What's More Important Than Progressive Taxes?

#12: The media's ignoring the most important economic statistics.

There’s been a big fuss over a new study by Emmanuel Saez and Gabriel Zucman purportedly showing that the richest 400 Americans pay a lower effective tax rate (i.e. the percent of their income they actually pay, not the nominal rate on the last dollar earned) than taxpayers in the bottom half of the income chart. 

Does it surprise you that the ultra-rich are good at avoiding taxes? Me neither. The really shocking Saez & Zucman claim is that the very rich really did pay high effective rates of 70% or 60% back in the 1950s and 1960s. The conventional wisdom, which I've shared, has always been that while the nominal, marginal rates for the wealthy were impressively high at mid-century, the rich found a way around them then, just as they do today -- so the effective rates were much lower than 70%. (In my book I cited an estimate of about 40% for the richest 1% in 1966, counting state and local taxes, though maybe not all the taxes Saez and Zucman count.) We'll see if Saez/Zucman’s shock claim holds up under peer pressure. There's talk of trouble in the denominator.

Meanwhile, Derek Thompson of The Atlantic has pointed up some less publicized stats about the bottom of the income distribution--where a variety of indicators show that wages are not only finally rising at the bottom, but they're rising faster for those workers than for the richest Americans.  Trump's presidency seems to be delivering on what was its most important promise: to bring back the incomes of people too often dismissed as the economy's "losers."

You can give some credit to the increases in the minimum wage. But they only affect 22 states (and DC) containing (by my calculation) a bit less than half of the population. It's hard not to also credit to Trump's relative success at controlling illegal immigration numbers--at least keeping them below what they would otherwise have risen to in a booming economy. By the end of the big late ‘90s boom, for example, there were more than 1.5 million migrants arrested trying to cross the Southern border. This past year it was 977,000, even counting the surge of asylum-seekers, mainly from Central America. These immigrants are overwhelming less skilled and, inadvertently, they have the effect of bidding down the wages of all workers doing the same sort of jobs they do. Without the usual supply of immigrants, employers seem desperate for labor, and they’re now raising pay (and hiring workers with criminal records and handicaps) to get it.

So in one statistic, workers at the bottom are losing. In another, they’re winning. Which is more important? It depends on why you care about income inequality. My argument is that we care about it, not for its own sake, but because we worry about its effect on social equality— how equal we are “in the eyes of each other.” If this is your perspective, does it matter more that 400 people—really, really, really rich people—paid 2.5 percent less in taxes, or that the bottom 25 percent saw their wages grow maybe 4.5% (annually).

It’s not even close, With their incomes mostly stagnant for decades, unskilled workers were in danger of falling out of the bottom of the economy—into despair, disability, drugs. How much difference does it make, in their actual lived experience, if a billionaire pays 25.5% in taxes instead of 23 percent? Would they even notice the change? But it makes a world of difference if they can take a job—any job—and have enough to buy a used car, or rent a safer apartment, or go on a date--participate in the normal activities of their communities as normal citizens.

It seems perverse, but under Trump we may be finally achieving social egalitarian gains many liberals have longed for. Don’t count on the press to point this out.

To-be-sure note: I'm fine with increasing the effective tax rate on the ultra rich We could use the money, it would make a timely political point, and it enforces a sound egalitarian rule (“equality of sacrifice”). Applying that rule is bound to have some social-egalitarian impact. But it’s a relatively mild impact, compared with changes that would increase the occasions when Americans actually interact with each other under conditions of equal dignity (e.g.—the pre-Vietnam draft, or a possible Medicare-style health service that enrolled the vast majority of the population, or even a ballgame, pre-skybox.)

That’s especially true when it comes to Saez and Zucman’s curated top 400. There’re only 400 of ‘em. There’s a limit to the impact the wealth even 400 Bill Gateses can have on American life. (It hasn’t let him subsidize an exploitive sexual elite!) Note that Saez and Zucman aren’t claiming that the entire top 1% don’t pay higher effective rates than most Americans, or even the top .1 percent, as I understand it. Most of the really rich pay higher rates. The Saez/Zucman claim is that at the tippy top—the top .0003 percent—they have managed to game the system. (And boy are those in the top .0004th percentile annoyed.)

For most people, the salient income divide for social equality will continue to be between the bottom 50% and the affluent top 20-25%—those who are able to segregate themselves from the rest of society in neighborhoods, schools, and health care. Our goal, it seems to me, should be to keep the vast majority of Americans (the bottom 90%) in the same basic social systems, ideally with the rich on the outside looking in.