Elizabeth Warren and Bernie Sanders have the same two outside advisers to thank for shaping their wealth tax proposals: University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman.
Each Democratic presidential candidate wants to tackle wealth inequality by raising trillions of dollars in revenue from taxing the wealth — in addition to the income — of millionaires and billionaires, an idea that is backed up by research from Saez and Zucman.
There are competing explanations for the rise in inequality. Those on one side argue that wealth concentration is natural as a result of globalization, technology gains, and economic growth, which give enormous rewards to the smartest, innovative, and most hardworking people. Drastically increasing tax rates, they say, would discourage innovation and hurt the economy.
The other camp sees rising inequality as unfair, immoral, and a threat to society.
Saez and Zucman are firmly in the second camp.
Saez, 46, and Zucman, 32, are both originally from France and have each worked in the past with Thomas Piketty, the famous French economist whose research on wealth and income inequality made him a best-selling author. By using new sources of data, such as individual tax records, Piketty reshaped the debate about inequality and wealth taxes. Piketty’s central argument in his book Capital in the Twenty-First Century, published in 2013, is that inequality is a central feature of capitalism and, if not checked, could rise inexorably.
In the United States, Saez and Zucman have assumed the mantle of leading exponents of Piketty-style economic policies. The pair have researched tax havens, the government’s lack of taxation of wealth, and how those factors affect wealth distribution overall.
Zucman, in a May profile that described him as The Wealth Detective Who Finds the Hidden Money of the Super Rich, said that he took up the cause of exposing economic inequalities during an internship at a French brokerage firm, when he was tasked with writing commentary for clients about changes within the global economy. He had just finished his education at the Paris School of Economics, where he’d studied under Piketty.
He came across data that showed billions of dollars moving from large economies into smaller ones, such as Bermuda, the Cayman Islands, Hong Kong, and Singapore. Such places have been known for hosting “offshore accounts” for big corporations and the wealthy. Zucman thereafter became a critic of the use of tax havens by corporations and the rich. He gained prominence in public policy debates on tax evasion after the Panama Papers revelations.
Zucman’s research has focused on quantifying phenomena like tax evasion and determining what policy failures might be responsible. He is also known for offering remedies for tax evasion through the proper evaluation and taxation of wealth. Saez has gained prestige through research on income inequality and tax policy, which helped him become a MacArthur Fellow in 2010. In 2009, he won the prestigious John Bates Clark Medal, awarded to the American economist under the age of 40 who is judged to have made the most significant contribution to economic thought and knowledge.
They argue that globalization doesn’t work if it results in lower taxes for the rich and for multinational companies and higher taxes for retirees and small businesses left behind. They also believe economic inequality is harmful for democracy.
“I think that extreme inequality certainly poses a very serious threat for democratic institutions. It’s hard to say what really is too extreme,” Zucman said in an interview with the University of Chicago’s Stigler Center.
Zucman points to the reform of banks in Switzerland and elsewhere that used to be offshore destinations for tax evasion in the past decade as evidence his ideas can work. He says that initially there was much skepticism that the global financial system could actually reduce tax evasion by forcing banks to send information to tax authorities in other countries. Now, “that’s the law,” Zucman told the Stigler Center.
The two economists have also referred to previous periods of relative economic equality in the U.S. for examples of the kind of policy regimes they would like to see, noting the fact that the top income tax rate was above 90% in the late 1950s and early 1960s. Saez and Zucman have also been publicly supportive of Rep. Alexandria Ocasio-Cortez’s proposal of a 70% tax rate for incomes above $10 million.
“The U.S. used to see itself as much more equal than Europe in the 19th century. That’s what Tocqueville, when he came to the U.S., he celebrated the American egalitarian ethos in some sense,” Zucman told the Stigler Center.
Warren and Sanders are aiming for a dramatic reduction in inequality using the wealth tax idea boosted by the two economists.
Sanders’ wealth tax plan would would raise a $4.35 trillion over 10 years, Saez and Zucman estimated, to pay for programs such as “Medicare for all” and universal child care. It would apply to households with a net worth above $32 million, which is about 180,000 households — the top 0.1% — starting at a 1% tax rate and rising to 8% for married couples with more than $10 billion in wealth.
In contrast, Warren’s plan would raise approximately $2.75 trillion over a decade, also by Saez and Zucman’s estimates, by levying a 2% wealth tax on assets worth more than $50 million, and a 3% tax on fortunes worth more than $1 billion. Saez and Zucman reckon the tax would hit approximately 75,000 families.
Since they advise both campaigns, Saez and Zucman compared both wealth tax proposals in a recent analysis.
In 2018, Bill Gates was worth roughly $97 billion. If Warren’s tax had been in place since 1982, Gates would have been worth just $36.4 billion, according to Saez and Zucman. Under the Sanders tax plan, Gates’ net worth would be a comparatively tiny $9.9 billion.
The concept of a wealth tax has generated some controversy among economists.
For instance, Larry Summers, the former president of Harvard University and economic adviser to President Barack Obama, has called Saez and Zucman’s estimates for the revenues generated by the wealth tax “naively high.”
One possibility is that, instead of paying the tax, the über-wealthy would strategically give their money away to charities, reducing the tax base. “It seems important to account for the fact that the wealthy (and their tax planners) will inevitably be motivated to limit tax liability,” Summers and another professor argued in June.
More generally, other economists say that it would be difficult for the government to accurately assess the value of the assets of the rich, given the ability of wealthy families to hire tax lawyers to engage in complicated planning to avoid levies. Warren’s wealth tax plans “work very poorly in practice,” Columbia University’s Wojciech Kopczuk said. “There is a reason why many countries get rid of wealth taxes.”
So far, at least 15 European countries have tried wealth taxes. All but four, though, have repealed them, most recently Saez’s and Zucman’s homeland of France.