by Karen Telleen-Lawton, Noozhawk Columnist (read the original in Noozhawk by clicking here)
A decade ago, mega-investor Warren Buffett, founder and CEO of Berkshire Hathaway, famously quipped that he paid a lower percentage of his income in tax than his secretary. Buffett was not bragging but rather arguing that the tax system was grossly unfair.
Economists took his statement as a challenge. After massaging figures in various ways, expert consensus at the time was that in general, most wealthy Americans did not in fact pay a lower tax rate than the middle class.
Turns out Buffett was prescient. His claim is now true in at least one measure. Summing federal, state and local taxes, the 400 wealthiest Americans paid a lower total tax rate than any other income group in 2018. This has never been true before in the U.S.
What has changed? In the intervening years, the taxes that most affect the rich, like estate tax and corporate tax, have plunged. Meanwhile, the IRS budget has diminished, resulting in lower enforcement and more tax avoidance. Moreover, the president’s 2017 tax cuts mainly benefited the wealthiest.
With all these perks, the 2018 tax rate for the richest 400 households averaged 23 percent, down from 47 percent in 1980 and 70 percent in 1950.
The new tax data are gaining a popular audience in the form of a book, “The Triumph of Injustice,” by economists Emmanuel Saez and Gabriel Zucman, both professors at UC Berkeley. The book, subtitled “How the Rich Dodge Taxes and How to Make Them Pay,” analyzes the methods by which wealthy avoid and evade taxes. They also delve into the effect on our national coffers and national psyche.
The authors argue that a democratic society’s decisions around tax are paramount, shaping many other decisions. “Wealth is power. An extreme concentration of wealth means an extreme concentration of power,” they write. “We could have chosen to prevent multinationals from booking profits in low-tax places, but we let them do it. We can make other choices, starting today.”
The Guardian finds “The Triumph of Injustice,” “a hope-inspiring book that should inform the manifesto of anyone keen to defend liberal democracy from the twin threats of inequality and multinational corporate power.” But the National Review finds reasons to quibble with the authors’ data parsing.
“The book does not adhere to standard practices within economics for determining who pays a particular tax and, in fact, isn’t always consistent even within the methodology Saez and Zucman chose,” writes The Guardian’s Joshua Hendrickson. “Their overview of the history of U.S. tax policy is overly simplistic and ignores broader issues of fiscal capacity.”
Hendrickson concedes in his conclusion that “inequality is clearly an important issue.” But the issue for him seems to be only that it has brought a “fierce backlash across the world against the wealthy and the so-called elite.” In other words, it’s a problem because it is perceived as a problem.
I would argue that inequality is more than just a problem of perceptions. As Saez and Zucman point out, taxes are the price we pay for civilization and we can’t afford free-riders.
A retired CPA agreed in an online book review: “I have seen these changes firsthand and, to my shame, thought they were for the best,” he writes. “However, in the last 20 years, I have come to see the terrible damage done to American families as they tried to deal with stagnant incomes, ever accelerating health care costs and children facing huge educational debts.
“I saw the growth of tax loopholes which favored the rich and their corporate interest. I saw the undermining of enforcement by the IRS which has given rise to outright tax fraud. To paraphrase Warren Buffett, there is a class wars going on and the billionaires are winning it.”
Karen Telleen-Lawton, Noozhawk Columnist
Karen Telleen-Lawton is an eco-writer, sharing information and insights about economics and ecology, finances and the environment. Having recently retired from financial planning and advising, she spends more time exploring the outdoors — and reading and writing about it. The opinions expressed are her own.