Hearing on “Ending a Rigged Tax Code: The Need to …

Gabriel Zucman Associate Professor of Economics, UC Berkeley Testimony before the Before the United States Senate Committee on the

Budget

Hearing on "Ending a Rigged Tax Code: The Need to Make the Wealthiest People and Largest Corporations Pay Their Fair Share of

Taxes"

March 25, 2021

Chairman Sanders, Ranking Member Graham, and members of the committee:

Thank you for inviting me to testify today on the progressivity of the US tax system. It is an honor to participate in this hearing.

My name is Gabriel Zucman and I am an Associate Professor of Economics at the University of California, Berkeley. I am one of the codirectors of the World Inequality Database, and I conduct research on the interplay between tax policy and inequality.

1. The progressive tradition in US fiscal history

The United States used to have one of the most progressive tax systems in the world. From 1930 to 1980, the top marginal federal income tax rate averaged 78%. This top rate reached as much as 91% from 1951 to 1963. At the

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same time, corporate profits were taxed at 50%. The largest estates were taxed at rates close to 80%.

100% 90%

Top marginal income tax rates in the United States Income tax

80%

70%

60%

Estate tax

50%

40%

30%

20%

Corporate tax

10%

0% 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

Source: E. Saez and G. Zucman, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, WW Norton, 2019.

No other country, with the exception of the United Kingdom, ever applied such high marginal tax rates on the wealthy.

Some commentators look at this history and dismiss the idea that the United States ever had a progressive tax system. "Nobody paid those 90% tax rate," they argue. The tax system was no more progressive during the middle of the twentieth century than it is today, according to this view.

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Along with my colleague Emmanuel Saez, we investigated these claims thoroughly.1 We came to two main conclusions. 1. First, it is true that few US taxpayers faced the 90% top marginal

income tax rates that prevailed at mid-century. But this was a feature of this policy, not a bug! High top marginal tax rates aimed at reducing inequality, not at collecting revenue. These rates applied to extraordinarily high incomes only, the equivalent of more than several million dollars today. Their goal was to discourage anyone from earning such sky-high incomes in the first place. Their goal, in other words, was to reduce the inequality of pre-tax income. And this policy achieved its goal. From the 1940s to the 1970s, inequality collapsed. According to the best available estimates, the share of America's pre-tax national income earned by the top 0.01% declined from more than 4% on the eve of the Great Depression to 1.3% in 1975, its lowest level ever recorded. The same evolution can be observed for other top groups, such as the top 1%.2

1 See E. Saez and G. Zucman, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, WW Norton, 2019; see also E. Saez and G. Zucman, "The Rise of Income and Wealth Inequality: Evidence from Distributional Macroeconomic Accounts," Journal of Economic Perspectives, 2020, 34(4), 3?26. 2 T. Piketty, E. Saez and G. Zucman, "Distributional National Accounts: Methods and Estimates for the United States," Quarterly Journal of Economics, 2018, 133(2), 553?609.

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2. Not only did the wealthy see their incomes constrained, but on their reduced income they paid high effective average tax rates. The average tax rate of the top 0.1% highest earners culminated at 60% in the early 1950s. It remained around 55% during President Eisenhower's two terms.

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The US tax system achieved a high degree of progressivity through the combination of high corporate taxes, high top marginal income tax rates, and high top estate tax rates. - Corporate profits, the main source of income for the rich, were

subject to a high effective corporate tax rate of around 50 percent. - The very high top marginal individual income tax rates made it

impossible for business owners to bypass the corporate tax by using pass-through businesses such as partnerships. - The wealthy were hit both by the progressive individual income tax on their realized capital income and by a progressive estate tax at the time of death.

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