Who says economics is the dismal science? Last week saw some positively scintillating intellectual combat between marquee-name practitioners, with the social media impact measurable in hundreds of likes and retweets. What’s more, there were real-world implications for how to measure a major social issue — inequality — and how to deal with it.
The fireworks began when University of California at Berkeley economists Emmanuel Saez and Gabriel Zucman unveiled their claim that, in 2018, America’s richest 400 households paid a lower effective tax rate (23 percent) than the entire bottom half of American households (24.2 percent). The finding challenged the economics profession’s long-standing view that, for all its flaws, the U.S. tax system is, overall, progressive: The richer you are, the more of your income you pay. This was still true, at least for federal taxes, even after the upwardly skewed 2017 tax cuts, according to congressional experts.
The Berkeley economists reached their more concerning conclusion by factoring in such regressive state and local levies as sales tax, as well as by accounting for years and years of federal tax policy that gradually lowered corporate rates and the top tax rates rich people owe on capital income and inheritances. An estimate of the impact of the first full year of the 2017 tax bill (which took effect in 2018 so actual data aren’t in yet) enabled Mr. Saez and Mr. Zucman to calculate that the top 400 households now shoulder a smaller tax burden than the bottom 50 percent.
Experts who still see the system as progressive fired back. Jason Furman of Harvard, President Barack Obama’s top economic adviser, pointed out that the Saez-Zucman analysis omits the refundable portion of the earned-income tax credit, a subsidy for wages delivered through the tax code that benefited 25 million mostly low-income people to the tune of about $63 billion in 2018, according to the Internal Revenue Service. The EITC, by design, offsets the most regressive levy on wage earners, Social Security taxes. David Splinter, the top analyst at Congress’s bipartisan Joint Committee on Taxation, made similar arguments. Mr. Zucman replied, on Twitter, that including the refundable EITC would open the door to consideration of all federal transfers, such as nutritional benefits and the like; Mr. Furman, more realistically in our view, countered that EITC refunds should be included if the goal is a picture of the tax system’s broad distributional effect.
Both sides in this polite quarrel agree that inequality is a major problem and that recent changes in tax policy, especially the upwardly skewed Trump tax cuts, have worsened matters — and we agree. In policy terms, however, it matters which description of the problem you accept, because that choice implies how many risks — political and economic — you are willing to take to maximize taxation of the rich.
Mr. Saez and Mr. Zucman, who have advised Democratic presidential candidate Sen. Elizabeth Warren on her wealth tax, believe Democrats have been far too timid in the past. Yet the administration Mr. Furman served backed an expanded EITC and higher individual income tax rates, leavened by growth-enhancing corporate rate reductions (with fewer loopholes), regarding that policy mix as socially progressive, economically efficient — and politically achievable. We hope that the most recent Democratic administration’s pragmatic spirit can survive the bruising debates, intellectual and otherwise, of 2020.
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