No, the Rich Don’t Pay Less In Tax Than the Working Class

    By Andrew Wilford for Real Clear Markets

    Yet again, progressive darling and wealth tax crusader Gabriel Zucman has received a featured spot in the New York Times opinion section. Yet again, Zucman is using this soapbox to repeat one of his favorite assertions: that the rich now pay less tax on their income than the working class. And yet again, Zucman’s claim is just not accurate.

    In 2019, Zucman and his colleague Emmanuel Saez published The Triumph of Injustice, a book outlining their claim that the rich pay less in tax than the poorest Americans. They were subsequently feted by the largest and most prominent media outlets, their counterintuitive arguments accepted uncritically by publications in which soaring income inequality and a tax code skewed towards the rich had become articles of faith.

    In reading these glowing regurgitations of Saez and Zucman’s claims, one would have little idea that this new data clashed directly with conventional analyses. While the French economists received all the attention, nearly all other analyses continued to churn out the far less interesting result that the rich paid far more in tax than the poorest Americans.

    To begin with, it is important to understand that Saez and Zucman’s analysis represents an attempt to calculate the impact of all taxes, not just income taxes. Even they would not argue that the rich pay a lower income tax rate than the working class (though one may easily get that impression from reading headlines on their research). The most recently released IRS data, covering tax year 2021, shows that the top 1 percent paid nearly 46 percent of all income taxes, while the bottom 50 percent paid just 2.3 percent.

    Nevertheless, the way that Saez and Zucman calculate income tax rates is a major reason for their divergence from the traditional consensus. The tax code contains provisions known as refundable tax credits, credits that reduce low-income Americans’ taxable income, such as the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC). If the value of these refundable credits exceeds the taxpayer’s taxable income, they can receive the remainder in the form of a tax refund even when they owe no federal income taxes.

    These credits represent a major element of what makes the American tax code so progressive. In large part because of these refundable credits, over 40 percent of Americans pay zero or negative income taxes every year. Ignoring them makes as much sense as ignoring the top income tax bracket. But because they work against the narrative Saez and Zucman are pushing, they deem them to be “transfers” akin to welfare payments and exclude them from their analysis.

    After all, if Saez and Zucman are willing to ignore the ways that the government already does intervene to redistribute wealth from the rich to the poor in their analyses of income inequality, no amount of wealth redistribution could change their results. Either the redistribution they advocate for is impactful and should be factored in, or it is meaningless and is not worth doing in the first place.

    That’s not the only way that Saez and Zucman pick data to match the conclusion that they want to reach. While a tax may technically be paid by one party, the “incidence” of the tax is defined by the party that is negatively affected by it. For instance, the payroll tax is technically split evenly between employees and their employers, but the incidence of the entire tax falls upon the employee.

    One of the more hotly debated areas of tax incidence concerns corporate income taxes. While all agree that much of the burden of the tax falls upon shareholders, most analyses agree that at least some of the incidence of the tax falls upon labor. After all, higher corporate income tax rates reduce capital businesses have to invest in their workforce.

    The debate is a complicated one, but the important thing to understand is that while experts disagree on the exact percentage borne by labor, they almost universally agree that the number is not zero. The nonpartisan Congressional Budget Office, Congressional Joint Committee on Taxation, and the center-left Tax Policy Center assign 25 percent of the incidence of the corporate income tax to labor, while other organizations have the portion borne by labor even higher.

    Saez and Zucman, however, assume that the number is zero. Because the corporate income tax has steadily decreased over time, this results in more of a lower tax being apportioned to the wealthy and less to the working class. In other words, their assumption inflates their estimate of the working class’s effective tax rate, and reduces that of the wealthy.

    It’s worth noting that this conclusion directly contradicts Zucman’s own work from the year before the publication of The Triumph of Injustice. Zucman surreptitiously changed his methodology to assign none of the incidence of the tax to labor upon realizing that it no longer provided the conclusion that he sought. All of this paints a picture of an academic who starts with a desired result and then works backwards to find the data to match it.

    More sober analysis by Gerald Auten and David Splinter, economists at the Treasury Department and Joint Committee on Taxation respectively, finds that after-tax incomes have remained relatively steady over the decades. Unsurprisingly, few media outlets are clamoring to fit Auten and Splinter into their op-ed pages.

    It’s unfortunate that outlets like the Times are fostering an environment in which activist research is highlighted and celebrated while boring, level-headed research is ignored. But make no mistake: Saez and Zucman’s sensationalist claims should be taken with a whole truckload of salt.

    Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government. The preceding article originally appeared on May 14, 2024 at the Real Clear Markets website and is made available here for educational purposes only. This constitutes a ‘fair use’ of any such copyrighted material as provided for in Title 17 U.S.C. section 106A-117 of the U.S. Copyright Law.