The triumph of the rich, which is one of the defining stories of our time, is generally described as largely the reflection of two factors. The first, of course, is the explosion of income among top earners, in which a tiny minority has vacuumed up a ballooning share of the gains from the past few decades of economic growth.
The second factor — which will be key to the 2020 presidential race — has been the hidden decline in the progressivity of the tax code at the top, in which the wealthiest earners have over those same decades seen their effective tax rates steadily fall.
Put those two factors together, and they tell a story about soaring U.S. inequality that is in some ways even more dramatic than each is on its own.
A new analysis prepared at my request by Gabriel Zucman — the French economist and “wealth detective” who has become famous for tracing the hidden wealth of the super-rich — illustrates that dual story in a freshly compelling way.
The top-line finding: Among the bottom 50 percent of earners, average real annual income even after taxes and transfers has edged up a meager $8,000 since 1970, rising from just over $19,000 to just over $27,000 in 2018.
By contrast, among the top 1 percent of earners, average income even after taxes and transfers has tripled since 1970, rising by more than $800,000, from just over $300,000 to over $1 million in 2018.
Among the top 0.1 percent, average after-tax-and-transfer income has increased fivefold, from just over $1 million in 1970 to over $5 million in 2018. And among the top .01 percent, it has increased nearly sevenfold, from just over $3.5 million to over $24 million.
I’m emphasizing the phrase “after taxes and transfers” because this is at the core of Zucman’s new analysis. The idea is to show the combined impact of both the explosion of pretax income at the top and the decline in the effective tax rate paid by those same earners — in one result.
The declining progressivity of the tax code is the subject of “The Triumph of Injustice,” a great new book by Zucman and fellow Berkeley economist Emmanuel Saez. It charts the slow strangulation of that progressivity at the top.
As they demonstrate, the effective tax rate (federal, state, local and other taxes) paid by top earners has steadily declined since the 1950s and 1960s, when the tax code really was quite progressive, to a point where the highest income groups pay barely more, percentage wise, than the bottom.
Indeed, in 2018, the top 400 earners for the first time paid a lower effective overall tax rate than working-class Americans. There are many reasons for this radical decline in progressivity, including domestic and international tax avoidance, the whittling away of the estate and corporate taxes, and the repeated downsizing of top marginal rates.
I asked Zucman to calculate the average totals in raw dollar amounts that each income group has taken home over the decades — after taxes and transfers. This includes federal, state and payroll taxes of numerous kinds, and government spending on transfer programs, including Social Security, Medicare, Medicaid, and disability and veteran benefits, among other things.
Zucman is able to do this because he and Saez created a database to do the new book’s calculations, and this database includes as much income, tax and transfer information at all levels of government as they were able to assemble.
Here are Zucman’s results:
As noted, real after-tax-and-transfer income edged up just a bit among the bottom 50 percent while rocketing upward to an extraordinary degree among the top-earning groups.
Meanwhile, among middle-class Americans in the 50 percent to 90 percent section of the income scale (sometimes called the “middle 40”), average income went from just over $44,000 in 1970 to just over $75,000 in 2018.
“After government transfers, the income of the working and middle class has grown a bit faster than before, but still their income growth rate has been very low,” Zucman told me. “For the working class, their after-taxes-and-transfers income has barely increased.”
And among those in the group from the top 10 percent to 1 percent, average income went from just over $90,000 in 1970 to over $185,000 in 2018. For this group, income doubled — they showed real gains. But the bottom very decidedly did not, and the middle 40’s gains were comparatively modest.
Here’s another way to look at what happened at the turn of each decade:
All this offers another way of looking at a phenomenon that political philosopher Samuel Moyn has labeled the “victory of the rich.”
These data help debunk frequent arguments against making the tax code far more progressive. Hedge-funder Leon Cooperman recently penned a whiny letter to Sen. Elizabeth Warren (D-Mass.) — demonstrating what Paul Krugman described as an odd billionaire “self-pitying” streak — arguing that the superwealthy already pay a lot and that the current tax code is more progressive than you think, once you factor in transfers.
It’s true that the wealthy often pay a lot. But the fact that after-tax income has pulled into the stratosphere at the very top, even as effective tax rates have fallen dramatically, shows that the current tax bill of the rich does not, in and of itself, constitute any kind of meaningful argument about the fairness of today’s after-tax distribution.
What’s more, the above also shows how limited the impact of transfer programs has been on soaring inequality over the decades.
“People have this idea that government redistribution has upset some of the rise in inequality, but essentially that’s not the case,” Zucman told me.
Finally, Zucman’s analysis could give weight to progressive arguments for a deep structural economic overhaul. Even Joe Biden’s plan, which would raise corporate tax rates and return top marginal income tax rates to where they were before President Trump’s tax cuts, is surprisingly progressive, a sign of how much this debate has shifted.
Meanwhile, Warren has proposed a tax on extreme wealth. And Sen. Bernie Sanders (I-Vt.) has offered an even more ambitious wealth tax, plus a proposal to boost top income tax rates far more than any other rival.
The larger context for this debate is that real-world take-home income has positively exploded at the very top, even as it has barely budged for the bottom half — the sum total of two separate but intertwined stories that have unfolded over the decades.
“You have two trends reinforcing each other,” Zucman told me. “There has been the rise in market income inequality — the rise in pretax income inequality. At the same time, the tax system has become much less progressive at the top of the income distribution.”
Zucman’s bottom line: “The U.S. tax system is slightly progressive at the bottom and in the middle of the distribution, and then it becomes regressive at the very top.”
How to change this is a debate progressives will relish. These new findings should help their case.
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