Tax Myths of Warrenomics

Wall Street Journal ^ | October 17, 2019 | Laurence Kotlikoff

[karpov]

Economists Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley are advising Elizabeth Warren’s presidential campaign and drawing generous media attention for their assertion that the U.S. tax system is flat—that the middle class and poor pay as great a share of their income in taxes as the rich. They’re wrong, and three huge mistakes underlie their analysis.

The biggest mistake is to focus on gross, not net, taxes. They ignore transfer payments, like Social Security, which are disproportionately paid to the poor. In doing so, they mistake language for economics.

To see the problem, consider a simple thought experiment. Joe, a minimum-wage employee, earns $15,000 a year. The government taxes Joe $1,000 and transfers him $600, so that he pays $400 on net. In another scenario, Joe pays $10,000 in taxes and collects $9,600 in transfer payments. Again, he pays $400 on net. But in the first scenario, Messrs. Saez and Zuchman would report Joe’s gross tax rate as a reasonable 6.7% ($1,000 over $15,000). In the second, they’d call it an onerous 66.7%.

The flaw in their method is even more obvious when you consider that American tax laws incorporate benefit subsystems, and benefit laws incorporate tax subsystems. The federal personal income tax, for instance, includes the earned-income tax credit, a major transfer program. The Social Security benefit system includes the earnings test, a major tax. If the focus is on gross taxes, should the EITC be excluded and Social Security’s earnings test included? Economics can’t say. What it does say is look past the language and measure net, not gross, taxes.

Messrs. Saez and Zucman’s second mistake is measuring progressivity on a one-year rather than a remaining-lifetime basis. That ignores the fiscal system’s double taxation

[freedumb2003]

There are lies, damn lies and economics.