How the Rich Dodge Taxes

Awareness has become widespread only recently that incomes before taxes of the bottom half – or more – of the American population have stagnated in the last 40 years, while incomes at the top rungs have soared. Now, a new book, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, by Emmanuel Saez and Gabriel Zucman, professors of economics at the University of California, Berkeley, shows that the divide is even greater after taxes. Taxes, they say, used to be progressive, but no longer are – because of tax rate changes over those years; payroll tax increases; and the rise of a gigantic tax avoidance and evasion industry that benefits only the wealthy. To remedy this situation, they propose – unflinchingly – a complete overhaul of not just the U.S. but the entire international tax system.

Some facts about the distribution of wealth and income before taxes

Saez’s and Zucman’s book is brimming with facts and statistics. It is what is called “wonkish” in the annals of public policy – intricate in details and numbers.

In 2019 the average income of all American adults was $75,000, while for the bottom 50% it was $18,500. This sounds low, but lower still when compared with the average cost of health care for American adults, $15,000. The next 40%, which Saez and Zucman call the “middle class,” averaged $75,000, similar to the overall average. The next 9% averaged $220,000. But it was the remaining top 1% that made up for a large part of the shortfall in the lower 50%, by averaging $1.5 million income a year.

The authors’ facts about how before-tax income among the adult population is distributed today are startling, but much more so when one realizes how that distribution has changed since 1980. Saez and Zucman say, “In 1980, the top 1% earned a bit more than 10% of the nation’s income, before government taxes and transfers, while the bottom 50% share was around 20%. Today, it’s almost the opposite: the top 1% captures more than 20% of national income and the working class [the bottom 50%] barely 12%.”

We have seen statistics like these repeated numerous times recently and in many versions. Thomas Piketty, who was Zucman’s thesis advisor, brought them to the world’s attention with the 2014 English translation of his 2013 book, Capital in the Twenty-First Century. In it, he showed how the income share of the top 10% had dropped in the United States during the years from 1945-1980, and has risen sharply since then – see graph below from Piketty’s website.

Inequality dropped precipitously during and after World War II for a variety of reasons, but Saez and Zucman attribute it in part to the quasi-confiscatory tax policies implemented under president Franklin Roosevelt, with marginal taxes on the highest incomes set above 90%. These taxes applied only to a very small fraction of taxpayers, the ultra-rich. They appear to have had the effect of discouraging those people from seeking even higher incomes, thus compressing the pre-tax income spectrum.