My late Great Aunt Ruth, who was born into tenement poverty more than a century ago, and who raised her own two children in a middle-class co-op, recounted a telling anecdote that showcased her attitude about taxes. Both of Ruth’s children grew up to become lawyers. An acquaintance commented to Ruth that her lawyer children would be helpful to her in figuring out tax loopholes so she could avoid paying. Ruth was deeply offended. To her, this sounded like an assumption that she was a freeloader. She enjoyed the use of public goods. She lived in modest comfort. Why should anyone think that she would shirk her responsibilities as a taxpayer? In my mind’s ear, I can still hear the shocked indignation in her tone.
Contrast this with the anecdote that opens Emmanuel Saez and Gabriel Zucman’s new book The Triumph of Injustice. They revisit the 2016 presidential debate in which Hillary Clinton highlighted Donald Trump’s tax avoidance. Confronted with the documentation that he had paid no federal income tax in the few years for which his tax returns were publicly available, Trump responded, “That makes me smart.” No indignation. (Also, no dignity.) Just shameless smugness.
Saez and Zucman argue that the tax system is “the most important institution of any democratic society,” not just because of the practical matters of financing public goods but because it is an expression of interdependence and collectivity. “Without taxes,” they write, “there is no cooperation, no prosperity, no common destiny.” The book is suffused with the principle that tax policy is not a puzzle with one right answer to be determined by technocratic expertise; it is a matter for democratic deliberation over desired ends and appropriate means. Tax evasion pursued by the rich and enabled by lapdog-of-the-rich government is a crisis of national moral character and of democracy itself.
Saez and Zucman have done a necessary public service by undertaking an enormous amount of careful data work documenting the distribution of income and tax burden over the last century. Furthermore, the book is accompanied by a nifty online tool to help inform our democratic deliberation over tax policy. Using the calculation methods employed in the book, they have made a tax simulator that can be used to test the likely effects of various tax policies on aggregate government revenues and distribution of the tax burden across different income levels. It is freely accessible on the website taxjusticenow.org.
Saez and Zucman document the history of tax policy (what the tax code on the books says) and tax incidence (who actually pays how much in practice). “Looking at most of the great retreats of progressive taxation,” they write, “we find the same pattern: first, an outburst of tax dodging; then, governments lamenting that taxing the rich has become impossible and slashing their rates.” They are right to be outraged. Why should we reward moral bankruptcy with swollen bank accounts? Where is the tough-on-crime, law-and-order crowd when we need them?
Instead of giving up on even pretending to collect adequate taxes from the rich and making ever greater concessions to the interests of the wealthy with each new change in the tax code, Saez and Zucman suggest that the interests of the wealthy should carry no weight whatsoever. When designing tax policy, they write that “we should not concern ourselves with the monetary interests of the rich. We should care only about how taxing them affects the rest of the population. The goal should not be to ‘make the rich pay their fair share’ (a somewhat nebulous concept), but to ensure that the great wealth of some benefits the least well off.” If we design tax policy to maximize tax revenue, which they suggest would require a top marginal tax rate of about 75%, and we are serious about enforcement, they estimate the amount collected from the wealthy could increase, “by about four percentage points of national income, or $750 billion a year in 2019.”
What of the risk that confiscatory tax rates disincentivize valuable economic activities? What if the tax is such a disincentive and the rich cut back so much on their economic activities that tax revenues actually fall? As long as tax revenues are falling because of real reductions in top incomes and not because of tax dodging, that’s OK with them. Reducing top incomes to compress the income distribution is so worthwhile a goal that we may reasonably choose to sacrifice some tax revenue for it. Concentrations of wealth are inescapably also undemocratic concentrations of political power, causing a degradation of the social environment. “Extreme wealth, like carbon emissions, imposes a negative externality on the rest of us. The point of taxing carbon is not to raise revenue but to reduce carbon emissions. The same goes for high tax rates on the very highest incomes: They are not aimed at funding government programs in the long run. They are aimed at reducing the income of the ultra-wealthy.”
Although Saez and Zucman focus much more on collecting taxes than on public spending, we could intensify our outrage over tax dodgers who suffer no consequences by drawing a contrast with the treatment of anyone trying to avail themselves of the social safety net benefits due to them. Once a tax law is passed defining the tax obligations of the rich, the amount defined in the law rightfully belongs in the public coffers. The rich resist. These days, the resource-starved Internal Revenue Service waves the white flag, and the rich keep our money. In 2018, the wealthiest 400 Americans evaded about 25% of their tax obligations, with the rest of the top 0.1% nearly matching their leaders’ evasion rate.
Enforcement of estate taxes in particular has collapsed. “The capitulation has been so severe that if we take seriously the wealth reported on estate tax returns nowadays, it looks like rich people are either almost nonexistent in America or that they never die.” Perhaps they are not getting away with murder, but they are getting away with theft.
Despite rampant fraud, rich people claiming tax deductions are not treated with suspicion. They are not tested for drugs. A social worker will not show up to check for the presence of a de facto domestic partner not acknowledged in the filing. Once a law is passed defining the welfare obligations of the state to its citizens, the amount defined in the law rightfully belongs to the qualified beneficiaries. Try to collect unemployment insurance or Supplemental Nutrition Assistance Program benefits or Temporary Assistance to Needy Families and see what happens. Of all the arguments I’ve heard made in favor of estate taxes, none of them have seriously emphasized the risk that heirs will make stupid choices with their money, blowing it on drugs or frivolous indulgences like manicures or making unhealthy choices at the supermarket. Yet how often have we heard calls for more generous social welfare benefits and less degrading distribution mechanisms dismissed with the charge that poor and unemployed people will defraud the system and do stupid things with the money, so we’d better not give it to them at all?
Don’t shrug and say possession is nine-tenths of the law, urge Saez and Zucman. Allowing tax evasion is a choice. When the wealthy respond to the tax code by saying, “You and who else are going to make me pay?” we don’t have to mumble that the public can make do without, after all. We can make—and at times have made—a different choice. We can make them pay.