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The U.S. tax system is "a new engine of inequality"

The link between taxes and inequality

The U.S. tax system, once viewed as a model for sharing the nation's bounty, is today a "new engine of inequality," said Gabriel Zucman, one of the world's leading experts on the rising gap between rich and poor.

Zucman, as detailed in his new book, "The Triumph of Injustice," written with fellow University of California at Berkeley economist Emmanuel Saez, found that the 400 richest Americans now pay a total tax rate of about 23% — that's lower than the bottom half of U.S. households, who pay a rate of about 24%.  

The impetus for the book was a wish to debunk a widespread belief that "nothing can be done to tax the wealthy or to tax multinational companies," Zucman told CBS MoneyWatch, adding that it's the type of criticism often leveled at senators Elizabeth Warren's and Bernie Sanders's wealth tax proposals. (Zucman and Saez consulted on both of those presidential candidates' proposed wealth tax plans.) 

For one, there's ample historical precedent for taxing the rich: The U.S. had an average top marginal tax rate of 81% between 1944 to 1981.

"You have lots of reactions of the type, 'Oh, this is impossible — they will find ways to dodge the tax, you can't tax the rich. It'll never work'," he said. "What we want to explain is, yes, if there is a political will to address the rise of inequality, then, yes, we can do something."

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Decades of tax cuts, starting with Ronald Reagan in the 1980s and through President Donald Trump's signing of the Tax Cuts and Jobs Act in 2017, have lowered how much the wealthy and corporations contribute. That is taking a toll, especially on the education, health and infrastructure investments that can help boost jobs. Today, Zucman said, the American Dream is "not doing well."

Zucman spoke to CBS MoneyWatch about his new book. The interview has been edited for length and clarity:

Q: The U.S. tax system was created to be progressive, meaning that the richest pay a higher tax rate than workers lower down the income ladder do. Is this still the case?

A: When you take into account all taxes paid at all levels of government — federal, state and local — it's actually not the case in the sense that total tax revenue of the U.S. is 28% of national income, and each income group pays roughly 28%, except the top 400 richest Americans, who in 2018 paid 23%.

The U.S. tax system is like a giant flat tax where every income group pays the fixed rate except at the very top end of the distribution, where it becomes regressive, with lower rates for billionaires. 

In 2018, it's the first time that billionaires paid a lower rate than other groups of the population. It's a direct consequence of President Trump's tax reform that slashed the corporate income tax rate from 35% to 21%

Q: What type of reaction are you getting to these findings?

A: It comes as a surprise and as a shock, and some people refused to believe it's true because the official statistics don't show it. You have estimates by the Congressional Budget Office or think tanks like the Tax Policy Center, but they only look at federal taxes. So there is a widely held view that the U.S. tax system is progressive. 

It comes as a shock that in actual fact it's not true anymore. 

Q: The sharp drop in tax rates for the rich has taken place over several decades, fueled by the notion that cutting taxes on top earners boosts job creation and the broader economy. In practice, how has that theory played out?

A: It's not played out very well. You can see in the data that when the U.S. tax system was very progressive in the 1950s and 60s, economic growth was strong. The average income per adult grew at a rate of 2.2% per year on average from 1950 to 1980. 

Since 1980, the tax system has been much less progressive, and tax rates at the top have been much lower, but overall economic growth has also been much lower — only 1.2% per year on average for adults.

The notion that high tax rates for the wealthy are detrimental to growth, this notion doesn't find much support in the data.

If you look at what has happened since 1980, for the the bottom 50% of the income distribution, there has been zero growth in pretax income since 1980. For 50% of Americans, average income was $18,000 in 1980. Today, it's barely more — $18,500.

Q: How would you describe the state of the American Dream today?

A: It's not doing well. The most striking statistic is the one I mentioned earlier, where you look at average income for half the population — what we call the working class in the book — and they have had zero growth in their real incomes since 1980. You've had half of the population that has been shut out from economic growth.

Q: How did the 2017 Tax Cuts and Jobs Act affect inequality in the U.S.? 

A: Tax reform has slashed the corporate tax rate, which means essentially it has reduced the taxes paid by the wealthy for their corporations. Billionaires will be able to accumulate more and more wealth without any barrier. The risk is inequality, and especially wealth inequality, keeps rising in the foreseeable future. 

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Historically, what has limited inequality was progressive taxation. But now, for people who already have billions or dozens of billions of dollars, it's extremely easy for them to accumulate even more wealth, while for the rest of the population, wealth isn't growing fast and in many cases is stagnating. 

The tax system is now a new engine of inequality.

Q: When President Trump and Republican lawmakers were promoting the Tax Cuts and Jobs Act, they promised it would benefit the middle class and boost household income by an average $4,000. Is that happening?

A: At this stage, there is no evidence of any of this happening. The theory behind the notion of cutting the corporate tax being a good thing for workers is that it would boost investment — that corporations would increase their stock of equipment and that it would make workers more productive, and so they would get higher wages.

But when you look at the data, you don't see any increase in investments since the passage of the tax cuts. In fact, you see decline in investment. There is no evidence that the law is doing what it was supposed to do. It's not boosting investment. There is no evidence it is boosting wages. Essentially, it is a tax cut for shareholders. 

Q: You've advised both Elizabeth Warren and Bernie Sanders on their wealth tax proposals. Sanders's plan would tax the rich more heavily than Warren's proposal, although they share similar goals, such as raising revenue to fund social programs like universal health care. Which plan would best advance those goals?

A: You are correct that their plans are similar in the sense that they both want to introduce a progressive tax on wealth, starting above $50 million for Warren and above $32 million for Sanders. The main difference is how high the rate would go for billionaires. 

In the Warren plan, the [surcharge] rate would be 3% for wealth above $1 billion. In the Sanders plan, the tax rate goes up to 8% for wealth above $10 billion. That's the reason why, overall, the Sanders tax plan is more progressive. Under the Sanders plan, it would become hard for existing multi-billionaires to accumulate more wealth. 

Q: If the tax code continues as it is now, what will the U.S. look like in a decade? 

A: The risk is to see wealth inequality keep rising. For instance, the top 0.1% of the wealthiest Americans in 1980 owned about 7% total wealth. Today they own 20 percent of total U.S. wealth. 

If the tax system doesn't change, their share of wealth could increase to 30% to 40%. It keeps rising to previously unseen levels.

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The important point is: Nothing is set in stone. The choice is really ours. We can choose to go down the current path of tax avoidance and tax competition and low tax rates on the wealthy, or we can make other choices. 

Q: Do you see evidence of inequality in American politics today? Is it affecting our democracy?

A: What's very striking is you see that inequality has been rising since the 1980s. Then in 2017, you have a tax reform which is regressive, which further cuts the rates on the super-rich, and it's hard to interpret that other than by saying it's a form of political capture — that this is symptom of a plutocracy. 

The wealthy have so much power they can further cut their taxes despite the huge demand in the public for more progressive taxation.

When you ask people — and it's true for Republicans and Democrats alike — in opinion polls, "Should the very rich pay more in taxes and should the big corporations pay more in taxes?," overwhelmingly they say yes.

The fact that there's such demand among the public, and at the same time what's been done over the last year, strikes me as indicative of what you could call a plutocratic drift — the wealthy influencing tax policy very strongly for their own benefit. 

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