In their fascinating but controversial new book, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, economists Emmanuel Saez and Gabriel Zucman make the case for a progressive revolution in American taxation.
Or more precisely, they make the case for a progressive restoration. Over the past 40 years, America has abandoned its historical commitment to progressive taxation, they contend. It’s time to find our way back to the future, they say.
Saez and Zucman are getting a lot of attention for the various ways they want to make progressive taxes great again. In particular, they have been closely associated with the wealth tax proposal of Sen. Elizabeth Warren, D-Mass. Zucman has emerged as an especially high-profile defender of wealth taxation, especially on Twitter, where he has engaged other economists in, shall we say, spirited debate.
Saez and Zucman ground their argument in history. They tell an uplifting story about American taxation, not unlike the one told by their colleague Thomas Piketty in his 2013 blockbuster, Capital in the Twenty-First Century. (Prior coverage: Tax Notes, Apr. 28, 2014, p. 416.) Their view is nicely summed up by one key passage: “Before injustice triumphed, the United States was a beacon of tax justice. It was the democracy with perhaps the most steeply progressive system of taxation on the planet.”
Strong words — perhaps too strong. Saez and Zucman have written a fascinating and provocative book. They raise crucial questions about the usual narrative of American fiscal history. In particular, they make a strong case that modern tax reform — defined as rate reduction coupled with base broadening — has damaged the cause of progressive taxation. That said, Saez and Zucman offer a view of American fiscal history that flattens some of its more important complexities. In particular, they exaggerate the political importance of wealth redistribution in the creation of federal tax law.
While certainly real (and occasionally influential), the impulse to limit and redistribute wealth hasn’t typically been the driving force in American fiscal development. Rather, that impulse has often been eclipsed by a different but related goal: the redistribution not of wealth, but of the tax burden. It’s an important distinction.
Conditions for Change
Saez and Zucman believe that history is important, and not just because it can inform our understanding of the past or even explain how the present came to be. History can also map a route to the future, they argue. “America’s fiscal history is deeply linked with the dynamic of inequality, the transformation of beliefs about private property, and the progress of democracy,” they write. “Understanding this history offers a window onto understanding the conditions for change today.”
That’s certainly true. What’s also true is the way Saez and Zucman describe the discontinuous course of American tax history. “The history of taxation in the United States is anything but linear,” they write. “It’s a story of dramatic reversals, of sudden ideological and political changes, of groundbreaking innovations and radical U-turns.”
Some of the most important U-turns came during the early decades of the 20th century, when Congress established permanent income and estate taxes. These new revenue devices were rooted in powerful concerns about inequality and the concentration of wealth. For the most part, however, champions of income and estate taxes defended them as a tool for redistributing tax burdens, not wealth. As legal historian Ajay K. Mehrotra has written in his definitive book on this period: “The goal was not to radically redistribute wealth, but rather to ensure that those who had the greatest taxpaying capacity were contributing their fair share” (Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877-1929, 2013).
Consider, in particular, the estate tax. In the realm of American tax policy, this was the tax innovation most suited to an attack on inequality. But as Saez and Zucman point out, the estate tax began its long life in rather tepid form. “Rates were initially moderate,” they write. “In 1916 the top estate tax rate reached 10 percent for the largest estates; it rose a bit during World War I before stabilizing at 20 percent in the late 1920s.”
Those rates weren’t the stuff of radical wealth redistribution. And indeed, that was never their intent. “I have no disposition to tax wealth unnecessarily or unjustly,” explained Rep. Cordell Hull, a Tennessee Democrat widely regarded as the father of both the modern estate tax and the 1913 income tax. “But I do believe that the wealth of the country should bear its just share of the burden of taxation and that it should not be permitted to shirk that duty.” (Prior analysis: Tax Notes, Sept. 5, 2016, p. 1330.)
Hull’s phrasing is important because it gets to the heart of what lawmakers thought they were doing. Hull and his allies were trying to redistribute fiscal burdens, to ensure that everyone paid a “just share” or a “fair share.” Another lawmaker, Rep. William Cox, an Indiana Democrat, described the estate tax in similar terms: “It is the first successful attempt to make wealth bear its just and proportionate burden of taxation.” Clearly, these lawmakers were reading from the same talking points.
Of course, there were other impulses at work on Capitol Hill, including a frank desire to limit large fortunes and redistribute wealth. “Many of the enormous fortunes of this country far exceed any service the recipients of these swollen fortunes have ever rendered society,” said Missouri Democratic Rep. Clement C. Dickinson. “And the time is ripe and opportune to levy graduated income and inheritance taxes for needed revenues.” (Prior analysis: Tax Notes, July 17, 2006, p. 293.)
Rep. Meyer London, a socialist from New York City, was even more forthright, abjuring any concern with revenue at all. He declared that the issue was one of power, not government funding:
It is difficult to see how, in a democracy, men will with indifference contemplate the inheritance, through the mere accident of consanguinity, of large estates, of tremendous power in the shape of capital. While we object to the power of making laws being transferred from father to son by inheritance, we do permit the acquisition by inheritance of a financial power which confers the right to legislate for industry, commerce, finance, and to shape the life of the country. As a matter of public policy, and not only as a source of revenue for the support of the government, the tax on inheritance should be increased.
Dickinson and London weren’t isolated voices; others shared their impulse to attack the concentration of wealth, as well as the political and economic power wealth conferred. Even Hull could get himself worked into a lather on the subject. “An irrepressible conflict has been waged for thousands of years between the strong and the weak, the former always striving to heap the chief tax burdens upon the latter,” Hull declared. “That conflict still continues.” But again, Hull was still talking about tax burdens, not wealth.
War provided the crucial backdrop for Hull’s argument about fiscal burdens. Woodrow Wilson’s military preparedness campaign was expensive, and lawmakers were struggling with how to pay for it. “Shall the masses be mulcted for the remainder of the taxes needed?” Hull asked his colleagues. “Or shall the additional taxes required be equitably imposed upon the larger owners of income producing property, and from a small graduated estate tax, and a tax upon the profits from the sale of munitions? The latter course will square with every principle of justice and equity in taxation.” Again: Tax burdens, not wealth.
New Deal
Saez and Zucman acknowledge that the original estate tax was modest in severity (and presumably, redistributive intent). But they see the New Deal approach to inherited wealth as something qualitatively and quantitatively different.
They aren’t wrong. In 1935 Franklin D. Roosevelt proposed a new federal inheritance tax to supplement the existing estate tax, and he defended the innovation in dramatic terms.
“Great accumulations of wealth cannot be justified on the basis of personal and family security,” FDR declared. “In the last analysis such accumulations amount to the perpetuation of great and undesirable concentration of control in a relatively few individuals over the employment and welfare of many, many others.”
Finally, a bold and unabashed argument for breaking up large fortunes using innovative tax instruments! But even Roosevelt was careful to frame his argument in terms of fiscal burdens, urging Congress to use money from the new inheritance tax for the repayment of federal debt. “By so doing, we shall progressively lighten the tax burden of the average taxpayer,” he said.
Still, Roosevelt’s redistributionist impulse was real. It was evident in many of his tax messages to Congress, but especially in that fire-breathing 1935 message. “Our revenue laws have operated in many ways to the unfair advantage of the few, and they have done little to prevent an unjust concentration of wealth and economic power,” he thundered.
FDR invoked a social theory of wealth creation to justify his progressive revenue reforms. “The movement toward progressive taxation of wealth and of income has accompanied the growing diversification and interrelation of effort which marks our industrial society,” he declared. “Wealth in the modern world does not come merely from individual effort; it results from a combination of individual effort and of the manifold uses to which the community puts that effort.”
More to Roosevelt
More than any other American president, Roosevelt was willing to make a frank case for limiting wealth. And Saez and Zucman are quick to emphasize this impulse. “From its creation through to the 1930s, the goal of the income tax had been to collect tax revenue,” they write. “After his election, President Franklin Delano Roosevelt added a new objective: Make sure nobody earns more than a certain amount of money. In short, confiscate excessive incomes.”
Saez and Zucman seem to be divining this intention from FDR’s tax rate preferences, which were undoubtedly quite progressive, especially at the top of the income scale. And they point especially to FDR’s 1942 proposal for a $25,000 cap on personal income (to last for the duration of the war and to be enforced with a 100 percent tax on income above the cap).
That’s pretty good evidence for the broader point that Saez and Zucman want to make about FDR. But they never adequately acknowledge something else about Roosevelt: his willingness to tolerate various regressive taxes.
Throughout the 1930s, even as he decried the dangers of concentrated wealth, Roosevelt did little to reduce the regressive burden of federal excise taxes, especially those on alcohol and tobacco. His reticence was understandable; until 1937, those taxes provided roughly one-third of total federal revenue. Worried about the politics of federal deficits, Roosevelt rejected the entreaties of his Treasury Department to replace some of that excise revenue with broader individual income taxes.
Such a reform would be progressive, Treasury argued. While it wouldn’t soak the rich, it would spare the poor.
Roosevelt was unmoved. His reluctance to make that tax swap led critics (including some historians) to label him a hypocrite. His determination to fund Social Security with a payroll tax seems like another count in the indictment. In this context, FDR’s push to enact high rates on income and estates seems like empty symbolism.
I disagree with that assessment. Not because FDR’s high rates weren’t symbolic, but because that symbolism was important. And what was true during the 1930s was even more true during World War II. High rates on wealthy taxpayers and corporations were a crucial element of the fiscal bargain that undergirded wartime finance (and the durable tax regime it established for the postwar decades).
The Bargain
During the Great Depression and World War II, policymakers — including FDR — asked low- and middle-income Americans to shoulder a significant part of the overall tax burden. Indeed, FDR eventually agreed to extend the income tax in precisely the ways he had once resisted, making it a middle-income levy for the first time in American history. In exchange, he asked wealthy taxpayers to pay the same levy at very high rates.
Fundamentally, this bargain was more about fiscal burden sharing than it was about wealth redistribution. FDR certainly liked the idea of redistributing wealth, as he made clear in 1935. But the principal focus of American fiscal politics during the 1930s and 1940s was getting rich people to pay “their fair share.”
This emphasis explains why FDR was constantly absorbed by the issue of tax avoidance. Saez and Zucman do a good job exploring FDR’s commitment to enforcing the tax law, including his great 1937 campaign against tax avoidance when he complained that too many people were ignoring the wise words of Justice Oliver Wendell Holmes Jr.
“Mr. Justice Holmes said ‘Taxes are what we pay for civilized society,’” Roosevelt told Congress in a special message about avoidance. “Too many individuals, however, want the civilization at a discount.” (Prior analysis: Tax Notes, Apr. 7, 2008, p. 83.)
Throughout their book, Saez and Zucman emphasize the importance of the social norms that undergird taxpaying (especially when backed up by legislation, regulation, and robust tax administration). Roosevelt’s fixation on tax avoidance fits well into that narrative; he was committed to the idea that no one should be able to shirk the shared responsibilities of fiscal citizenship.
A Question of Timing
In broad strokes, the story that Saez and Zucman want to tell about American fiscal history is defensible. After all, the distinction between redistributing wealth and redistributing the tax burden isn’t always clear; specific tax reforms can serve both ends.
But Saez and Zucman do have a problem with the way they explain the timing of major tax changes. In particular, their tendency to downplay the importance of wars seems puzzling. Several times throughout their history chapter, they acknowledge that wars tend to occur at inflection points in American fiscal history. But they dispute the primacy of wars in causing that change.
Writing of World War I, Saez and Zucman contend that “even though it played a role, it does not seem that the war context was the key impetus for the rise of tax progressivity in America.” Other countries also faced severe wartime revenue needs, but none followed the United States down the road of heavy progressive taxation, they point out.
As Saez and Zucman continue:
More than the mere product of exceptional wartime circumstances, the rise of progressive taxation in America stemmed from the intellectual and political changes that had begun in the 1880s and 1890s: the evolution of the Democratic party, brutally segregationist in the South, but eager to unite low-income whites in the North and the West against Republican financial elites by means of an egalitarian economic platform; the social mobilization in favor of more economic justice, in a context of surging inequality and industrial concentration.
Well, yes. Those factors were all crucial to progressive tax changes. But war was the crucible of change.
It’s reasonable to ask why American lawmakers took a sharp progressive turn when other countries did not: That question yields important insights, not least the importance of ideas in the formation of fiscal policy. But historians also need to explain why change occurs when it does: History, after all, is about timing.
America’s progressive tax revolution, unfolding in the early 20th century, might have happened even absent the exigencies of World War I. But it’s also true that those exigencies were pivotal, not just creating the need for new revenue, but shaping the particular solutions lawmakers used to fill the fiscal gap.
Saez and Zucman are right that U.S. fiscal history is “a story of dramatic reversals, of sudden ideological and political changes, of groundbreaking innovations and radical U-turns.” But it’s no coincidence that most of those sudden changes came during wartime (or during other moments of systemic shock, like the Great Depression).
Both World War I and World War II were watersheds in 20th-century U.S. fiscal history, as was the Civil War in the 19th century. Without ignoring the importance of ideas in policy formulation, it’s still important to recognize that exogenous shocks do more than just create problems. They shape solutions.
And here’s where Saez and Zucman miss an element of fiscal history that would actually bolster their case. American political leaders have almost always cast new, progressive taxes on the rich as a necessary counterweight to existing, regressive taxes on the poor. This was especially true in wartime, when policymakers used notions of shared sacrifice to make the case for progressive tax innovation.
During World War I, for instance, Kansas Republican Edward Little reminded his colleagues in the House that when they “conscripted the youth of this country,” they had also promised to conscript the wealth of rich Americans who weren’t fighting in the trenches. “Let their dollars die for their country, too,” he declared. (Prior analysis: Tax Notes, Mar. 16, 2009, p. 1306.)
Income and estate taxes were particularly suited to ensuring that wealthy Americans shared in the nation’s communal sacrifice. Indeed, during both world wars, the concept of sacrifice helped shape decisions about which taxes might best balance the scales of justice.
But once again, this argument is more closely linked to burden sharing, rather than wealth redistribution. Which may be why it doesn’t get much love from Saez and Zucman.
What About 1986?
Of course, fiscal history didn’t end with World War II. And for Saez and Zucman, some of the most crucial episodes came later, when Congress began to unwind some of its most progressive achievements.
In this story of declension, the Tax Reform Act of 1986 plays a major role. Ronald Reagan’s 1981 tax legislation was also crucial, since it not only lowered rates dramatically but opened up new avenues for tax avoidance. However, that avoidance — and the political response to it — is what really proved the undoing of progressive taxation. “The Tax Reform Act of 1986 illustrates how progressive taxation dies,” Saez and Zucman write. “It does not die democratically, struck down by the will of voters. Looking at most of the great retreats of progressive taxation, we find the same pattern: first, an outburst of tax dodging; then, governments lamenting that taxing the rich has become impossible and slashing their rates.”
There’s compelling logic to this view. And Saez and Zucman do a good job challenging the received wisdom of modern tax reform, including the mantra-as-shibboleth “lower the rates and broaden the base.”
By disputing both the dangers of high rates and the payoff from lower ones, Saez and Zucman raise fundamental questions about what constitutes tax reform. Indeed, their own definition of reform — characterized principally by raising taxes on wealth — is consistent with the way that term was understood for much of American history.
Notably, however, that version of tax reform had almost run its course by the time the 1950s rolled around. Saez and Zucman describe the 1930s, 1940s, and 1950s as an era when many lawmakers understood the value of high marginal tax rates on wealthy taxpayers. And they are right. But Saez and Zucman never really wrestle adequately with an inconvenient fact: Many tax experts of the ’30s, ’40s, and ’50s worried that rates were too high.
“The federal personal income tax rates are very low at the bottom and very high at the top,” wrote two economists in Roosevelt’s Treasury Department way back in 1937. “They are probably higher at the top than they should be, in view of the incentives to avoidance and evasion that they create, and the consequent administrative troubles, and in view, also, of the danger of stifling the willingness to take risks.”
By the 1950s, such worries had only grown. Certainly, conservatives were eager to see tax rates come down after World War II. But so, too, were many liberals, as Dennis J. Ventry Jr. explained in his 2002 article, “Equity Versus Efficiency and the U.S. Tax System in Historical Perspective”: “Postwar tax programs — conservative and liberal, Republican and Democratic — emphasized economic growth through tax reduction.” Growth-oriented liberals may have been wrong in worrying so much about high rates, but their concern was genuine — and coincident with a commitment to the ideals of progressive taxation.
Saez and Zucman should grapple more seriously with liberal doubts about high rates during the midcentury heyday of progressive taxation. Those doubts bear at least some acknowledgment, especially when lauding the progressive achievements of these same liberal policymakers.
A Future Catalyst
Let me be clear: Saez and Zucman provide some excellent historical interpretation on their way to making a case for taxing wealth. I would categorize their approach as “motivated history,” with a presentist agenda that clearly influences their storytelling. But that’s hardly a deadly sin, especially when the presentist agenda is explicit throughout. Transparency is the key.
But I think their history fails to answer one crucial question. It’s a question, moreover, that they identify at the start. The past can give us “a window onto understanding the conditions for change today,” they tell us.
I’m not sure Saez and Zucman have identified the conditions that will lead to progressive tax change. To be sure, rising inequality and falling tax burdens among the rich may shape the next chapter of their story. But those are slow-moving crises — not the sort of precipitating event that has traditionally triggered major tax reform.
The past, of course, is not a roadmap to the future. And it seems unlikely that wars will continue to play the catalytic role in fiscal reform that they once did (even if Saez and Zucman dispute the primacy of that role).
But one thing is certain: Change will definitely come. I only wish that Saez and Zucman could give a better of sense of when.