Chicago Booth Review Podcast Is Wealth Inequality Overstated?

Hal Weitzman: Many economists would agree that inequality has risen in recent decades in many big economies, but that may be where the agreement ends. Measuring the trend is a contentious topic, and it’s more than just a methodological squabble. How severe one sees the problem tends to inform the type of policies proposed, from no change at all to a host of new taxes aimed at correcting the imbalance.

Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking academic research in a clear and straightforward way. I’m Hal Weitzman, and in this bonus episode we bring you a conversation between three heavyweight economists. In one corner is Emmanuel Saez of the University of California, Berkeley, whose research has been cited by US Senator Elizabeth Warren in her attempts to introduce a wealth tax. In the other is Chicago Booth’s Steve Kaplan, who argues that Saez overstates the gap between rich and poor. And the referee for this bout is Booth’s Luigi Zingales, who as well as being a professor of finance, is also the co-host of the Capitalisn’t podcast, and faculty director of the Stigler Center for the Study of the Economy and the State.

Saez is a world expert on inequality, and a frequent coauthor of two other economic experts on that topic, Paris School of Economics’ Thomas Piketty, whose 2013 book Capital in the 21st Century was that rarest of things, an academic book that becomes a bestseller, and Saez’s UC Berkeley colleague, Gabriel Zucman. You’ll hear Steve Kaplan refer to Zucman, as well as Booth’s Eric Zwick, another expert on measuring inequality and identifying its causes.

The conversation was hosted by the Stigler Center in 2020, and it encapsulates the spirit of open debate and rigorous discussion that is a hallmark of the academic culture at Chicago Booth. Now over to Luigi Zingales, Emmanuel Saez, and Steve Kaplan.

Luigi Zingales: OK. So Emmanuel will start by giving a short presentation. Then Steve will have a short rebuttal, and then we’re gonna have a real conversation among the three of us.

Please, Emmanuel.

Emmanuel Saez: Thank you. Thank you very much. It’s a delight for me to be here today to talk about, our work on inequality and taxes. So most of my academic life has been about putting together a series on inequalities, inequality and taxes. So with Piketty, we’ve documented the enormous rise in the share of income going to the top 1 percent. That has roughly doubled, from 10 percent around 1980 to about 20 percent today.

The counterpart of that is that the share of income going to the bottom 50 percent has dropped dramatically, you know, and the 10-point gains of the top 1 percent has been essentially lost by the bottom 50 percent. And so what that means, practically, is that in the United States, the bottom 50 percent is essentially being shut off from economic growth on a pretax basis. While the economy was growing, very little of that growth was going to the bottom 50 percent, whose income of more or less stagnated. So taxes play a fundamental role in regulating inequality. I mean, very obviously, you know, they are the ways the community puts together resources to then fund a number of transfers and public programs.

And so while inequality was soaring, tax progressivity was eroding in the United States. That is, few people in the public remember that, but the US is the country that pioneered very progressive taxation. It was the first country to really crank up income-tax rates during World War I. Then developed a very progressive estate tax, and for many decades, from the ’30s to around 1980, the US had perhaps the most progressive tax system in the world, with a very progressive individual income tax, a state tax, and a very large corporate tax.

What we document in the book is that that tax system was very successful in taxing the rich at very substantially higher rates than the rest of the population. That tax progressivity has eroded over time, starting in the 1980s, you know, with the Reagan administration until, you know, the most recent development, a big cut in the corporate tax under the Trump administration.

So that today, when you pile up all the taxes together at the state, local, and federal level, the US taxes system looks roughly flat in the sense that earned income groups pay something pretty close to the average economy wide, which is 28 percent. It’s slightly progressive, you know, from the bottom to the upper middle class. And then what we find is that at the very top, there is some regressivity. We estimate that today, the very richest Americans, the top 400—the billionaires described by Forbes magazine—are actually paying perhaps a slightly lower rate than people at the bottom. We estimate 23 percent.

And that’s because the current tax system is not effective at taxing the very rich, who make most of their income through profits of corporations. So Jeff Bezos, for example, his income are the profits of Amazon that accrue to him. The corporate tax is almost gone. So he doesn’t pay much tax there. Then, because he doesn’t need the money for his consumption, he doesn’t need to realize the individual income, the money can stay within Amazon, so he doesn’t have that much individual income relative to his true income. And that’s why the individual income tax is not good at catching his income. So that’s why we have that regressive tax system.

Now, what we say in the book is that nothing prevents us from restoring tax progressivity if we want to. That is, it’s often presented like with globalization, it’s become impossible to tax the rich. If there is one message we want to put forward in our book is that that view is wrong. Actually, if we want to, technically, it is possible to tax the rich effectively.

In the book, we [he and UC Berkeley’s Gabriel Zucman] make some proposals for the corporate tax, where currently the system is such that multinationals can very easily avoid taxes by reporting their profits through tax gimmicks and tax accounting gimmicks in low tax jurisdictions. That’s fixable.

The US has the data to see how much US multinationals underpay and could pretty easily collect the tax that those corporations don’t pay abroad. We think that’s essential because multinational corporations are the most visible winners of this globalized world. So the fact that they pay so little while incomes at the bottom are stagnating really gives a devastating image of capitalism that, in our view, is not sustainable.

Now, we also discuss the wealth tax that has been very visible in the public-policy debate as perhaps the most direct and effective way to tax billionaires because it goes directly after their stock of wealth that’s very visible at the top. You know, Forbes magazine is able to put together their wealth. So a world of renewed progressive taxation is possible. There’s no guarantee we’ll be there.

Now, we have in the political debate in the US, you know, the presidential candidates on the Democratic side are really putting together a tax proposals that are very radical relative to what have been discussed. So that’s the debate we are having and that’s why I’m happy to be here with you today to discuss this.

Luigi Zingales: Thank you very much. Steve.

Steve Kaplan: So. Very interesting. I agree with some of the things Emmanuel said, but there’ll be some places I disagree. So let me just be clear about the problem that Saez and Zucman are trying to solve. Pretaxed inequality has increased markedly in the last 40 years. And at the same time, they think, the system has become proportional not progressive. And as a result, the top 1 percent have gained a lot while the bottom 50 percent have not. And they view that as unfair with pernicious effects.

And another thing that goes through the book is that billionaires have too much power. And finally in the book, the problem, there’s sort of a sense that the tax system in the US should raise more money, and there’s a corollary in their work that the government should be bigger. So I’m gonna talk about that.

What is the solution? So the solution in the book, and I think Emmanuel is still with the book, is that the tax system in the US should be much more progressive. And that means average tax rates for the top 0.1, 0.01 percent should be 60 or 70 percent. That’s average. And that, basically, you should have very high taxes for billionaires, and perhaps eliminate them. So that’s the problem. And that’s their proposal.

And I want to make three points that I’ll expand on if Luigi lets me later. First, their estimates of the extent of inequality and the lack of progressivity are quite different from everyone else’s. And so there’s work by the Congressional Budget Office, which is nonpartisan, the Joint Committee on Taxation, which is nonpartisan, and, actually, a paper that Emmanuel wrote two years ago before he wrote the book, which finds more progressivity.

So let me tell you what the other’s find. They find that the bottom 50 percent pay about 15 percent, not 30, and that at the top, they pay more than 30, and depending on the estimate, up to 40 percent. So the tax payments are more progressive than I think Emmanuel and Gabriel say. And as a result, when you look at after-tax income and after benefits, the increase in inequality is much less. There’s some estimates that say it hasn’t changed. That’s probably wrong, but it hasn’t gone up by this huge amount that the pretax has because the system more or less works.

The wealth inequality numbers, which are also there, have some of the same problems. Saez and Zucman make assumptions that are very aggressive and very nonstandard. Other people, including one of our colleagues, Eric Zwick, make different assumptions. And the wealth share of the very top goes from, like 20, 22 percent down to 15 percent.

So there’s still inequality, but it’s much less than Emmanuel says. So that’s point one. He’s overstating, I think, the problem, and at a minimum, we can’t be sure. There’s a lot of uncertainty in these numbers. So take “the uncertainty is probably overstated” as point one.

Point two: they kind of believe higher inequality is, like, all bad. And that’s not entirely clear. Nick Kristof of the New York Times, who is a very conservative person—not—wrote recently, “For humanity overall, life just keeps getting better.” People living in extreme poverty overall in the world has fallen from, like, 40-plus percent to less than 10. Half of the world today is middle class or rich. Absolute poverty has actually declined by quite a bit in the United States over the last 30 or 40 years. [UChicago’s] Bruce Meyer has done work on that. It’s gone from, depending on how you measure it, 13 percent in 1980 to about 3 percent today. And that decline in global poverty, where’d that come from? Technology, globalization, markets, human capital. And at the same time, that created a lot of billionaires.

And so what Saez and Zucman wanna do is they wanna impose taxes that effectively eliminate billionaires and potentially eliminate 50 millionaires ’cause that’s the wealth-tax cutoff. And the thing you just have to be careful about is if you eliminate those people or you really hurt them, are you going to get rid of innovation? And I’ll tell you a little bit later that if you had implemented what’s in that book, you would not have Tesla today and you would not have Pixar. And it’s very clear, if you look at the histories of those, that that’s the case. And at the same time, if you take away this money from the billionaires, where’s it gonna go? It’s gonna go to the government. It’s gonna go to, probably, public-sector unions, and perhaps academics.

And is that better? I don’t know. Probably not.

And finally, yeah, I don’t wanna say you shouldn’t be concerned about this. So I think after-tax inequality has increased somewhat, although not nearly as much as they claim. And we’ve seen a flattening of life expectancies, and particularly for people with lower income. So you may decide you wanna raise tax revenue and do more spending, and that may be something that we decide to do.

The question is: How do you do it? And the Saez-Zucman proposals are to have a wealth tax of 2–3.5 percent, to increase marginal income tax rates to 60 percent, and basically increase taxes by 10 percent of GDP. So that’s taking taxes from 20 percent of GDP to 30 percent. And what does that mean? That means government is increasing in size from 20 percent to 30 percent on those numbers. Do we want that? They also, basically, in doing this—so notice those big tax rates, some of the wealthy in those tax rates, those are averages—there’s gonna be a number of people in the top 0.01 percent for whom their average tax rate is actually over 100 percent. Meaning some people will be lower, some higher if you have their numbers.

So some wealthy people will be paying more than a 100 percent of their income in taxes. Now, what do Saez and Zucman assume in the book? They assume two things. They assume that the wealthy won’t evade taxes much, even if they’re paying 100 percent of their income in taxes. Or, if they are paying 100 percent of their income in taxes, if they can’t evade it, then they’re not gonna change their innovation choices and their work choices and their choices of producing. And I just think that’s really not possible. They’re either gonna evade or you’re gonna have big impacts on innovation and production.

So the bottom line is they’re proposing really big changes with uncertain effects, based on data that I would argue is uncertain, and some people argue is much overstated, and I just wouldn’t do that right now, particularly given that in the US, once you put something in, it’s really hard to undo, given the nature of our political system.

So if you are gonna do something, there are better, less disruptive ways to do it. Eric Zwick and [Princeton’s] Owen Zidar, you know, basically say, if we went back to where we were in 1997, you’d get more tax revenue, you’d get more progressivity, and you’d be doing something we’d done before. [Harvard’s] Larry Summers argues for more enforcement. There’s real money there, probably, in doing a better job of enforcement.

And there are other suggestions as well. So I think I will stop there and let Luigi ask us some questions.

Luigi Zingales: As you can see, they really think alike.

(laughs)

But I think that as economists, we’d like, at least, to agree on the facts. There are a lot of proposals that people can disagree or agree with, but let’s try to at least agree on the facts. So what are the facts in this book you agree with, Steve?

Steve Kaplan: So I think the pretax numbers, in . . . So we have . . . There are two series. So there are the income series and then there’s the wealth series. And I think the income series, the pretax income series, are OK. It’s clear—

Luigi Zingales: So you agree that the 1 percent got a large increase.

Steve Kaplan: Yeah, yeah. I think that’s true.

Luigi Zingales: And also the fact that, basically, the median American did not see much of an increase in income over this period, in a cross-sectional way.

Steve Kaplan: In a cross-sectional way. So this is cross-sectional. The thing that’s harder to know is if you take the same person and look what happens to him or her over time, there’s more movement than just looking at the cross-sections. What they’re looking at is, you know: Every year, what does the top 1 percent get? What does the bottom 50 percent get? And those people, you know, are not always the same. Like, particularly at the very top, the very, very top, some years someone’s in it, some years someone’s not, depending on the capital gains they realize or things. But bottom line is, I think pretax incomes have gone up. I agree with that.

Luigi Zingales: And that’s it? What about multinationals? (laughs) What about the fact that he documents the fact that, basically, multinationals shift 60 percent of their profits abroad. And they really elude, in a major way, corporate income tax by relocating property rights in foreign countries.

Steve Kaplan: So I think we can agree on that.

Luigi Zingales: OK.

(talking over each other)

Steve Kaplan: But let’s be clear.

Luigi Zingales: OK.

Steve Kaplan: So it’s a loophole, and what you’d like to get is sort of corporate taxation similar around the world so that companies don’t have an incentive to locate elsewhere. The US, before the recent tax cut, was, like, 36 percent or 35 percent. It was much higher than everybody else. So bringing it down to the low 20s makes it more like the other countries, and that, I think, is reasonable.

Then getting rid of the loopholes, I think that would be a reasonable thing to try.

Luigi Zingales: OK. And what about the wealth? Do you see a divergence in wealth?

Steve Kaplan: The divergence in wealth has occurred, and this is, again, where the estimates in Saez and Zucman are much higher than other estimates. So wealth inequality has gone up, and part of that . . . In their numbers, the thing that’s controversial and drives a lot of the difference between their numbers and Eric Zwick’s is their assumption of, essentially, how much fixed income or how much bonds the wealthy owned versus the less wealthy. And it’s a technical point, but their assumption is that, basically, the bottom and the wealthy earn less than 1 percent on all their bonds. And when you look at the data, it’s very clear that the wealthy have riskier bonds. They earn higher interest rates. The bottom or the bottom half is a lot in deposits. And so their interest rates are much lower. And as a result, it’s like a $5 trillion difference in the assumption of wealth. And that’s why Eric’s numbers are 15 percent at the top. His are 20 or 22. And again, that’s a big difference in terms of how much you think this inequality has gone.

Luigi Zingales: OK. So we’ve got two points where we agree and two points where we disagree.

So Emmanuel, let’s go in steps. First of all, what about this increase in inequality of wealth? The criticism that Steve raises a lot of people have raised, and it’s the fact that, of course, you make estimates. We all do. And one way you impute wealth is by capitalizing some flow of income. And you can capitalize it at the bond rate. You can capitalize at a more risky rate. And, and of course, as all the students here know, is that depending on the rate, the value is gonna be very different. So what is your take on that?

Emmanuel Saez: Yeah. So those are good, technical questions, and that’s what academic life is about. You know, we’re fighting as teammates. The key point is that for wealth, we don’t know as much as for income. Why? Because we don’t have, yet, good wealth statistics, you know, well enforced, that would measure those things.

Luigi Zingales: (laughing) So for economists, the wealth tax would be good because nobody would fall into that category, I think. And we’d get a lot of data.

Emmanuel Saez: So on the substance, we want to have that debate. Refine estimates. We believe our estimates are better, you know, than Zwick’s. But that’s how academic life goes.

Just to give you one example. The Forbes 400, you know, which is a nontax source, documents more than a tripling of the share of wealth that that tiny group captures. You know, they captured less than 1 percent in the early ’80s. Now they are at 3.3 percent of total US wealth.

Steve Kaplan: But Emmanuel, the SCF [Survey of Consumer Finances] and Forbes 400 series is still at that 15 percent number, which is where Eric is.

Emmanuel Saez: Yes. Take the Zwick and Zidar, because they’ve scored, you know, the tax on billionaires. And they say that the top 400 has only one-third of what Forbes says they have. Well, our estimates, at least when we produced them, we were careful to make sure we would be close, you know, to Forbes.

Luigi Zingales: So maybe all the billionaires are, like, a pretend billionaire trying to—

Emmanuel Saez: Like . . .Yes.

Luigi Zingales: They boast their wealth to show up in the statistics. But it’s not that bad.

Emmanuel Saez: It’s possible. The point is that, you know, I’m an academic. My life has been about putting together these series, and it’s good that they generate a debate, and hopefully, you know, if our academic world works well, we’ll, you know, improve our knowledge.

Steve Kaplan: And we agree on that.

Emmanuel Saez: Yes.

Steve Kaplan: But these are very highly uncertain. But you’re agreeing these are highly uncertain, and you want to make big changes on uncertain stuff.

Emmanuel Saez: But you have to be careful because when I hear you say “uncertain,” I can’t help but think about climate-change deniers.

(all laugh)

And so what I want to say.

Luigi Zingales: (laughing) Let’s not go into climate change, OK? This is about inequalities. It’s a big enough problem. We don’t need to bring climate change in.

Emmanuel Saez: No. But what I want to do is that, hopefully, it’s knowable. We academics can improve our knowledge, and that’s how I want it to be framed. And I don’t like when those debates are used, you know, to say, “We shouldn’t do anything because there’s so much uncertainty. We’ll never know, really, whether, you know, inequality is not—.” So let’s, you know, put us in a position of knowledge.

Steve Kaplan: Is there a difference? The world is not, you know . . . With climate change, the world may fall apart. Here, it’s not, you know, so clear the world is falling apart.

Luigi Zingales: Let’s stay away from climate change. It seems to me that actually there is more agreement than disagreement because you both agree that wealth inequality has increased over time, and that the question is, has it increased a huge amount or has it increased just a moderate amount, but it’s increased. So I don’t see, like, a dramatic difference here, or am I mistaken?

Steve Kaplan: There’s a difference about what you would do about it. That’s right.

Luigi Zingales: But that’s a difference . . . At least on the facts, I think we agree on the fact that inequality has increased in income and in wealth.

Steve Kaplan: Now, there’s an issue, and this is an issue several people have brought up, about the permanent income versus the wealth, and, going back to discount rates, the discount rates on equity have gone way down. Right? If you look at PE ratios, PE ratios have gone way up. So part of what’s happened with the increase in wealth is PE ratios have gone up. And if you hold stocks, you’ve done well. The question is: What can you consume out of it? And so if the interest rate has also come down . . .

So if it used to be you had 10 percent interest rate on $1 billion—that was a a $100 million a year— and now the value goes up to $2 billion, but the rate is 5 percent, it’s the same $100 million a year. So your consumption or your, sort of, resources haven’t changed. And that’s where the after-tax income numbers, after-tax, after-benefit numbers are much more important.

I’m saying income inequality is much more important to look at than the wealth inequality. And the after-tax income numbers haven’t changed so much.

Luigi Zingales: Sorry, I might have missed something, but if you double your wealth, it’s true that the income might remain the same, but you have twice as much wealth. And so if you wanna leave to your children a fixed amount, you can consume much more. You are more wealthy.

Steve Kaplan: No, no. Because if you wanna consume $100 million . . . Let’s say you want to consume $100 million a year forever. Let’s take that down: $1 million a year forever. Let’s say you want to consume $1 million a year forever. If the interest rate is 10 percent versus 5 percent, that makes a big difference about your wealth.

Luigi Zingales: I completely agree. But so you die twice as rich. (laughing) Anyway. So we agree on that fact.

One big disagreement it seems to me—so I wanna walk with you through the numbers, because this is important— is on how redistributive the tax system is. So he’s saying that a lot of estimates seem to be over. So why don’t you walk through the two extremes so we get a sense of where we are.

Emmanuel Saez: Yes. So what we do is that we distribute all national income. That is, all your income, whether you make the money, you know, as a wage or a salary, a fringe benefit, or profits through a corporation—the Bezos case. Then we distribute all taxes. So in contrast to the CBO, the Congressional Budget Office, we distribute not only the federal taxes but also the state and local taxes that are sales and consumption taxes, property taxes, and also income taxes. And the sales and consumption tax is much more regressive than the income components. And that’s why, when you pile them up, you find, you know, that the bottom pays a substantial amount, and it’s not that hard to understand. You’re a low-wage worker. You pay already 15 percent in social-security taxes. You consume your income, and that adds a significant percentage in sales and consumption taxes.

Now, the other difference with CBO is that CBO subtracts from taxes transfers that are administered through the tax system. That is, now we have programs, like the earned income tax credit for low-income families with kids, that give you a transfer. It’s a transfer because it’s not a tax refund it’s really a direct transfer. Your taxes are negative. That we’d say you know shouldn’t be subtracted from taxes, because taxes are a payment from people to the government.

So if you subtract the EITC, you should also subtract food stamps, which is a similar transfer, and you should talk about after-tax income, which is something we’ve done in our academic work. I want to reemphasize that yes, taxes are kind of flat—flat rate relative to income—that what the government does with the money is redistributive, because what’s going to be distributed back is not going to be proportional to your income but is going to be bigger relative to your income at the bottom.

But you don’t want to do a mix. You either want to look just at taxes or include all the transfers.

Luigi Zingales: OK, so let me go in steps. So first of all, let’s agree, and then we can discuss whether this is right or not. But let’s agree that your approach is only to look at the revenue side not at the transfer side. So if we do only the revenue side, you’re saying, I am at the bottom of the income distribution. I get 15 percent of social security, 10 percent of implied local taxes—and that includes gasoline tax, tax on cigarettes, etc., etc. Even if I pay 0 percent on income tax, I’m still at 25 percent.

At the other end of the income distribution, let’s take Bezos. What tax rate does Bezos pay?

Emmanuel Saez: Yeah, so Bezos, I think, is extreme, because he probably pays very little through Amazon corporate tax, you know, there were newspaper articles, and then he probably doesn’t distribute himself that much. But so it’d be close to 0, right, if to his true economic income.

Luigi Zingales: But imagine for a second that Amazon were to pay the statutory tax rate, what would they pay?

Emmanuel Saez: It would pay . . . If the corporate income tax was truly 21 percent on true economic profit, that would be his tax rate. In practice, the corporations pay a lot less than 21 percent in corporate tax.

Luigi Zingales: But, so don’t you think that this is regressive just on the tax side? We have 25 percent on one hand, 21 percent—at best, probably less on the other hand. This seems regressive.

Steve Kaplan: Let me just say a few things. So first of all, if you look at the IRS numbers for the people in the top 0.001 percent, their taxes—federal taxes—as a fraction of AGI are 24, 25 percent. If you add to that their charity deductions, which we can talk about whether they should be getting it, you get up to 33, 34 percent. So I’m looking at 34 percent, or 24 percent federal, if you don’t wanna give the charity. They’re paying a lot in taxes, which sort of counters—

Luigi Zingales: You’re missing the exercise here, because he adds back the entire corporate income. So if you are Warren Buffett, you probably make a couple of million dollars normally. But if you impute the income on his property—

Steve Kaplan: I’m telling you, with his numbers . . . I used his numbers. His numbers are 23—

Luigi Zingales: Whose numbers?

Steve Kaplan: Emmanuel’s.

Luigi Zingales: OK.

Steve Kaplan: His numbers are 23 percent, and my number, I think 23 percent is too low ’cause let me tell you, on the corporate tax, he’s assuming the incidence of the corporate tax is completely on the shareholder. Most people who do this work, you talk to your public-finance colleagues, they’ll say it should be more like 50-50 or 60-40.

Luigi Zingales: OK. Let’s talk about incidence later.

Steve Kaplan: He’s putting the entire incidence there. So then he does that, or he and Gabriel do. And it’s 23 percent.

Luigi Zingales: OK.

Steve Kaplan: 23 percent. Now, if you add to that charity, they give a lot more—

Luigi Zingales: That’s not a tax.

Steve Kaplan: But it’s money out of their pockets. So if you care about. (laughs) They’re putting money . . . I’m saying that’s a big number. But it is 23 percent when you do it on those assumptions that are debatable about the incidence.

Luigi Zingales: OK. But still, 23 versus 25 on the bottom is flat.

Steve Kaplan: But the bottom is not 25. Let’s go back to the bottom. Let’s go back to the bottom. In income, he doesn’t have, he doesn’t . . . whatever income is there is pretax. The transfer system has increased markedly over the last—

Luigi Zingales: OK, let’s talk about the transfer.

Steve Kaplan: Wait, wait, wait. He’s paying sales taxes out of transfers. So if I give you food-stamp money, or if I give you EITC, OK, then he’s paying sales taxes out of that. So it’s kinda double counting. It’s not fair. If you look at how much consumption . . . Let’s go to the consumption numbers, which I think are better numbers to look at. The after-tax consumption numbers for the bottom 50 percent have actually gone up a fair amount over time. And the inequality on consumption is much lower.

So you have inequality on wealth—pretax wealth—is greater than inequality on pretax income is greater than inequality on after-tax is greater than inequality on consumption. So as you go down, and presumably you care about consumption, that inequality has not grown nearly as much over the last 30 years. And I think that’s the right number.

Luigi Zingales: Depends on how you measure consumption because if I buy a $250 million Degas, what is the consumption flow?

(talking over each other)

I’m using [University of Chicago Harris School of Public Policy’s] Bruce Meyer’s measures, who is, as far as I can tell, the world’s expert on that.

Luigi Zingales: So you disagree—forgot the transfers—from a fiscal point of view, it’s not that flat?

Steve Kaplan: No. I mean, everybody has 15 percent for the people at the bottom half.

Luigi Zingales: Because they add the transfer.

Steve Kaplan: But the transfer . . . You can’t say that they’re not . . . Look, I pay a payroll tax, and then I get an earned income tax credit. Have I paid taxes? I don’t think so.

Luigi Zingales: OK, so let’s—

Steve Kaplan: Right, that’s the . . . Right?

Luigi Zingales: What I was trying to say is I think that on the pretransfer, he is right, it’s flat. Now, there’s a question of should we include the transfer or not. And I was discussing earlier with him, if you were to abolish social security tomorrow, you’re gonna get a more progressive tax system. But I don’t think that Emmanuel is in favor of abolishing social security. So I think that social security is part of the reason why this is more flat. So can you explain to us why you focus on that part and not more broadly on the role of the government in redistributing from pretax to posttax?

Emmanuel Saez: I’m a public economist, and that’s what public economics is about. Government raises revenue and then spends it, you know, through transfers. So both sides are vital. But, obviously you know, it’s a big topic, and we’ve actually, in our published academic work, we’ve also put together after-tax income series. We wanted to write a book that focuses on the tax side, to emphasize the dramatic evolution of the erosion of tax progressivity. So that’s what the book is about.

I agree that looking at transfers is very interesting, and we’ve put together a series of disposable income. That is, what do people at each income get after taxes and after cash or quasi cash transfers. And the picture, I’m sorry to report, doesn’t look quite that good. That is, the bottom 50 percent incomes if you exclude the elderly, who are getting big transfers through social security, are kind of, not stagnating, but they are growing very modestly relative to the growth of the economy. Now, if you pile up on top of that the in-kind transfer, Medicaid, you see a significant growth. Because it’s true we’re spending a lot more in health care, and part of that is spent on low-income people through the Medicaid program.

But it’s a stretch, you know, to say low incomes have been doing well because in resources, yes, they get more, but a lot of that is through health-care price inflation. It’s not so clear that in cash, they are doing that much better. Now. But the numbers that everybody cites . . . Part of our work is to influence, to do better measurement. And I think, I repeat it here, the CBO that includes only federal taxes misses something important with the state and local taxes.

Doing transfers part way just through agencies is also not principled in an economic basis. And so we encourage them and engage in active discussions with them about how, you know, to do better.

Steve Kaplan: But the numbers . . . I mean, the Bruce Meyer numbers include everything. And the consumption number, and those are the best numbers that I’m aware of, and they show a real decline in poverty over time, and that is real. The people, though, who I think have been hurt more are the middle. And if you look at the CBO numbers, the CBO numbers have, I think, since ’79, the top quintile has gone up like 100 percent. The bottom quintile has actually gone up 80 percent.

Emmauel Saez: Yes.

Steve Kaplan: The people who have not gone up as much in the CBO numbers are the middle quintiles, which are about 50 perfect. But the bottom has actually done pretty well, I mean.

Emmanuel Saez: Yes, but that includes Medicare and Medicaid.

Steve Kaplan: I think Bruce’s numbers . . . I mean, I don’t know if Bruce is here. He can speak for himself. But Bruce is pretty adamant on this, that those poverty numbers have gotten better on an absolute basis.

Emmanuel Saez: They’ve gotten better, but what that means is that some economic growth has gone to the bottom. That’s because in the US, we have an absolute level for poverty. It doesn’t tell you that those incomes have grown nearly as much as the average.

Luigi Zingales: But Steve, you recognize that inequality has gone up pretaxes?

Steve Kaplan: Yeah.

Luigi Zingales: And we agree that we might disagree on how progressive the tax system is, but I don’t think it has become more progressive in the last 20 years. You agree with that? The entire system has not become more progressive in the last 20 years.

Steve Kaplan: On tax rates, I think that it’s become . . . If you look at Emmanuel’s old numbers, I think his old numbers went from the top going from something like 43 to 40. The bottom went down too. So I think the—

Luigi Zingales: So you’re really thinking that the system has become more progressive. The fiscal system?

Steve Kaplan: No, not more. OK, not more. But not a whole lot less.

Luigi Zingales: OK. So inequality has gone up. We used to have progressivity. Should we increase our progressivity to take care of the fact that the pretax income has increased, or not? We’re now passing the fact, and we’re going into policy. So what is—

Steve Kaplan: Now we’re going to policy. So state the question again.

Luigi Zingales: The question is: We agree on two facts. No. 1, that pretax income has become more unequal in the last 20 years. And at the very minimum, we have not seen an increase in progressivity of the tax system. So should we have an increase in progressivity to compensate the increase in inequality of the pretax income.

Steve Kaplan: So if you are going to do that—

Luigi Zingales: I’m asking what you think you should do. Not if. You. What do you want?

Steve Kaplan: I think there are ways to tidy up, to expand the base, which would have that effect,vthat are probably more effective than puttingvin something like a wealth tax.

Luigi Zingales: Now you are on to instruments. I’m asking you what you think, as your preference. Now you’re not an economist. You’re, sort of, an individual voting: What are your preferences?

Steve Kaplan: I would say that if you look at the tax cut that we had two years ago. They did three things mainly. They cut the corporate tax, which I think was good, to make it more like the rest of the world. They got rid of the state and local deductions, which is actually also good. And that’s progressive. And then they cut the tax rate for everybody. And I probably wouldn’t of done that. So that would be an answer: I would have made it more progressive. OK.

Speaking about the rest of the world, did we really need to cut down the corporate taxes?

Emmanuel Saez: I agree with Steve that corporate taxes around the world have gone down a lot. But that’s a terrible development, in my view, because—and we discuss that in the book—if you don’t have much of a corporate tax, it really destroys your ability to do tax progressivity. Why? Because the high-income folks are going to incorporate so that they can make money through corporate structures and not pay taxes until they need to use the money. So it becomes like a consumption tax. And some people are in favor of a consumption tax, but that’s the direction we are going. Right now, with the 21 percent, I think we are borderline. So currently the Jeff Bezoses of the world are incorporated and they pay low taxes. If the corporate tax stays at 21 percent, we’ll see a lot more of the rich—not the billionaires but the decamillionaires—starting to incorporate, and that really will further undermine the tax progressivity.

So if your view of the world, and it’s a principled view—Steve has a model of the world in mind based on economics— it tells you it’s good to tax corporations at 0, and therefore taxing the rich at very low rates is good, that’s the direction we’re going. We think that’s a disastrous direction to go, and we think it’s reversible. That is, Steve is saying the US had to lower corporate taxes because around the world the rates were lower already. And that’s right, but that’s a very narrow view.

Our view is that you need to redesign the US corporate tax system so that you prevent corporations from shopping around to get the lowest rate by shifting their profits.

Steve Kaplan: But what effect would that have on investment, right? Already people are worried about corporations not investing, and that’s a recipe for getting even less.

Emmanuel Saez: So then that . . . You have an interesting empirical question. Would we see less investment with higher corporate tax rates? Frankly, it’s an open question. The Trump tax cut was supposed to have generated a boost in investment. We certainly don’t see much in the time series, so it’s debated. My view is that I haven’t seen super convincing evidence that investment, real business decisions, respond strongly to corporate taxes.

(gesturing to Kaplan) Steve, please.

Steve Kaplan: Let me give you a nice example. So let me tell you about Elon Musk. Elon Musk was an entrepreneur, and he started PayPal. And when PayPal got sold, Elon Musk got $250 million pretax. OK, that left him with $180 million after tax. What did he do with that $180 million? He pumped $100 million into SpaceX, and $70 million into Tesla, or $80 million into Tesla. Basically, he put all of his PayPal money into SpaceX and Tesla.

What happened in 2008? In 2008, they almost both went bankrupt. They both were on the precipice of surviving and they survived. Now, I would argue that if we had put in a higher marginal tax rate on capital gains, he would of had, and the numbers that are in that book, he would have had $60 million less, and either SpaceX or Tesla would not exist. And I don’t think anyone else would have done it.

You can tell the same story with Pixar. Steve Jobs got his money from Apple. He left Apple. He put a big chunk of it into Pixar. It also almost went bankrupt. It didn’t. And if you had taxed him more, he would have had to have sold Pixar. It wouldn’t have been Pixar. So what I would say there is you would have Losing Nemo instead of Finding Nemo.

Emmanuel Saez: Let me answer it at two levels on that one. Do high taxes on the rich kill economies? That’s the key question we are debating. And I think here, you have to look at the historical record. And so that’s what we do in the book, and we say the United States had this enormously progressive tax system that, when you put the numbers all together, really imposed a very high tax rate on the rich, and that was a period where economic growth was strong, even though the US was way out in the technology frontier, really dominating the world in terms of technology. High growth, and very equitably distributed, where all income groups were growing at the same rate.

So just from this macro picture, it’s hard for me to believe that you kill the economy. Now, on the issue of credit constraints, and Steve is a specialist, you know. It’s true. You want capital to go to the most promising ventures, and his work has been about that. What I think is that, and maybe I’m too naïve and Steve will correct me, but taxing wealth precisely is when you hit people who don’t face credit constraints. Because if I understand something about credit constraints, if you’re a billionaire, typically that’s not where credit constraints are. That’s why we think the wealth tax is perhaps a better tool than the corporate tax. That’s more indiscriminate and hits businesses regardless, so that’s my—

Luigi Zingales: OK, so I need to open up for questions, because a lot of people want to ask from the audience. So why don’t you line up. There are some people with a microphone. Yeah, they’ll reach out. In the meantime, I wanna say, I think that this debate should be solved with data, and so you present two anecdotes. You present a correlation. If we go through that correlation, the euro is a terrible thing, because Italy was going before without the euro, and now with the euro it does not go.

So is it . . . (mumbles)

(Kaplan laughing)

So those laughing . . . It’s deteriorating the debate. So let’s go to more substantive econometric status. And questions. Lucy.

Audience member: Yeah, I have a clarification question, trying to understand the difference between the time series talked about. Professor Kaplan, were all of the numbers you were giving excluding state and local taxes? Is that the difference between the previous?

Steve Kaplan: I think if you add the state and local taxes, what I said is still true.

Audience member: But in particular, is that the difference between the old work that Professor Saez has done and the new work?

Steve Kaplan: I don’t think so. I think that the numbers with state and local.

(audience laughs)

The numbers with state and local taxes, are 10 or . . . I think if you look at the federal taxes,

the CBO numbers are with just federal, but if you add state and local to that, I think [the Joint Committee on Taxation’s Gerald] Auten and [David] Splinter do that, you get the same progressivity that everybody else gets except for Emmanuel and Gabriel. And he’ll disagree, but I—

Emmanuel Saez: I’m not going to convince Steve, here.

Steve Kaplan: Go on the internet and look for these things. They’re there.

Emmanuel Saez: But the big difference is that yes, CBO is only the federal, and they put in the EITC. If you do those two corrections, you get very close to our numbers. We’ll write it out fully, explicitly, you know.

Luigi Zingales: I looked at Splinter. Splinter does not add the social contribution. And that’s the difference, in my view. Because he reaches numbers . . . He adds the local taxes, you’re absolutely right. And when you add the local taxes, you arrive roughly at 10 percent. And it does not include the contribution. And he legitimized not including that because that’s part of a transfer system. So if you include one, or not include the other. So at the end of the day, the difference is: Are you only looking at the revenue side, or are you looking at an integrated system? And I think on the revenue side, I think he’s right, it is 25 percent. It’s 15 percent of contribution—

Steve Kaplan: But on the integrated system, it’s very different. And on the consumption side, it’s very different.

Luigi Zingales: But at least we agree on the facts.

Steve Kaplan: I’m not sure. I’m not sure, but go ahead.

Luigi Zingales: Yes.

Audience member: Yes, hello, so my teacher, my former teacher, [the late] James Mirrlees did some pretty amazing work on the regressive tax system. How would you reconcile our discussion just now with his theory.

Luigi Zingales: So this is a question for whom?

Audience member: Um, anyone?

Steve Kaplan: For the public-finance person.

(laughs)

Luigi Zingales: Who was your teacher?

Steve Kaplan: James Mirrlees.

Luigi Zingales: Mirrlees. (talking over each other)

Emmanuel Saez: Yes, well, I mean, I like Mirrlees a lot. You know, I started doing optimal tax theory that precisely when you want to do redistribution, but the reach may work less, as Steve was warning us about. How should you set up the tax system? OK.

Audience member: Just, we’re now at the opposite end of the spectrum.

Luigi Zingales: He has an answer. You have an answer. How much should people be taxed?

Emmanuel Saez: This is actually in our book. Steve wasn’t quite right when he said our calculations don’t even take into account the fact that the rich may work less. We put in a behavioral response, that’s how much the rich work less if you tax them somewhat more, and we think that if you don’t have issues of tax avoidance and tax evasion because you have a well-enforced tax system, the real response about people working less is not that large based on our reading of the literature. In that case, you should do, if you want redistribution, you know, you can go up to 75 percent marginal tax rate, which translates into a tax of 60 percent on average at the top. That’s in the book.

Steve Kaplan: And that would be very, very uncertain.

Emmanuel Saez: Yes, maybe Steve believes there is a much bigger response, and his people are really, really motivated by the financial gain, and if they get less, they slack off.

Steve Kaplan: And they evade and they don’t invest. It’s a very big question as to how big that is. If you look at the Swiss data, which you’ll have a response to, but Switzerland, they put in a wealth tax, and the maximum wealth tax was only 1 percent. So we’re talking here 2, 3.5, maybe 6. The elasticity that [MIT’s] John Gruber found—and again, John Gruber was associated with Obamacare, some of you will remember. What he found is that for every 0.1 percent increase in the wealth tax, reported wealth went down by 3.5 percent. So if we did a 3 percent wealth tax, wealth would disappear—if that was linear. So it has big, big effects.

Emmanuel Saez: Yeah, and on that one, let me rebound because we haven’t discussed that.

Steve Kaplan: I know you will. (laughs)

Emmanuel Saez: Yes, taxes, progressive taxes can fail if they are poorly designed and are easy to avoid and evade, and that’s something we discuss a lot in the book. Our view is that it is possible to structure them in a way that will work well. We have examples where this was well done. But there are so many examples, like wealth taxes in Europe, where the wealth taxes weren’t well designed, and as a result, they weren’t effective.

Steve Kaplan: And the estate tax in the US.

Emmanuel Saez: Yes, the estate tax in the US is another example of a failing tax.

Audience member: Hi, yeah, thank you. You talked a little bit about the downstream effects or response effects of people not working as much or investing as much. Can you compare the three approaches that we’ve talked about, wealth tax, income tax, and especially an estate tax, which seems like a particularly effective way to go after lucky inheritors of somebody else’s hard work as opposed to directly disincentiving worker investment.

Emmanuel Saez: Yeah, so the estate tax has the advantage that it comes very late, perhaps it has less disincentives. The problem, though, is that it comes too late, and it gives sufficient time for people to plan around to avoid it. You are going to die decades away, and you can plan your affairs so that the amount reported at death is going to be small. That’s what happens in the US system. You also have the inequity that people are becoming billionaires very fast. You know, Bezos, Zuckerberg are striking examples. Is it fair that they pay low rates? We know that maybe if the state tax were working well, they would pay. But still, if they pay 40 years down the road. Isn’t that too late?

I think the wealth tax has the advantage of taxing you once you’ve succeeded and doesn’t tax you that much on the ramp up, you know, while the income tax, the corporate tax, taxes you immediately. So in that sense, the wealth tax is powerful to go after established wealth. And therefore if you have a billionaires problem, where you think billionaires have too much wealth, too much power as a result of that, the wealth tax is the obvious most powerful tool to address the problem.

Steve Kaplan: So I’ll say a few things there. First of all, if people have been evading the state tax, what makes you think they’re not gonna be able to evade the wealth tax, and they will do lots of things to try to evade it. You can divide up the amount of money you have. You can have various options that you put into who of your family owns things and reduce that wealth. You will also see people stop going public and stay private, which they do more in Europe, partially as a result of this.

Luigi Zingales: Actually, there is a solution on that. You give a share in your company. So if we don’t know how it’s valued, you just give 5 percent of your company every year.

Steve Kaplan: And how is that gonna trade, how is that gonna get any value?

Luigi Zingales: Eventually, somebody’s gonna sell the company.

(talking over each other)

Steve Kaplan: Luigi, let me give you a problem with that. First of all, you would kill the venture-capital industry. Second of all . . . Because you’re taxing, you’re taking away . . . Many of these people make a lot of money. And remember, and so they would be hit by this tax. The other thing, the other problem with your thing is—

(talking over each other) (laughs)

Steve Kaplan: It’s hard to tell. (laughs) The other issue is . . . He said, once they’ve already made their money and they’re already established, then we’re gonna tax them. Jeff Bezos was worth $4.7 billion, or $5 billion in 2000, at the peak of the dot-com bubble. Amazon was sort of, hadn’t really succeeded then. And if you would have imposed, what number do you want the wealth tax to be? 3 percent? 5 percent? What should I use?

Emmauel Saez: Yes.

Steve Kaplan: 5 percent?

Emmanuel Saez: 5 percent. OK, we’ll use 5 percent. So if you had put a 5 percent wealth tax on him when it was $5 billion, that’s a $250 million tax. By the time he probably would get around to pay it, which would be June, his shares were worth $2.5 billion. So now he’s gotta sell to get $500 million, sorry, to get the $250 million, he would have to sell 10 percent of his shares. But then, oops, we have a 50 percent capital gains tax. Gotta sell 20 percent of my shares. So in six months, under this plan, he would have to sell 20 percent of Amazon in that situation, which would probably, what would that do to the stock price? Probably drive it down further. So maybe 25 percent of Amazon. Do you want Jeff Bezos to be selling 25 percent of Amazon in 2000?

That would be . . . Then you wouldn’t have Amazon. There would be a ton of innovation you wouldn’t have. The same thing would have happened to Elon Musk. And you are really risking completely changing the system when you have other alternatives. If you think the estate tax is not so effective, tighten it up. And again, that’s where Larry Summers has a nice paper where he’s saying, if you audit the top incomes more, if you tie up or get rid of some of what people would say are loopholes, which one of the big ones is when you die, if you have a big capital gain, it never gets taxed. And that’s one that seems like an easy one.

So there are many things you can do that are far less disruptive than a wealth tax. And that’s why I would be very, very hesitant to put that in.

Luigi Zingales: I’m sorry that we are running out of time. But I wanna thank both of you, and particularly I think that the major contribution of Emmanuel has been that Steve now agrees with Larry Summers. We should audit more taxes. And we should close loopholes. So that’s a major accomplishment.

Thank you very much.

Hal Weitzman: That’s it for this episode of the Chicago Booth Review Podcast. It was produced by Josh Stunkel, and I’m Hal Weitzman. If you enjoyed this episode, please subscribe and please do leave us a 5-star review. And for more insights from Chicago Booth faculty, visit us online at chicagobooth.edu/review. Thanks for listening—until next time.