“Tax Competition Is Not a Principle Set in Stone”

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#ZEWBookTalk with UC Berkeley Associate Professor Gabriel Zucman

UC Berkeley Associate Professor Gabriel Zucman in dialogue with ZEW President Professor Achim Wambach.

Do all Americans pay a fair amount of tax? Not at all. On the contrary, there is a huge disparity in the taxation of average workers and the taxation of the wealthy, especially the super-rich, according to UC Berkeley Associate Professor Gabriel Zucman. On 10 March 2021, the economist presented his new book ‘The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay’ virtually at ZEW Mannheim, which he wrote together with Emmanuel Saez. Zucman is also leading the newly established European Tax Observatory that has commenced its work in 2021. ZEW President Professor Achim Wambach moderated the third edition of #ZEWBookTalk.

“How much do the various income groups pay in tax in the US?” This was the first question that Gabriel Zucman asked at the start of his talk. Since the tax reforms introduced by former US President Donald Trump, billionaires in the United States have been paying lower tax rates than average workers for the first time. The effective tax rate of the 400 richest US Americans is currently 23 per cent, which includes both corporate tax and real estate tax. By contrast, the working class and middle class each pay a tax rate between 25 and 30 per cent. “Contrary to popular belief, the US tax system is not currently progressive. In fact, there is a flat tax that has a regressive effect on the super-rich,” explains Zucman to around 200 viewers streaming the event live.

Why are the super-rich in the US paying such a small amount in taxes? On the one hand, this is due to the fact that capital income is only taxed at a very low rate. On the other hand, the wealth of the super-rich increases almost exclusively through the growth in the value of their stocks and company shares, and this growth remains income tax-free in the US. Tax on wages has, however, increased amongst average workers over the years. In addition to this, consumption taxes place a much heavier burden on low-income earners than on high earners. Zucman is particularly critical of subtle decline of corporate taxation in the US. “While the share of corporate income tax in state tax revenue has fallen drastically since the 1950s, the share of personal income tax has remained largely the same.”

What does a modern and democratic tax system look like?

In the further course of his talk, Zucman elaborated on ideas for a fair and democratic tax system to counteract excessive accumulation of wealth among the rich. “A great amount of wealth comes with a disproportionately high amount of influence and power, which can be detrimental to a democracy.” First of all, Zucman proposed that globalisation be linked with tax justice. A plan must be developed to stop corporate tax evasion and destructive tax competition between countries, and not only in the US. “International competition in which companies are lured with low corporate tax rates is often depicted as being unavoidable within the scope of globalisation. This is not the case. A negative tax competition is not a principle set in stone.” Future negotiations, such as trade agreements, would have to contain a tax agreement by all means. It would be possible, for example, to set a lower limit for corporate taxation of 25 per cent as a precondition for further trade liberalisation. At the same time, sanctions could be enforced as defence mechanisms against non-cooperative tax havens. Switzerland is a perfect example in showing how this can work.

In view of the US tax system, Zucman called for a return to a more progressive form of taxation as was the case beforehand. The development of the last 40 years, in which the rich have become increasingly rich and the poorest income earners increasingly poor, has to be counteracted. According to Zucman, a modern and democratic tax system has to rely on increased taxation of wealth. The aim should not only be to curb extreme wealth growth, but also to generate revenue for the welfare state in the US. This could be achievable through a tax on wealth of two per cent for all US Americans with assets amounting to more than 50 million US dollars. For all those with assets of more than one billion dollars, the taxation would be three per cent. “Such a wealth tax of two to three per cent can stabilise the disparity in wealth in the US at a level last seen in 1980,” says the UC Berkeley economist.

The subsequent discussion with ZEW President Achim Wambach focused, amongst other things, on the question of whether or not international tax competition is necessary, as some countries have little to offer besides low taxes. Additionally, there was a debate on what advantages Europe would have regarding the crackdown on tax evasion and profit shifting to tax havens, as well as what a fair form of taxation could look like and whether tax on wealth could also be a sensible option for Germany. Zucman concluded by saying that there are no external or technical constraints that make tax justice impossible. Tolerating tax evasion is rather a political decision. There are, however, a wealth of possible options which could lead to a fairer form of taxation. We would only have to choose one of them.

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