Sanders and Sen. Elizabeth Warren (D-Mass.) 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 that 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. These contributions don’t go toward general government expenditures, as income taxes and sales taxes do, and including them creates a skewed view of the distribution of tax burdens.
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.
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.
Yet too many commentators whom I generally respect have taken the Saez-Zucman numbers at face value, from Leonhardt to The Washington Post’s Greg Sargent (“The massive triumph of the rich, illustrated by stunning new data”).
It’s hard to fight headlines like that, because adding numerical nuance to the discussion risks making people’s eyes glaze over. But let me say a bit more about why Social Security should not be considered a tax. There’s a reason, after all, that it says “FICA” on people’s pay stubs — standing for the Federal Insurance Contributions Act. When it comes time to collect, your Social Security and disability benefits are based on how much money you and your employers have paid into the system over the years. (Workers and their employers split the burden of Social Security contributions. Saez and Zucman follow the economic convention, with which I agree, that both the employer and employee share ends up falling on the worker.)
The combined 12.4 percent Social Security contribution cuts off at around $130,000 precisely so people like Bill Gates or Warren Buffett or Jeff Bezos (chief executive of Amazon and owner of The Washington Post) don’t get seven-digit annual benefit checks when they retire. However, the cutoff means Social Security takes a far lower percentage of the income of the Gateses, Buffetts and Bezoses of the world than it takes from other earners.
I grant that the Medicare portion of the “payroll tax,” 2.9 percent — again, split evenly between employer and employee — should count as a tax. That’s because, unlike Social Security, all Americans who qualify for Medicare (those 65 and older or with certain medical conditions) get the same Medicare package, regardless of how much they and their employers put in.
In my modifications of the Saez-Zucman numbers, I therefore separated Social Security from Medicare payments, after friendly exchanges with Saez and Zucman about how this might be done. (They continue to insist the full “payroll tax” should be treated like any other tax.)
Social Security payments make up 81 percent of FICA contributions for workers who don’t exceed the earnings cap; the Medicare proportion constitutes 19 percent.
For each Saez-Zucman cohort up to the 90th percentile, therefore, I subtract 81 percent of payroll tax. Again, above the 90th percentile, where more than half of earners max out on Social Security contributions but keep paying Medicare, which has no cap, my formula stops working.
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.
While you can support a wealth tax even without accepting the Saez-Zucman numbers on the tax burden, the wealth tax strikes me as an example of academic thinking that sounds great in theory but is difficult if not impossible to apply in the real world.
Calculating the values of all kinds of assets — from paintings to privately held companies — would be a mess, subject to endless gaming by accountants and lawyers. In addition, lots of us would doubtless have to file all sorts of new forms with the IRS, baring our souls and finances to show that we’re not wealthy enough to be subject to the tax.
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 that 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).
Make these changes, and we would make significant progress, both in balancing the federal budget and making the overall tax system fairer.
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. There are many problems with the U.S. tax system, but it’s indisputable that the wealthy pay higher tax rates than the poor.