It’s not every day a wonky tax proposal becomes the political rallying cry for a generation of activists.
At rallies around the country, crowds of thousands have cheered on Democratic presidential candidate Elizabeth Warren as she describes how her ambitious wealth tax proposal will work.
“It’s ti-i-i-me for a wealth tax!” the senator from Massachusetts shouts, with a hint of sports announcer in her voice.
“Two cents! Two cents! Two cents! Two cents!” the crowd chants back.
Then she launches into the part of her stump speech explaining how everything will work: All it is is a 2-cent tax on fortunes exceeding $50 million. That first $50 million? “You’re in the clear,” she says. For dollar number 50 million and 1, “you pitch in 2 cents, and 2 cents for every dollar after that.”
“Just 2 cents,” she adds for emphasis.
And according to Emmanuel Saez and Gabriel Zucman, the two economists who helped draft Warren’s plan, those pennies could add up to trillions in federal revenue.
“Saez and Zucman, and then ultimately Warren as the messenger, have figured out a way of framing what we really ought to do — raise taxes on the rich — in an attractive way,” observed University of Chicago Law School professor Daniel Hemel.
It used to be that Republicans ran on cutting taxes and Democrats fought among themselves to be the ones who wouldn’t raise taxes by much, Hemel said. Now, it’s not just Warren, but virtually all the Democratic candidates who are proposing to raise taxes significantly.
“That’s a shift in the debate,” according to Hemel.
For their work in sparking a spirited debate on wealth inequality in the United States through their research, and reshaping the political and academic discussion around ways to address that through the tax system, Tax Notes Federal has selected Saez and Zucman as co-Persons of the Year for 2019.
The Team
Saez and Zucman first met when the latter was a PhD student at the Paris School of Economics. Before long, Saez invited Zucman to do postdoctoral work at the University of California, Berkeley, where he’s been a professor of economics since 2002.
It was during that postdoctoral period from 2013 to 2014 when Saez and Zucman began work on estimating the wealth distribution in the United States, which Saez says underlies many of the ideas and scoring of the wealth tax.
Saez and Zucman are under no illusions that they invented the wealth tax, and they insist they’re not blind to the flaws that have doomed other countries’ wealth tax regimes. More than a dozen countries, mostly in Europe, have experimented with a wealth tax, but most of those experiments are widely deemed failures. Just three countries still retain a wealth tax.
But Saez and Zucman are adamant that the European experience does not have to be the American experience. The United States at one time was a “beacon of tax justice,” with one of the most progressive tax systems of any democracy on the planet, they say, and they’re optimistic it can be that once again.
The pair say they want policymakers and the public to think big and to cast off the conventional responses about what seems possible or practical. “The notion that external or technical constraints . . . make tax justice idle fantasy does not withstand scrutiny,” they wrote in their book The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, released this fall.
“When it comes to the future of taxation, everything is possible,” they wrote. Perhaps even a wealth tax.
The Thought Process
“I’ve been thinking about it for a long time,” Zucman said of the wealth tax, noting that he wrote his master’s thesis in 2008 on whether and how the French wealth tax was driving wealthy individuals to expatriate and avoid the tax.
“The French, and more broadly the European, experience with wealth taxation — it’s not a big success, frankly,” Zucman told Tax Notes. But the problems that led to those failures are not inherent to the wealth tax idea itself; rather, they’re the result of poor choices, he insisted.
Saez has been closely associated with research in the area of wealth inequality for nearly two decades. He’s collaborated with the renowned French economist Thomas Piketty on income distribution research since the early 2000s, and serves as the director of Berkeley’s Center for Equitable Growth.
Piketty had proposed in his seminal 2013 book, Capital in the 21st Century, the “very utopic idea” of a global wealth tax, and the book received such widespread attention that Saez says it got him thinking about what a U.S.-based version of the tax might look like in more practical terms.
David Gamage, a professor at the Indiana University Maurer School of Law, said that while he was presenting a paper at Berkeley on the taxation of wealth, Saez grew excited upon hearing Gamage propose a wealth tax.
“I remember him saying, ‘Piketty has been arguing in favor of a wealth tax, and you give good reasons for why this makes sense!’” Gamage recalled, noting that this was just before the English translation of Piketty’s book was released, drawing worldwide attention.
For Saez and Zucman, the enactment of the Foreign Account Tax Compliance Act in 2010 was a game-changer, in which the United States led the charge on global financial transparency and other countries soon followed suit.
That example showed that “tax evasion is not a law of nature, it’s a policy choice,” according to Zucman. “If we think hard about implementation, about how to make taxes work, then actually a wealth tax is doable,” he said.
The pair’s research was the final factor that led them to prescribe a wealth tax to address what they consider one of society’s ills: the increasing and staggeringly high concentration of wealth among the superrich.
“The natural and straightforward answer to this dramatic increase in wealth concentration is obviously a wealth tax,” Zucman said.
Role Play
Both Saez and Zucman are economists, and they describe their research as a highly collaborative effort.
Nonetheless, each plays to his own strengths. Zucman has a knack for writing in a way that a broad audience can understand, Saez said, while he described himself as “more of a classical academic” focused on crunching numbers and, in particular, preparing the computations underlying an online tool that allows the public to simulate various tax scenarios.
“I don’t do Twitter,” Saez added.
Zucman does use Twitter, and frequently. On any given day, he can be found posting articles that he has written or co-written, offering commentary on the latest bit of economic news, or responding to critics — often with no shortage of internet-appropriate sarcasm.
“‘It’s completely impossible to value assets that are not listed,’ say financiers whose day-to-day job is to value assets that are not listed,” Zucman sniped in a November post responding to critics who say wealth valuation challenges would sink a wealth tax.
“I think it’s important when you’ve found something that you think is relevant to the public, like a research finding about wealth inequality, for instance, to reach out to a broader audience,” Zucman said, explaining his Twitter propensity.
The public, for its part, has responded positively, and not just Warren supporters. Polls have consistently shown that a large majority of voters, including Republicans, view Warren’s wealth tax proposal favorably.
Trekking the Campaign Trail
It should come as no surprise that two economists with big, bold ideas would be associated with the presidential candidates with the biggest, boldest ideas.
The Warren campaign contacted Saez and Zucman at the start of 2019 through Bharat Ramamurti, one of Warren’s top policy advisers. Over the next several weeks, the pair scored various versions of a wealth tax proposal and helped brainstorm some of the implementation details.
Warren’s proposal quickly surged in popularity, which led the campaign of Vermont Sen. Bernie Sanders to also reach out, requesting “something more radical than the first Warren wealth tax,” according to Saez. Sanders’s campaign then issued its own proposal in September, with higher rates and lower thresholds for the tax to kick in.
Even though Sanders’s campaign was late in proposing a wealth tax, it was actually the first to give the idea serious consideration, according to Saez. Four years before, during the 2016 presidential campaign, advisers from both the Sanders and Hillary Clinton presidential campaigns contacted the economists to explore the idea of a wealth tax, with the Sanders campaign going furthest down that road. Ultimately, however, both campaigns shelved the idea.
Saez and Zucman report that they have had conversations with campaign advisers for Democratic presidential candidates Pete Buttigieg and Tom Steyer, as well as the since-concluded campaign of Bill de Blasio. The pair also regularly stay in touch with campaign staffers, serving as a sounding board on a wealth tax or issues involving tax progressivity, although not in any official advisory capacity.
The attention Warren’s wealth tax proposal received initially blindsided Saez. “Tax geeks like myself are always a little bit surprised and happy when our ideas get discussed,” he said.
But in retrospect, Saez said, he realized that the wealth tax is something the broader public can easily understand. Proposing mark-to-market taxation of capital gains or eliminating stepped-up basis at death might be reasonable policy options, but “you’ve lost 80 percent of your audience if they’re nonexperts,” he said.
“A tax on people who have more than $50 million in wealth? That’s a pretty concrete thing,” Saez added.
Gamage, who also helped draft Warren’s wealth tax proposal in early 2019, observed that the proposal seems to have opened the floodgates to progressive tax policy ideas and research.
“Not in my lifetime have major, left-of-center political candidates proposed such ambitious tax reform proposals,” Gamage said.
Relatively recently even the far-left politicians were largely sticking to proposals with limited scope, like increases in income or capital gains tax rates, without doing the deep thinking that has become associated with a wealth tax or mark-to-market taxation to make those proposals work effectively, Gamage said. That’s no longer the case, he said.
Progressive Pushback
Saez and Zucman’s wealth tax and associated research may have captured the public’s attention, but not everyone in the progressive camp is thrilled.
“I think for progressives to invest their energy in a proposal that the Supreme Court has a better than 50 percent chance of declaring unconstitutional, that has very little chance of passing through the Congress, whose revenue potential is extraordinarily in doubt — for that to be the defining element in the progressive agenda in the U.S., it seems to me is to potentially sacrifice an immense opportunity,” former Treasury Secretary Lawrence Summers declared at an October 17 debate on the wealth tax hosted by the Peterson Institute.
Summers took issue with Saez and Zucman on multiple fronts: He questioned the premise of using tax policy to combat wealth concentration as a means of contributing to a more just society; argued that their underlying research on wealth distribution was “substantially inaccurate and substantially misleading”; and feared that a big, shiny new proposal could distract from more pragmatic, achievable solutions to ensuring wealth doesn’t escape taxation.
“There are better ways to be much more progressive,” said Summers.
Hemel said he is delighted with the attention the wealth tax has received this year, insofar as it has drawn attention and widespread public support for raising taxes on the wealthy.
“If what ultimately emerges from this process is a Democratic standard-bearer who’s talking about top tax rates in the high 40s or low 50s but no wealth tax — and that seems moderate relative to what Sanders and Warren are talking about — then this is potentially super-productive,” Hemel said.
However, there’s a risk that the progressive base will be so tied to the idea of a wealth tax that it won’t accept a post-election pivot to an alternative, Hemel warned.
“I’m concerned that selling the American people on one thing and then doing another is not a recipe for a durable progressive coalition,” Hemel said.
Hemel also worries that a wealth tax would run straight into a constitutional crisis. “A wealth tax that is struck down raises exactly zero dollars and redistributes exactly zero dollars,” he said.
Zucman said he isn’t bothered by friendly fire from the left. A wealth tax is a new idea in the U.S. context, and having a debate about it is both good and healthy, he said.
The criticism has yet to deter him from pressing for a wealth tax. “I think many people are rushing to reach a dramatic conclusion,” while ignoring new research or developments in areas like valuation, Zucman said.
Ultimately, according to Zucman, there’s precedent in U.S. history for a brand-new tax regime: the federal income tax. The same arguments against a federal income tax — that it would be unconstitutional, unenforceable, and too heavy a lift — are now being levied against a wealth tax, yet the income tax managed to become law and remains a success over a century later, he said.
A wealth tax may not happen immediately, but “the notion that we can’t do anything and the political constraints that have existed over the past decades are never going to change, are always going to be the same — that notion strikes me as way too naïve and shortsighted,” Zucman said.
Thanks, GOP
Until 2019, a wealth tax wasn’t exactly a top subject of discussion among legal minds in America.
Gamage said Warren deserves a lot of credit for merging a wonky policy idea with creative messaging that gets the point across in an easy-to-understand way. But, he added, Republicans also deserve a lot of credit for indirectly making a wealth tax seem feasible.
The mind-set among academics, politicians, and policymakers for decades was that the only way to do comprehensive tax reform is through bipartisan compromise, 1986-style. But according to Gamage, Republicans blew that thinking away with the Tax Cuts and Jobs Act, when they pushed major tax cuts and structural changes through Congress, particularly on the international side, on a purely partisan basis.
“I think that has created an appetite for ambitious left-of-center tax reform this political cycle that I haven’t seen in my lifetime,” Gamage said.
Progressive-minded academics are suddenly starting to think big, not just with the hope of making a splash in intellectual circles, but “with the thought that this might actually influence policy,” Gamage said.
That’s precisely the type of thinking propelling Saez and Zucman.
“We’re not just doing research for a small circle of academics,” Zucman explained. “It’s my philosophy, my vision of the social sciences and economics in particular, that the reason we’re studying economics is to contribute to better public policies.”
Runners-Up
Eric Hylton’s Long Arm of the Law
IRS Commissioner Charles Rettig promoted Eric Hylton from his position as deputy chief of the Criminal Investigation division to commissioner of the Small Business/Self-Employed Division as part of the former’s commitment to addressing tax fraud.
Hylton’s move from CI to SB/SE was rare enough to attract attention when it was announced. Practitioners immediately saw the manifestation of Rettig’s interest in enforcement and concern over the small portion of CI’s workload coming out of fraud referrals by examiners.
As soon as he took over SB/SE, Hylton wasted no time confirming his goal of strengthening the working relationship between civil and criminal enforcement personnel at the IRS. He brings to SB/SE his interests developed at CI in both data analytics and cryptocurrency reporting.
Nina Olson Leaves Big Shoes to Fill
After 18 years as head of the Taxpayer Advocate Service, Nina Olson stepped down at the end of July. Her departure was met with high praise for her many years of service from the leadership at Treasury and the IRS.
Rettig lauded Olson’s dedicated service, and Treasury Secretary Steven Mnuchin called for a replacement who matches her character. The Urban-Brookings Tax Policy Center praised her tenacious advocacy on behalf of low-income taxpayers.
Olson was known for her blunt approach, and her reports to Congress on the failings of the IRS were often unsparing. In her most recent and final report, she said that IRS taxpayer service was “woefully inadequate.” She criticized the administration’s budget proposal that would build up tax law enforcement at the expense of its already “remarkably poor customer service,” which she said was “tantamount to robbing Peter to pay Paul.”
In her final blog post as national taxpayer advocate, she continued to push for improved services. Among her last suggestions were excluding taxpayers with income below their allowable living expenses from the private debt collection initiative, providing training for taxpayer-facing employees on the Taxpayer Bill of Rights, using an “economic hardship indicator” to improve collection selection strategies, and creating more transparency in chief counsel guidance.
Olson said she would be moving on to become executive director of the Center for Taxpayer Rights. Longtime Taxpayer Advocate Service staffer Bridget Roberts was named the group’s acting head after Olson’s departure.
Chip Harter’s Juggling Act
It’s been a busy year for Lafayette G. “Chip” Harter III. Harter, Treasury deputy assistant secretary for international tax affairs, has been a key player in fleshing out major pieces of international tax reform from the TCJA through thousands of pages of regs. This included finalizing guidance on the transition tax, the foreign tax credit, the base erosion and antiabuse tax, and the global intangible low-taxed income provision.
The final guidance reflects a balance between accommodating numerous taxpayer comments and Treasury concerns.
Harter opened the year trying to find a consensus position between the United States and other countries participating in OECD-led negotiations on a common, two-pillar framework to address the tax challenges of the digital economy. Under pillar 1 of that work, which focuses on revised nexus and profit allocation rules, the OECD has proposed an approach that would allocate more residual profits of consumer-facing businesses to market jurisdictions.
Agreement, however, has been elusive and has led to a trade fight with France.
As part of his efforts to find a multilateral deal with the OECD, Harter has also been tasked with working on a pillar 2 plan for ensuring a minimum level of taxation on international transactions.
Meanwhile, in addition to finalizing rules, Harter has been working to roll out temporary or proposed regs on the foreign-derived intangible income provision, rules limiting the availability of the dividends received deduction, more rules on the BEAT and FTCs, guidance limiting the fallout from changes to the downward attribution rule, and a highly anticipated high-tax exclusion from the GILTI regime.