Q: You also have a broader definition of income, right? You’re saying billionaires get certain income that they’re not reporting to the Internal Revenue Service.
Zucman: The very rich can earn a lot of economic income while reporting very little. One striking example is Warren Buffett. He is worth $80 billion, and his true economic income per year is something like 6% of that, close to $5 billion. And yet what he reports in his tax returns -- and we know this because he discloses this himself -- is taxable income on the order of $10 million. The reason is that he owns Berkshire Hathaway, and he instructed the company not to pay dividends. So the only taxable income he gets is when he sells a few shares and pays taxes on this realized income. That’s a rate of essentially 0%. Mark Zuckerberg and Jeff Bezos are in the same situation. There are also billionaires who have high tax rates, but some have very, very low rates.
Q: How did we get here?
Zucman: The U.S. used to have one of the most progressive tax systems in the world. From the 1930s to 1981, top marginal income tax rates averaged close to 80%, and were as high as 91%. The corporate tax rate was 50%, and the top estate tax rate was close to 80%. When you say that, people often answer that there were so many loopholes that nobody paid these rates. In the book, we recompute the statistics all the way back to 1913 and find that, no, in actual fact the effective tax rate on the rich was really very high in the middle of the 20th century. For the top 0.1% the effective tax rate was as high as 60%, and for the top 400 Americans as high as 70% in the early 1950s, when the corporate income tax generated as much revenue as the individual income tax, about 7% of national income.
Today it’s 1%. And the corporate tax is the main tax paid by the very wealthy because, taking again my example of Buffett, even if he instructs his company not to pay dividends, it has to pay the corporate income tax. It’s a kind of minimum tax on the affluent. The decline of the corporate tax is the main driver in the decline of tax progressivity.
Q: What happened to corporate taxes in the U.S.?
Zucman: What’s happened is a big increase in tax avoidance, the rise of profit shifting to tax havens. Today U.S. multinationals book 60% of their non-U.S. profits in low-tax places -- in Bermuda, Switzerland, the Cayman Islands, Ireland -- where they face effective tax rates of between 0% and 5%.
Q: The OECD recently proposed rules that would change how profits are allocated between countries. What do you think?
Zucman: It’s a step in the right direction, but missing a very important thing: What’s the tax rate to apply to these profits? It’s high time for these international organizations to talk about rate harmonization and minimum country-by-country taxes. In the book, we say corporate taxes should be taxed at a minimum rate of 25% in each country, to end this race to the bottom. If all countries had the same tax rate, corporations would go where the workforce is productive, where infrastructure is good, where people are happy at work and qualified. Countries would compete positively, not negatively like today.
Q: You define the “working class” in your inequality research as the bottom half of the U.S. by income. How have they been doing?