Talking Again With Gabriel Zucman

Hi, Paul. Thanks for having me on.

Basically because uh there's a fundamental tension uh in democratic societies uh between uh extreme wealth and the very possibility of a well functioning democracy. And it's not a new idea, don't get me wrong. uh all the thinkers uh of democracy have written about this all the way back to Aristotle more than 2,000 years ago. Um but there was a period of time after World War II when many people thought that this issue belonged to the past and it corresponded to a very particular moment in history when when extreme wealth had largely disappeared after World War II, after the shocks of the first half of the 20th century. But now of course it's making a dramatic comeback. And so we are back to this to this discussion of how do we deal with with this tension? How do we organize the economy and our society to prevent the the forms of capture of the political process in particular that are associated with um extreme wealth?

Well, it's for two reasons. Number one is a macroeconomic reason which is that wealth as a whole has been growing much faster than income. So if you look at the ratio of of uh total household wealth to GDP in the US in 1980 it was around 200 250% and today we are past 500%. So it means that the total wealth of the country is equivalent to more than five years of annual production, five years of uh annual GDP. The second reason is that wealth itself has become uh much more concentrated and and the rise of wealth inequality especially at the top of the distribution at the very top has been uh massive and has been even uh faster and stronger than the rise of income inequality. So we all know about the rise of the of the 1% the top 1% share of total income has increased from about 10% of income in the US in 1980 to about 20% today but at the top of the wealth distribution for wealth the increase has been even more dramatic than that.

I think both uh statistics are interesting and capture different aspects of reality. So if you're interested in wealth inequality in the concentration of wealth, the most meaningful statistic is to divide the wealth of the super rich by total wealth in the economy. So for instance, if you look at billionaires, roughly the top 0.001% of the population, um they own about 7% of total US wealth today. In 1980, they used to own about 1% of total US wealth. So it gives you a sense of the rise in wealth concentration. Um if you look at the super top the the the oligarchs the 20 wealthiest families so it's really a very very small fraction of the population top 0.01% um their total wealth is 2.2% 2% of total household wealth in in the economy. So I think that's if you care about wealth inequality, these are the relevant numbers. Now it's also interesting to compute another statistic which is the wealth of those top groups and in particular the oligarchs uh relative to total income or total output in the economy because it gives you a sense of their uh influence on the economy and also because it gives you a sense of how much revenue there is at stake from from taxing their wealth. So let me illustrate. Um if you get back to the 20 wealthiest people in in the country, they have about 2.2% of total US wealth and that's equivalent to about 12 13% of total US GDP.

Okay. So now you're dividing a stock their wealth by a flow. And what it means is that if they spend their wealth, of course they're not going to do that in a given year, but imagine that they spent all their wealth in a given year, then they could buy uh 13% of all the goods and services produced in a given year uh in the US. So it really gives you a sense of just uh how big they are relative to the economy as a whole. And also it gives you a sense of uh what's at stake with taxing uh billionaires because of course the way we think about tax revenue about government budget is often in relation to to GDP and so here what you have with billionaire wealth is that there's a base a potential tax base because we are not taxing billionaire wealth today which has been skyrocketing and that means that the flip side of the rise of wealth concentration. The positive aspect in all of that is that now there's a lot of tax revenue at stake from uh potentially taxing the wealth of billionaires.

Exactly. When I say that expressing their wealth relative to total income gives a sense of the influence they have, precisely. It means it gives you a sense of like how much they can spend on buying media companies on funding electoral campaigns. Billionaires now account for 19% they accounted for 19% of total political spending uh during the 2024 federal election cycle. uh they can fund think tanks and foundations and influence the prevailing ideology like that. So it's in that sense that it's really useful I think to express their wealth relative to the value of the total income of uh people in the country.

So there there are different stories. Um and I think the one that makes most sense to me and that seems most consistent with the data is that there's been a number of policy changes since the 1980s that have uh favored wealth and capital broadly speaking. So for instance, you used to have uh rent controls for uh housing in many countries. When you lift rent controls, the value of housing wealth tends to go up. Um many countries used to have pretty high corporate uh income tax rates.

Of almost 50% on average at the world level in the 1980s. Well, when the government takes half of the profits of companies, it capitalizes into stock prices. It reduces the market value of companies. But then when governments slash the corporate tax and it has declined from about 45 50% to about 20 25% today at the global level. Well, that again capitalizes into stock prices and now it boosts the market value of of companies of equities. Um, and uh you've had deregulation in in many sectors uh that has boosted the profitability of corporations. You've had a significant change in um the division of value added between labor and capital. you know, the rise of the capital share, the decline in the labor share, you know, that means more profits, uh, more income for shareholders. Again, it boosts the value of corporate equity. So, and all of these changes, they don't happen, uh, like that uh, you know, out of nowhere. They are of course heavily influenced by by policy. So for instance, changes in uh um factor shares, labor and capital shares uh have been uh partly affected by um uh the decline in union power. When unions are stronger, you tend to get a bigger labor share. When unions are weaker, you you get a bigger capital share. Um also in the way that we organize international economic relations, globalization, you know, when we organize things without any kind of international tax coordination or to put it differently, if we organize global economic integration by allowing um total uh uh tax competition, no minimum taxes, no minimum tax rates, then capital owners can can can can threaten to outsource production or to uh uh shift profits to low tax places and again it reinforces the the power of of capital hence the value of wealth.

Um I think there have been different factors at play. So it's not just a one issue uh story. Um the the thing that seems important to emphasize uh from my perspective is the dramatic changes that have happened with uh taxation, right? Um, and particularly in the US because many people have forgotten about that, but the US used to have a a sharply progressive tax system where capital was heavily taxed, uh, where high incomes were heavily taxed, where uh, large inheritances were heavily taxed. And in fact, probably it used to have the most progressive tax system in the world between the 1930s, the New Deal and the late '70s. And then during the 1980s, uh it went all the way into the opposite direction. Uh and perhaps what's most striking is what has happened with the income tax. So when Reagan enters the White House in uh 1981, the top marginal income tax rate in the US is 70%. At the time, it's the highest top marginal tax rate of all industrialized countries in the world. And then in 1986, you have the big uh tax reform, the Reagan tax reform that slashes this top rate to 28%. Which at the time was the lowest tax rate among industrialized countries. So it's a really big change in just 5 years. And you've had that for the income tax, but also for the estate tax, but also the corporate tax. Tax rate used to be 50% after World War II. after 2018, the Trump Tax Cuts and Jobs Act, it's been reduced to 21%. And so all of these really big changes all going in the same direction uh have um had a massive effect on how much on on two things. So first of all, on the incentives for very wealthy people to try to earn super high incomes. So when when the top marginal income tax rate was close to 100% more than 90% uh in in the 1940s 1950s um there was just no incentive to try to earn a ton of money because you knew that past some point almost any extra dollar would go to the IRS. So why bother? You know why try to bargain a super high compensation as a CEO? It was just pointless. Now when the top marginal income tax rate is 28% now it becomes really uh profitable to try to earn super high incomes right because you get to keep most of the money for yourself. Um so there is this incentive effect. Uh and there's of course the pure mechanical effect which is that with lower tax rate you have more disposable income when you're very rich that you can save and use to to grow your your wealth. And that's why I think those changes to taxation which have been particularly powerful in the US um have played a very important role in the particularly fast rise of US inequality.

Well, then it becomes an empirical question, right? So if uh so in principle it could be true. You could say well when people face those super high top marginal income tax rates it discourages people from innovating from launching businesses. Um but then you look at the data and you realize that uh in those decades after World War II GDP growth was higher in fact than it's been since the 1980s. investment rates were no lower. In fact, they were higher. US capitalism, broadly speaking, seemed to work okay uh at that period of time in that period of time. So, of course, you don't know the counterfactual. You don't know what would have happened if uh the tax rates had been much lower at the top in those decades. But what you can know as a fact is that these quasi-confiscatory rates on high incomes and we're talking about rates that apply to only super high incomes of several millions of today's dollars. They just don't didn't kill uh innovation and and growth and uh capitalism. And you know, you have to think about who you're discouraging, what type of behavior you're discouraging when uh you you tax very high incomes at very high rates. Um you could say, okay, perhaps it's going to discourage innovation, but you know, are scientists or innovators really motivated by the extra income they're going to be able to make above 5 million dollars in income. you know, perhaps perhaps not. You're also discouraging people who want just to um capture rents, you know, who want to create private universities that sell fake diplomas, for instance, or want to exploit um uh uh patents uh and squeeze as much money as as possible from consumers or patients or uh uh sick people and so on. So you know there's also always in the economy you know you have people who are motivated by innovating creating uh knowledge and broadly speaking uh undertaking activities that are positive sum for the economy as a whole. And there's also people who are motivated by rent extraction by different activities that are inherently zero sum or even negative sum. And suddenly when you have 90% top marginal income tax rates, you're discouraging uh this type of zero sum rent extraction which is the plausible reason why this policy was uh so effective at least rightly effective in the post uh war decades.

I I I think we could do it and it would uh make sense but also probably it wouldn't be enough. Uh so first of all one of the outcomes of the first uh Gilded Age at the beginning of the 20th century was the creation of the progressive income tax in 1913 the progressive estate tax in 1916. So we instituted taxes to prevent to curb the the the rise of concentration that was observed at the time and that um many people were worried uh about. Um and um uh it was it made a big difference but also there was and has always been a kind of fundamental limitation I think with this historical experiment uh which is that um when you're extremely wealthy and think about billionaires uh it's in fact very easy to uh own a lot of wealth without having to report any or any significant amount of income. And so it's in fact uh relatively easy to avoid the income tax and we we kind of knew about that from various anecdotes and case studies. So for instance a few years ago you had revelations by ProPublica of the taxes paid by US billionaires and you saw people like Jeff Bezos and Elon Musk in some years reporting very little income paying very little income tax. There's even one year when Bezos says look I'm so poor that I'm going to claim the child tax credit and he received the child tax credit. So, we kind of knew about these limitations of the income tax, but it's only relatively recently that we've come to understand that this is a structural feature of income taxation in the US and globally. A structural feature that the super rich have not yet entered into the system. You know, the income tax is just not the right instrument for them to tax them. And so that's why in addition to the income tax, you need some kind of tax based on wealth because for the very it's easy to manipulate income to pretend they have no income. So for instance, Bezos as CEO of Amazon didn't pay himself a wage. Uh he instructed Amazon not to distribute dividends. Uh he didn't sell shares and so he didn't realize capital gains and so his taxable income was really low. It's there's no tax evasion there. It's all perfectly legal. Um, but of course his ability to pay taxes as one of the world's richest men is of course extremely high. And so that's why for people like him, the right tax is based not on income but on wealth, which is much harder to manipulate than income. And that was partly one of the reasons for having an estate tax, which is a tax on wealth. But it's it's not enough because the estate tax is just one time tax at the time of death. And so you can be in a situation where the wealthiest people in the country year after year pay no or almost no income tax. And it's only when they die that when the estate tax was still functional that we we tried to make them pay a little bit of tax. That's the limitation of the US experiment with progressive taxation which is that it didn't re never really tried to make the ultra wealthy pay personally on an annual uh basis and I think that this is this limitation that we need to overcome in the 21st century and basically that has to involve some kind of annual taxation based on wealth.