In a June article for AIER, Professor Peter Boettke identified one of the key missions in teaching economics as “trying to explain outcomes that are not implied in the intentions of the participants.” In their work with presidential candidates and current moment in the spotlight, economists Emmanuel Saez and Gabriel Zucman of UC-Berkeley are failing that mission catastrophically.
Their star pupil and presidential hopeful Elizabeth Warren has always viewed the very wealthy, through intention and direct malicious conduct, as harming the well-being of the vast majority of Americans. This is where one might hope economists advising a candidate would emphasize the complexity of problems like poverty, unequal access to health care and education, and environmental damage. When these problems arise in our economy, it’s for a dizzying number of reasons one must disentangle instead of imagining bad deeds by specific actors.
Instead, Saez and Zucman are set this week to release their book The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay. In attempting to add academic credibility to the simplistic narrative of a system intentionally rigged by the greedy and wealthy, they set back the public’s understanding of important economic issues and harm those they wish to help.
Saez and Zucman’s thesis is that our tax system over time has gone from progressive, where poorer people pay lower overall rates than rich people, to regressive, at least at the very top. Their recent New York Times op-ed focuses heavily on the “injustice” of this outcome and the implication of what America’s 400 wealthiest people, which their work singles out, must have done to achieve this coup.
These ideas are part of a compelling but confused narrative of growing inequality and taxation of the wealthy that has gained steam on the left since economist Thomas Piketty’s 2013 book, Capital in the Twenty-First Century. The problem is that even the facts behind the narrative may not be true.
My colleague Phil Magness has questioned many of Piketty’s results, reviewing decades of tax codes and changes in reporting. He’s begun to put similarly difficult questions to Saez and Zucman, finding several reasons why the recent drop in the tax rate paid by the 400 richest Americans that allowed the authors to make their provocative claim is misleading. Particularly eye-opening is the authors’ exclusion of refunds from the earned income tax credit in the rate paid by poorer Americans.
Our complicated tax code turns out to be a sort of Rorschach test for what left-leaning economists are predisposed to see happening in the economy. In what promises to be a particularly brutal election year, they aren’t likely to let go of the narrative they believe to be so potent.
When candidates like Warren and Bernie Sanders sell the rigged-economy paradigm to voters, they lead to a critical misunderstanding of how the economy works that I’ll call the “XFL fallacy.” In its original incarnation, the XFL was a second professional American football league that played only one season about 20 years ago. Since the incumbent NFL had the substantial competitive advantage of employing the several hundred best football players in the world, the new entrants had to resort to gimmickry.
In lieu of a traditional kickoff, the XFL introduced the scramble, where players on opposing teams would sprint to the ball, hopefully employing gray-area violent tactics en route.
It’s a zero-sum vision that couldn’t be less accurate when thinking about a market economy. Of course there are instances of exploitation in the economy, but my guess is that most of Saez and Zucman’s colleagues at Berkeley would flunk an undergrad who didn’t recognize that the first result of commerce is almost always growth rather than exploitation.
Taxation as Freedom
Enter the tax system, which Saez and Zucman focus on as the means by which the rich manipulate the system to grow even richer.
In his review of The Triumph of Injustice, New York Times columnist David Leonhardt sums up how many on the left view the second half of the 20th century:
Companies found ways to take more deductions and dodge taxes. Politicians cut every tax that fell heavily on the wealthy: high-end income taxes, investment taxes, the estate tax and the corporate tax. The justification for doing so was usually that the economy as a whole would benefit.
The justification turned out to be wrong. The wealthy, and only the wealthy, have done fantastically well over the last several decades. G.D.P. growth has been disappointing, and middle-class income growth even worse.
The key victim in Saez and Zucman’s imagined heist by the rich isn’t the poor. It’s the government.
In the economists’ own op-ed they continuously rail against the injustice of the rich paying a lower tax rate than the poor. They see one solution, economists rolling up their sleeves and figuring out how to make the wealthy pay more:
The history of taxation is full of U-turns. Instead of elevating some supposedly invincible and natural constraints — that are often invincible and natural only in terms of their own models — economists should act more like plumbers, making the tax machinery work, fixing leaks. With good plumbing — and if the growing political will to address the rise of inequality takes hold — there is a bright future for tax justice.
It’s striking and somewhat alarming that they never directly mention the obvious second remedy: finding ways to cut the taxes paid by “working people,” defined as the bottom 50 percent of the wealth distribution. They don’t appear interested in what low-income families and communities could figure out from the bottom up with extra spending and saving power, rather only what principled elites as embodied by themselves and Warren could provide for them.
Leonhardt, once again:
In their book, Saez and Zucman sketch out a modern progressive tax code. The overall tax rate on the richest 1 percent would roughly double, to about 60 percent. The tax increases would bring in about $750 billion a year, or 4 percent of G.D.P., enough to pay for universal pre-K, an infrastructure program, medical research, clean energy and more. Those are the kinds of policies that do lift economic growth.
I won’t downplay the importance of any programs, and this isn’t the space to get into all the problems with top-down initiatives. But consider that $750 billion is also enough to hand every adult and child in that lower 50 percent $4,500 per year. That’s $18,000 a year for a struggling family of four, and it pays long after the kids are done with nursery school.
A Harmful Narrative
As the election season heats up and we hear more about billionaires rigging the economy, remember that neither the data nor the economics really holds up. From a purely political standpoint, the Left is employing time-tested tactics used by all sides.
To rank and file voters on the left, billionaires aren’t the object of envy as much as they’re scapegoats. “Here is a group of people apart from you, and they have caused the problems with which you struggle.” Our president has Mexican immigrants and Chinese trade officials. Warren and Sanders have billionaires.
One must remember that immigrants are a population far more vulnerable to potential anger resulting from a cynical political strategy. America’s billionaires will be just fine, but demonizing them harms everyone. Our economy, our culture, our world grow continually more complex. Problems like poverty, or inequality if you must, arise as Boettke says: without the bad intentions of specific participants.
These are processes that often defy our intuition, and economists must redouble our efforts to understand such phenomena and pass that understanding along if true progress is ever to be made. We needn’t hero-worship billionaires, but casting them as direct actors leading to poverty and inequality puts the actual well-being of people behind the short-term success of someone’s political agenda. Now that’s what I call injustice.