Tax evasion: Tax evasion is the illegal non-payment of taxes owed. Tax avoidance is use of legal means to reduce taxes, e.g., by finding or creating loopholes. Zucman's paper comments: "Lastly, we attempt to account for tax evasion. US financial institutions automatically report to the IRS the dividends, interest, and capital gains earned by their clients, making tax evasion through US banks virtually impossible. But absent similar reporting from foreign institutions, taxpayers can evade taxes by holding wealth through foreign banks. Zucman (2013 and 2014) estimates that about 4% of US household net financial wealth (i.e., about 2% of total US wealth) was held in offshore tax havens in 2013. There is evidence that the bulk of the income generated by offshore assets up to 2013 was not reported to the IRS. Furthermore, the share of wealth held offshore has considerably increased since the 1970s. . . . . To obtain reliable top wealth shares, accurately measuring the distribution of equities and fixed income claims—which constitute the bulk of large fortunes—is key."
According to Zucman, wealthy Americans held about $7.6 trillion in offshore accounts. The amount of tax cheating that generates each year is unclear. Wealthy people who cheat on their taxes operate in as much secrecy as possible to hide their crime.
Wealth distribution: Until the late 1930 s the top 1% held about 35-40% of US wealth. That dropped to about 25-50% until the late 1970's. After that the proportion of wealth increased to about 40%.
Data for 2014 indicates that the bottom 30% of Americans have a net negative worth. They own more than their assets are worth.
US wealth inequality is close to that generated by the Russian kleptocracy.
Politics: Bloomberg writes: "Their data became the heart of Vermont Senator Bernie Sanders’s stump speech, recited to the outrage of his supporters during the 2016 Democratic presidential primary. . . . . Before Massachusetts Senator Elizabeth Warren started her 2020 presidential campaign by proposing a wealth tax, she consulted the pair, who estimated that her tax would bring in $2.8 trillion over the next decade. She conferred with them again before floating a corporate tax on profits above $100 million, which they calculated would raise more than $1 trillion over 10 years. Sanders came looking for their advice on his estate tax plan, which would establish rates as high as 77% on billionaires. And when New York Representative Alexandria Ocasio-Cortez proposed on 60 Minutes to hike the top marginal tax rate to as much as 70% on income above $10 million, Zucman and Saez were fast out with a New York Times op-ed in support."
The key question: Not surprisingly, there is a bitterly contested assumption. Bloomberg writes:
The tools Zucman has identified to date challenge a series of assumptions, fiercely held by many economists and policymakers, about how the world works: That unfettered globalization is a win-win proposition. That low taxes stimulate growth. That billionaires, and the superprofitable companies they found, are proof capitalism works. For Zucman, the evidence suggests otherwise. And without taking action, he argues, we risk an economic and political backlash far more destabilizing than the financial crisis that sparked his work.
Bloomberg comments that Zucman and his co-worker Emmanuel Saez have written a "cookbook of sorts for any 2020 candidate looking to soak the rich. The Triumph of Injustice, to be published by W.W. Norton & Co. early next year, focuses on how wealth disparity can be fought with tax policy." Zucman argues that the actual effect of lower taxes on the rich, isn’t to stimulate the economy but to further enrich the rich and further incentivize greed.
Obviously, anti-tax ideologues including most pro-Trump populists, libertarians, republicans and nearly all wealthy people will vehemently disagree and argue that increasing taxes on them will kill their incentive to work and cause economic growth to stall and maybe create a serious global recession or depression. Is the anti-tax argument persuasive?
It appears that at times when income taxes were well over 50% in the 1900s, Americans still innovated, worked hard and did not hesitate to become wealthy. Do increased tax rates necessarily kill incentive to innovate and work hard in all motivated people? This is a point that deserves its own discussion. It goes to the heart of this dispute, which appears to be one of a few central issues in modern American politics. It is an issue that requires looking at unbiased data on what various tax rates actually do to innovation and work ethic. Maybe Zucman's book will go into that critically important issue.
Final thoughts - policy proposals: Bloomberg writes:
In recent months, Zucman has devoted a great deal of energy to the question of how multinational corporations avoid taxes. He’s produced papers and policy briefs showing that U.S. multinationals shift almost half of their overseas profits to five havens—Ireland, the Netherlands, Singapore, Switzerland, and the Greater Caribbean, which includes Bermuda. “That is a huge problem for the sustainability of globalization,” he says. Countries and territories are engaged in a race to the bottom, Zucman argues, offering ever-lower corporate rates in the fear that companies will shift their profits elsewhere. He proposes to “annihilate” such competition by apportioning profits based on where sales were made.
These ideas might be nonstarters today, but Zucman professes to take the long view. Remember, he points out, that the U.S. Supreme Court ruled the income tax unconstitutional in 1895; it took a constitutional amendment to legalize it in 1913. “There’s a lot of policy innovation ahead of us,” he says.
When Zucman and Saez’s site, wealthtaxsimulator.org, went live in March, it sparked some of that hoped-for innovation. One proposal, posted on Twitter by Adam Bonica, a political science professor at Stanford, was for a 100% tax on wealth beyond $500 million. He based it on what he called “Beyoncé’s rule,” which he explains as, “Think of the most talented and hardest-working person you know, and think about how much money they have and how much money they deserve.” Queen Bey, he tweeted, has an estimated net worth in the neighborhood of half a billion dollars. “Let’s have Howard Schultz explain to us why he should be worth more than Beyoncé.”
With any luck, talk about increasing taxes to help reduce wealth inequality will help open the Overton window and make this line of thinking more publicly acceptable. At the very least, data, not naked, self-serving anti-tax arguments should be relied on to inform the situation and help guide policy.
B&B orig: 6/23/19
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