Let’s get honest about tax rate claims

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People love hearing experts tell them things they want to believe are true. That helps explain, I think, why flawed numbers from two well-known economists about the tax rates paid by lower-class, middle-class and upper-income Americans have been accepted unquestioningly by political commentators and even some prominent Democratic presidential candidates.

In a new book and in several opinion articles, University of California economists Emmanuel Saez and Gabriel Zucman argue that the 400 highest-income families in the United States paid a lower tax rate last year — if you combine all federal, state and local taxes — than people at the bottom of the food chain.

That buzz-producing finding has profoundly shaped public discourse about inequality.

“The richest 400 billionaires pay lower taxes than everyone else,” Sen. Bernie Sanders, I-Vermont, said, in an Oct. 25 statement. Saez and Zucman have advised Sanders, so it’s not a surprise he cites their work. Sanders and Sen. Elizabeth Warren, D-Massachusetts, use Saez-Zucman numbers to justify their wealth taxes — designed in part by, yes, Saez and Zucman. These two pioneers in the study of wealth inequality estimate the 400 highest-income taxpayers in the United States had a total tax rate of 23.0 percent last year.

They estimate, meanwhile, that the bottom 10 percent of taxpayers had a total tax rate of 25.6 percent (and that those in the 50th income percentile paid roughly 24 percent). That’s the opposite of a progressive tax system, one in which people with a greater ability to pay are understandably asked to carry a larger percentage burden.

Saez and Zucman arrive at their innovative numbers by counting not just the (progressive) federal income tax, but also state and local sales taxes (which hit low-income people far harder than they hit the wealthy); real estate taxes; and Social Security contributions.

In my view, Social Security is where Saez and Zucman run off the rails, because Social Security contributions are not “taxes” in any real sense. They are, rather, payments supporting a specific federal program to keep people from having to live in abject poverty when they retire or if they become disabled during their working years.

Once you remove Social Security contributions, you get a much different picture than the one Saez and Zucman draw: Specifically, the wealthy, as they should, pay taxes at a higher rate than the poor.

Intellectual honesty

This isn’t hairsplitting: It’s about intellectual honesty. If we’re going to talk about taxes and inequality, we ought to base the conversation on accurate numbers rather than on what progressives find it convenient to believe.

By my math — working from the Saez-Zucman numbers but subtracting Social Security contributions from them — the overall tax rate for people at the 10th percentile is 16.5 percent. The figure for the 50th percentile is 15.6 percent. I find that people at the 90th percentile pay 21.5 percent.

I can’t give you corrected numbers for the top 400 taxpayers because people stop making Social Security contributions after they earn more than $128,900 ($132,900 as of 2020) — but keep paying Medicare, which has no cap. However, Social Security is such a small portion of the overall burden for the Saez-Zucman 400 that excluding it is at most a rounding error, so I’ll accept their 23.0 percent number.

But you can see that if you exclude Social Security, the talking point that the 400 taxpayers at the very top of the food chain pay a lower rate than the people at the bottom disappears. We can argue over whether the overall American system (skewed as it is by those regressive state and local sales taxes) is progressive enough — I don’t think it is — but it is nevertheless progressive.

Tackling inequality

Saez and Zucman have a proposal for remedying the problem of tax inequity that they purport to have identified: a wealth tax. The Warren plan they helped design would tax wealth above $50 million at 2 percent, and wealth above $1 billion at 6 percent.

There are much simpler, realistic approaches to increasing the fairness of the tax system without such an unwieldy “reform.” One would be to roll back the rate reduction the Trump tax bill gave top earners, restoring it to 39.6 percent rather than 37 — and also eliminating the 20 percent tax break on “pass through” income generated by operations that have set themselves up as partnerships so owners, who tend to be high-income types, can take their share of the profits without the business having to first pay corporate income tax. You might even raise the top rate to 42 percent or so.

Second, restore half the cut in the corporate tax, which under Trump has been reduced to 21 percent from 35 percent. That cut worked out great for people (including me) for whom stocks are a big part of their net worth, by helping goose stock prices, but it did little or nothing for average people.

Most important, we should tax income from investments (current top rate: 20 percent) the same way as income from work (37 percent). That would seriously increase the taxes paid by ultra-high-income people (and raise my taxes, as well).

But whatever approach we take to tackling inequality, we need to start with the right numbers — not the ones that many people want to hear.

Allan Sloan is a columnist for The Washington Post.