On Taxation of the 'Rich' vs. 'Workers', NYT Redefines Gullible
On Friday, the New York Times ran an Op-Ed titled “How to Tax Our Way Back to Justice”, by Emmanuel Saez and Gabriel Zucman, two economists from the University of California. The subtitle of the piece proclaims: “It is absurd that the working class is now paying higher tax rates than the richest people in America.”
The professors have concluded that for the first time in history the super-rich now pay a lower “tax rate” than the working class. This contention will undoubtedly be accepted, without any questioning of its validity, and trumpeted across the nation by newspapers, websites, pundits, and presidential hopefuls.
The problem with all of this is that the professors’ analysis is completely flawed, as it is based on faulty logic, fallacious arguments, analytical sleights-of hand, and cherry-picked data. It is abundantly clear that Professors Saez and Zucman concocted this flawed analysis with a goal of furthering an ideological agenda, rather than to seek and speak the truth about U.S. tax policy. What is truly absurd is that this piece is getting the fawning, uncritical attention that it has.
Ironically, the two professors laid out the elements of their flawed thinking for anyone with a discerning eye and rudimentary knowledge of tax matters to see, via a graph they included in their piece, which can be found here, and also below. Please take a moment to digest it before reading on.
In viewing the graph, the “total tax rate” of a Top 400 earner (23.0%) is lower than that of a “working class” taxpayer with taxable income of $25,000 (24.5%), an apparent “tax rate” advantage of 1.5% points. It is this comparison that the authors claim proves their assertion that “the working class is now paying higher tax rates than the richest people in America.”
Of course, a closer look at the graph shows that payroll tax is the tax category in which the Top 400 taxpayer has the largest tax rate advantage versus the working class taxpayer with taxable income of $25,000. The working class taxpayer’s payroll tax burden is 11.7 % of taxable income. The payroll tax burden for a Top 400 taxpayer is only 0.2%, a difference of 11.5% points. On the surface, this may seem unfair, but beyond simply being a function of how payroll taxes are assessed (and benefits received), this difference is in no way reflective of any kind of tax “injustice”, as the authors imply. Here’s why.
Payroll taxes are paid by taxpayers to fund our two major entitlement programs, Social Security and Medicare. While these taxes do not fund a specific taxpayer’s future benefits, taxpayers pay them in order to become eligible to receive future Social Security and Medicare benefits. In essence, they are paid to buy a future “ticket on the bus”, and, in the case of Social Security, the amount of benefits received is strongly correlated with the amount of tax paid.
The Social Security tax is assessed at a rate of 6.2% on a capped amount of gross wage income each calendar year ($128,400 of wage income in 2018). Other sources of income (interest, dividends, business income, and capital gains) are not subject to the Social Security tax. Hence, the most anyone paid in Social Security taxes in 2018 was $7,961.
Someone making $37,000 in gross wages (before deductions) in 2018 paid $2,294 in Social Security tax (Social Security tax is paid on gross wages, not taxable income). Applying the $12,000 standard deduction against gross wages yields taxable wages of $25,000 (the authors used taxable wages as the denominator in compiling their “tax rate” analysis). Thus, the effective Social Security rate (for someone earning $37,000 in gross wages) in the authors’ analysis (with taxable income of $25,000 as the denominator) is 9.2%.
I estimate that the average taxable income for a Top 400 earner was roughly $350 million in 2018. Assuming that at least $128,400 of this income was wage income (a good assumption), someone with taxable income of $350 million paid Social Security taxes of $7,961 in 2018, or .003% of their total taxable income. In the eyes of the authors, this ~9.2% Social Security tax rate differential (between the lower-paid earner’s rate and the Top 400 earner’s rate) is indicative of some sort of “tax injustice”. They are profoundly wrong.
What the authors conveniently forgot to mention (and what progressives always forget to mention when discussing this topic) is the fact that Social Security benefits are capped as well. This skews the Social Security benefit comparison in favor of lower-paid workers.
Upon retirement, the lower income taxpayer noted above, making the equivalent of $37,000 in gross wages per year (inflation adjusted) over the course of his/her career, will receive a monthly Social Security benefit of roughly $850, or $10,200 per year. This annual Social Security benefit amount works out to be 28% of his/her pre-retirement gross income.
A Top 400 taxpayer, who had taxable annual income of $350 million (from all sources) on average over the course of his/her career, can expect to receive a monthly Social Security benefit of $3,000 per month, or $36,000 per year (remember, Social Security benefits are capped). This annual benefit amount represents 0.01% of this individual’s annual pre-retirement income.
Does the percentage difference between the working class taxpayer’s Social Security benefit (28% of pre-retirement income) and the Top 400 taxpayer’s Social Security benefit (0.01% of pre-retirement income) highlight some sort of structural benefit unfairness in favor of the working class taxpayer? Of course not! For the same reason, the 9.2% point higher effective Social Security tax rate paid by the working class taxpayer (as noted above, using the authors’ methodology) is not indicative whatsoever of any tax rate “injustice”. This difference is a mirage caused by looking only at Social Security tax rates without taking into account Social Security benefits.
The Medicare tax (the other component of payroll taxes) produces the same kind of mirage, albeit at a lower magnitude.
As such, the 11.7% point “tax rate” advantage attributed by payroll taxes allegedly enjoyed by Top 400 earners, as noted in the table above, is a complete and total fabrication. It simply does not exist. When payroll taxes are excluded from the analysis (as they clearly should be), the “tax rate” of the person having taxable income of $25,000 drops to 12.8%. For the Top 400 earner, it drops to 22.8%. If you’re keeping score, the Top 400 earner now has a “tax rate” a full 10.0% points higher than the earner with $25,000 of taxable income.
There is more analytical deception to expose.
According to the authors, the second largest “tax rate” privilege enjoyed by the Top 400 vis-à-vis the Bottom 50% is in “consumption taxes”. Included in this category are sales, gasoline, and other excise taxes. Yet again, the authors play the “percentage” game to gin up the effective tax rate of working class taxpayers, as displayed in the above graph.
Working class earners pay a higher percent of their taxable income on these taxes simply because they spend a higher percent of their income on goods and services upon which these taxes are assessed. This is absolutely not indicative of any “tax injustice”, as the authors imply. To be clear, Top 400 taxpayers pay the same sales tax percent (measured as a percent of the cost of the item purchased), just as they pay the same gasoline tax per gallon, and the same hotel tax per night, and on and on. And they pay much more (in $ terms) over the course of a year than a working class taxpayer does.
If looked at in this (correct) way, the authors’ inclusion of consumption taxes in this analysis is completely wrong. If consumption taxes are carved out of this analysis (as they absolutely should be) along with payroll taxes, the effective tax rate of the working class earner with adjusted gross income of $25,000 is 3.7%. For a Top 400 earner, the effective rate drops to 20.5%.
The scorecard now shows that the Top 400 earner now has a “tax rate” a full 16.8% points higher than the earner with $25,000 of taxable income.
We’re not done yet exposing the flaws in this analysis.
The authors’ inclusion of residential property taxes in their analysis is similarly flawed, simply because lower income taxpayers pay a higher percent of their disposable income on housing. To be clear, Top 400 taxpayers are subject to the same property tax rates (as a percent of the assessed value of their property) that working class property owners are subject to, and Top 400 taxpayers pay much more in property tax (in $ terms). To ascribe some form of tax “injustice” to this situation, as the authors do, is completely incorrect and fallacious.
If property taxes are carved out of this analysis (as they absolutely should be) along with payroll taxes and consumption taxes, the effective tax rate of the working class earner with adjusted gross income of $25,000 is 2.3%. For a Top 400 earner, the effective rate drops to 20.4%.
If you’re still keeping score, the scorecard now shows that the Top 400 earner now has a “tax rate” a full 18.1% points higher than the earner with $25,000 of taxable income.
It is said that some peoples’ ideologies are derived from facts, and that some peoples’ “facts” are derived from their ideologies. It is clear that Professors Saez and Zucman fall into this latter category. They have compiled a convoluted and intellectually flawed “analysis” to support their view that taxes need to be raised dramatically on upper income earners. They should be firmly criticized for doing so.
Criticism should also be directed at the sympathetic news outlets, pundits, and politicians who will accept the authors’ conclusions without any critical review and parrot this nonsense simply because it coincides with their worldviews and narratives. Where is their critical thinking?
Taxation is an issue that should be the subject of spirited, honest, and healthy debate between competing ideologies. By all means, let's argue about tax policy and the merits of raising or lowering taxes on taxpayers at all income levels as part of this debate. But please, let's not resort, as Professors Saez and Zucman have done, to putting forth disingenuous and flawed analyses and commentary in support of our respective positions. The American electorate deserves better.