy will just “find ways to dodge the tax.” One reason there is so much effective tax evasion by the rich is that their wealth is mobile: They can just move it to countries where they are taxed less. So you can impose a wealth tax, but just as with today’s corporate taxes, nobody will actually end up paying it.
One of the excellent contributions of Saez and Zucman’s book is that it successfully rebuts this sort of “futility” argument. Actually, there’s nothing to stop the United States from taxing money regardless of where people keep it. It’s just a matter of willingness to enforce the policy. There has been a widespread consensus that countries are trapped in a “race to the bottom” on taxes, because they now have to compete with each other to keep businesses in their country. Saez and Zucman point out that for the United States, there is no reason this need be the case. Amazon operates in the United States, we can tax it how we please and choose whether to recognize tax shelters as legitimate or not. Saez and Zucman say that countries have an interest in agreeing to levy uniform minimum tax rates (they suggest a 25 percent corporate tax), but there is much they can do unilaterally. As they say:
The choice is ours. The race to the bottom that rages today is a decision we’ve collectively made—perhaps not fully consciously or explicitly, certainly not a choice that was debated transparently and democratically, but a choice nonetheless… We could have chosen to prevent multinationals from booking profits in low-tax places, but we let them do it. We can make other choices, starting today.
So, no, don’t accept that the wealthy will “just evade” new taxes. They won’t if they’re prosecuted for it. This is a matter of political willpower. We can make the wealthy pay their fair share, if we’re willing to enforce the laws as they are written and say that the U.S. corporate tax rate is the U.S. corporate tax rate, period.
There are other valuable points made by the book. Saez and Zucman respond to a lot of classic free market arguments. They explain why it’s important to have high wealth taxes even if those taxes don’t raise much revenue: because wealth is power, and concentrated wealth concentrates power. In response to arguments that growth and poverty statistics underestimate the boon of “quality of life” from innovations, they point out that these statistics also fail to include declines in unquantifiable things—such as the “dramatic deterioration of the climate.” They point out that low taxes do not actually help workers and spur innovation, except in certain undesirable ways:
The sellers of zero-sum financial products, the creators of deadly pills, the promoters of tax dodges and the lawyers who certify them, the price gougers, the patent trolls, the makers of fake university diplomas: they will rise to the occasion and supply more of their labor when taxes fall.
I don’t want to evaluate Saez and Zucman’s particular tax proposals or their predicted effects, because I think that is best left to those with a better empirical understanding of taxation than I have. Left wonks can discuss and tweak this, and I am sure they will. I think the value of this book for non-experts is that it helps us think about the problem more clearly. It shows how the tax system’s giveaways to the rich have worsened inequality without giving the rest of us much in return. It shows how tax evasion became standard for corporations, who reasoned that it was actually their obligation as part of the mandate to maximize shareholder value.
But its greatest value is in its insistence that something better is possible, that “economics” is not stopping us from having universal healthcare and a more equal economy. Policy decisions are decisions, and they are decisions we can make differently. There is no reason why countries need to “race to the bottom” to cut taxes. Instead, they need to get tough on the rich criminals who will go to almost any lengths to avoid paying their rightful share. The Triumph of Injustice is helpful not just as statistic-laden documentation of grotesque inequality, but as a blueprint for how we can start to remedy that inequality through our existing political institutions.