The Triumph of Injustice by Saez and Zucman

I just finished The Triumph of Injustice by Emmanuel Saez and Gabriel Zucman and I have to admit, it is the perfect antidote to this week's breaking story about how Donald Trump managed to successfully avoid paying virtually any federal income tax at all.  The book even leads with a story about how Trump bragged about avoiding taxes in one of the presidential debates with Hillary Clinton in 2016, declaring that this just shows how smart he is.  One of the key points of the book, which I hadn't fully considered myself, points out that one of the way progressive tax systems fall apart is through a surge of avoidance and evasion that causes policymakers to throw up their hands and give up on high tax rates because they appear to be too difficult to collect.  They even argue that tax avoidance gave low tax advocates key leverage when they passed the 1986 Tax Reform Act, because they were able to strike a deal that had all the extra revenue gained from closing loopholes and ending the massive tax avoidance practices go to reducing the tax rates, especially at the top. 

The conclusion that follows is that in order to save our system of progressive taxation and ensure rich people pay their fair share is to reform our tax structure and methods of tax administration in order to end the corrosive tax avoidance and evasion currently plaguing our system.  To their credit, they have a comprehensive plan to make sure this happens that includes reconstructing the way we tax multinational corporations, taxing capital at normal income tax rates, raising the top marginal tax rate, and imposing a new wealth tax on the richest individuals, while also creating a new government agency to regulate tax shelters.  Included in this list are some important new innovations in tax policy that really could improve the way we tax the wealthiest people and corporations.

I'll even admit that they changed my mind on the usefulness of wealth taxes.  I originally thought they were tough to administer, easy to avoid, didn't raise much money, and also encouraged the wealthiest to just move to another country.  Many liberal European countries who have tried to adopt wealth taxes have ultimately gotten rid of them, so that internationally, even in very friendly political environments, the trend has been away from wealth taxes rather than towards them.  They point out that the billionaires in the US have a lot of their income tied up in unrealized capital gains from the companies they founded, and therefore don't report much of any income in a given year, so raising the income tax won't hit them.  Therefore, if you don't have a wealth tax, many billionaires can avoid paying taxes entirely until they die or sell the company, which might take decades and protect them from paying any taxes for most or even all of their lives.

I also have to give them credit for creating an abundance of fascinating tax data, which includes a policy simulation you can use to craft your own ideal tax plan that you can find at taxjusticenow.org.  In addition, one of their first key points shows that the US essentially has a tax system that charges most everyone the same tax rate (between 25% to 30%) except for the ultra wealthy who pay only about 20% in taxes.  They also make the useful point that taxes were much more progressive during and after WW II, even to the point of being deliberately confiscatory, and this still allowed our society to grow and prosper quite successfully. 

I also have to confess that even though I was agreeing with them for virtually the entire book, they did lose me a little bit in the last chapter just before their conclusion.  Here they bad mouth the prospect of creating a VAT in the US, and instead propose an entirely new type of tax, a national income tax, that includes taxes on wages, business profits, and interest income at one flat rate with no deductions.  They argue this is better than a VAT because it is less regressive and has a broader base.  

My reply would be that first we should gradually raise taxes on the top 1%  either until it reaches its revenue maximizing point or until politically it becomes unacceptable to raise them any further.  If we do this first, and then create a VAT, we do not have a progressivity problem because that has already been solved by the other more progressive taxes.   In this case, it does not matter if a VAT even imposes no tax at all on the rich because we have already reached the optimal combined tax rate for that group, and raising taxes even further on that group through a new national income tax would just mean we would need to reduce other progressive taxes to get back to our optimal rates for the rich.  If you are worried about a narrow base, this is largely driven by political pressures and could be a problem in a national income tax as well if political concerns end up overruling ideal policy design.  For me then a better approach is to figure out the taxes on the rich, then raise any additional revenue we need through a VAT and try and solve the narrow base problems by broadening the base on existing payroll, income, and corporate taxes rather than creating a whole new type of income tax.  Plus, given that this type of tax has never been tried before, we should experiment in some smaller states or countries first to work out the kinks, and this could take decades to test and learn how to do right, where a VAT can be implemented right away with few problems off the shelf.

All in all, I came away very impressed with the book, and they provide a tremendous service to those interested in building a just and prosperous society by showing how the rich can and should be taxed.  There is no reason we have to accept increasing levels of tax avoidance and evasion, either from the super rich or multinational corporations, since they have provided a detailed road map as to how we can fix all of these problems and address the issue of income inequality in our country in a very fundamental way.  Progressive taxation it turns out is quite useful and can be saved, and we should move ahead on the task of doing exactly that.