America’s Tax System Is Broken

In the following excerpt, Gabriel Zucman and Derek explore the current tax rates for different income levels in the U.S. and the reasons why the effective tax rate for the superrich has declined so drastically since the 1950s. 

Derek Thompson: I want to start with a very simple and straightforward question. According to the best analysis, who in America pays the most tax as a share of their income, and who pays the least?

Gabriel Zucman: That’s an apparently simple question, but it’s in fact surprisingly difficult to have a good answer to that question. So let’s try to unpack everything. So first of all, on average, Americans pay around 30 percent of their income in tax, all taxes included. When you add up the income tax, payroll taxes, property taxes, sales taxes at all levels of government, this adds up to 30 percent of U.S. national income, meaning the average American pays 30 percent of their income in taxes. Now, if you do that computation for the different social groups, here is what you find. For the working class, meaning the 50 percent of Americans with the lowest income, so half of the population, their tax rate is a bit lower than 30 percent but not much lower, perhaps around 28, 27 percent. If you look at the middle class, so the next 40 percent between the median and the top 10 percent, they pay around 30 percent of their income in tax.

If you look at the upper middle class, the top 10 percent but excluding the truly very rich, they pay a bit more than 30 percent, perhaps around 32, 33 percent, of their income in tax. But now if you look at the superrich, if you look at the billionaires, this falls to about 23, 24 percent of their income in tax. So to summarize, the U.S. tax system is like a giant flat tax where the different groups of the population roughly pay the same fraction of their income in tax, with one main exception, which is the billionaires, who are significantly below the other groups.

Thompson: And this shape of the American tax picture, is this a feature of the 21st century, or have the extremely rich, the top 0.1 percent, have they always found a way to pay meaningfully less than the rest of the upper middle class?

Zucman: They have paid more in the past. So it’s a relatively new development. Historically, in the middle of the 20th century, the superrich paid quite a lot of tax—not so much through the individual income tax, but they paid a lot indirectly through the corporations that they own. Because what you have to understand is that income for the very rich corresponds mostly not to wages but to their share of the profits of the companies that they own. And for a long time, the corporate tax was really high in the U.S. The statutory tax rate in the 1950s, 1960s was 50 percent. And the effective corporate tax rate, what companies effectively paid, was also around 50 percent. So meaning out of any dollar in profit, you had 50 cents that went straight to the government. And then with anything that remained, the companies could pay out dividends, but those dividends were taxed at very high rates also until the 1980s, with top marginal income tax rates of up to 90 percent for the highest incomes in the middle of the 20th century.

And so if you tried to compute what was the effective tax rate of the superrich in the 1950s, it was more around 60, 70 percent of their income. And then gradually it declined from that very high level to about 23, 24 percent today.

Thompson: And why did it decline?

Zucman: So the main driver has been the big decline in the corporate tax. The statutory rate fell from 50 percent to 21 percent for the federal corporate tax. And the effective corporate tax rate fell even more because corporations started to do more tax avoidance. For a long time, tax avoidance was not considered something that companies should do or that company executives should do. It was considered as part of the duty of a corporation to pay taxes, and so they didn’t try to avoid taxes by shifting profits to tax havens, for instance. But this changed in the 1980s. And so the combination of the decline in the statutory rate and the rise of corporate tax avoidance led to a big decline in effective corporate tax rates. And you have to always remember that who benefits from that is essentially the people who own the companies, meaning the shareholders who tend to be at the top of the wealth distribution.

So that played an important role. Second has been the decline in the estate tax. The estate tax used to be a serious wealth tax. The U.S. has, like many countries, a kind of wealth tax, which is the estate tax. You pay only once at the time of death, but it used to be significant. There used to be a pretty aggressive enforcement of the estate tax with a lot of auditing in the 1970s. And then this kind of unraveled. The exemption threshold increased a lot. The tax rate for the largest estates declined. And most importantly, the enforcement of the estate tax largely disappeared. Very few estate tax returns are audited. Since the turn of the 21st century, there’s not been a real political will to enforce the estate tax. So that’s the second reason. 

And the third reason is that the individual income tax has also declined a little bit for the very rich, but that’s not the main or the most important part of the story. The corporate tax and the estate tax is where a lot of the action has been.

This excerpt has been edited and condensed.

Host: Derek Thompson
Guest: Gabriel Zucman
Producer: Devon Baroldi