Is the One Percent Finally Paying A Smaller Percentage In Taxes Than the Poor in the U.S.? Probably Not.

Income inequality continues to be a rallying cry for the Democratic presidential candidates. Whether it is the idea of raising the estate tax or creating a wealth tax, the Democratic candidates want to soak the rich with taxes. A study by two economists give additional fodder for the "soak the rich" platform. According to economists Emmanuel Saez and Gabriel Zucman in their latest book "The Triumph of Injustice," we have reached the point where the billionaires are paying a smaller percentage in taxes than the poorest 20 percent when factoring in federal, state, and local taxes. The New York Times had a field day with this finding (see figure below).

If Saez and Zucman's (herby referred to as SZ) findings are true, it would strengthen, at least in a political sense, the Democrats' arguments for higher taxes on the rich. Rather than give into knee-jerk reactions about the Tax Cuts and Jobs Act (TCJA) that the Republicans passed, let's actually take a closer look at what went behind SZ's findings:

• Where are the 2018 federal income tax figures coming from? Normally, such figures would come from the IRS. However, the IRS has not released the 2018 figures. If that's the case, how could SZ possibly assert that the rich paid a lower percent than the poor? They took 2017 figures and extrapolated. As the Left-leaning Tax Policy Center points out, that is no easy feat because the TCJA made such changes to the tax code. Any findings on the TCJA have been preliminary, and as such, SZ's findings are premature at best. While I cannot be certain until we receive those figures, I would bet (if I were a betting man, that is) that the richest are not paying a lower tax rate than the poor, so let's get into why I would make that assertion, shall we?  
• The U.S. tax code has been progressive, and most probably remains so. Historically, the U.S. tax code has been more progressive than its European counterparts (see 2016 CBO figures as an example). What is even better is that the TCJA made the tax code more progressive, not less. That is not just based on the estimates from Joint Committee on Taxation, but also the Tax Policy Center. In response to SZ's book, JCT economist David Splinter wrote a response with an alternative estimate to SZ showing how the tax code remains progressive (Splinter, 2019; see Figure below). Obama's former Chair of the Council of Economic Advisers, Jason Furman, also takes issue with SZ's claim about tax progressively. With these estimates from Left-leaning sources and the JTC, it becomes more difficult to accept SZ's thesis. The federal tax code seems to remain progressive, even with the TCJA. Perhaps state taxes are the thing causing the increase in the tax rate for the poorest.

• Skepticism on state and local tax calculations. I'm not only skeptical of SZ's estimates on the federal figures, but the state figures as well. For one, I have to question why SZ include state- and local-level consumption and property taxes. Everyone pays the same tax percentage. There is no "tax injustice" going on here, only a recognition that lower-income households pay a higher percentage of their income on these taxes because they spend a higher percentage of their income on the goods and services upon which the taxes are assessed. If you remove these taxes from the equation, it's unsurprising how the richest manage to have a higher tax rate than poorest, thereby diminishing SZ's argument. 
• Skepticism on state and local tax calculations, Part II. But for argument's sake, let's give SZ this assumption and include state- and local-level consumption and property taxes. It's still problematic. Why? The Left-leaning Institute on Taxation and Economic Policy releases its study, Who Pays?, on state tax levels. ITEP found that the difference in state taxes between the Top 1 Percent and the Bottom 20 Percent is 4 percent (ITEP, p. 4), which is nowhere what it would need to be for the poor to pay a higher tax rate than the rich. What is even better is that ITEP estimated what taxes paid and total income would be. It turns out that in terms of tax rates and shares of total federal, states, and local taxes, the rich still pay more. Figures from Left-leaning sources show that the higher the income, the higher the tax burden, which serves to imply that SZ's estimates are simply over the top. How is that the case?

• Omission of Earned Income Tax Credit (EITC) and other means-tested welfare. What SZ are measuring (or in this case, not measuring) is affecting their numbers. SZ consider the EITC as a transfer of income rather than a negative income tax. As the Tax Policy Center argues, while the EITC and the Child Tax Credit (CTC) feel like spending, they are features of the federal tax code to offset the burden of the regressivity of the payroll taxes. Since the EITC and CTC are administered through annual tax filings and contribute to net tax rate, the Congressional Budget Office has included them in their calculations. By treating the EITC and CTC the way they did, SZ raised the effective tax to a rate much higher than otherwise would exist. When those tax credits are accounted for, the Tax Policy Center has the effective federal tax rate for the poorest 20 percent at 2.9 percent, and not the 20-plus percent that SZ have calculated.
• Addition of health care premiums. Not only do SZ omit aspects of the tax code explicitly created to ease the burden of the poor, but SZ highlight something else peculiar on their website: they consider private health care premiums as a "health insurance poll tax." If that ends up playing out in the data they used for their book, it is a peculiar choice indeed. While there are aspects of health care premiums intertwined with the tax code, it is equally true that private health care premiums are not taxes. Treating private health care premiums as part of taxation while excluding the EITC and CTC as part of taxation (when they are de facto negative income taxes) only serves to exaggerate the tax rate of the poor. 
• Treatment of Corporate Taxes. When analyzing the incidence of corporate taxes, some of the incidence falls on shareholders and part of it is passed through other forms of capital (e.g., disbursement through the non-corporate sector). SZ toss aside that assumption and transfer the entire incidence to shareholders, which is contrary to reality and standard economic practice (e.g., Smith et al., 2019; Splinter, 2019). This heterodox approach is significant because using this assumption attributes an excessively high amount of wealth to the rich, thereby giving the appearance of a lower tax rate than they actually have. 

Postscript: When looking at the tax data with reasonable assumptions, the U.S. tax code has not become overly regressive, certainly to the point where the rich pay a lower rate or amount than the poor. The best-case scenario is that SZ are using unconventional means and assumptions to arrive at their numbers. Combining the spurious assumptions with how they frame the issue in a "politically slanted narrative" (e.g., their website promoting the book has an interactive data simulator with tax proposals from the Democratic presidential candidates, boasting on their university website how it will affect the Democratic primaries), it becomes more difficult to accept the best-case scenario, thereby casting doubts on their intentions since they blur the line between scholarship and politics. These severe methodological flaws do not take away the need for debates about what tax policy should like (e.g., simplify the tax code to remove tax avoidance mechanisms, adapt to the increasingly global nature of firms) or what to do about income inequality. At the same time, Elizabeth Warren, Bernie Sanders, and others who are of similar ideological mind should base their policy ideas on reality, not on what they would like for reality to be.