Kotlikoff: Tax Myths Of Warrenomics

Wall Street Journal op-ed:  Tax Myths of Warrenomics, by Laurence Kotlikoff (Boston University):

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. ...

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: Income earned, taxed and saved this year will be subject to future taxation on interest, dividends and capital gains. This omission disproportionately understates taxes for the rich, who save at a higher rate. The current-year focus also understates benefits paid to the poor, since future benefits are a bigger share of their resources.

Their third mistake is failing to adjust for age. The old have paid most of their lifetime taxes, which makes them now look like tax cheats, particularly those who saved out of previously highly taxed labor income. With changing demographics, this problem will deeply confuse tax progressivity comparisons over time. ...

America’s progressive fiscal system, as well as the more even distribution of human wealth, makes spending inequality far smaller than wealth inequality. Nonetheless, average spending by top 1% households is miles higher than average spending by those in the bottom fifth. Like Messrs. Saez and Zucman and Ms. Warren, I am appalled by the degree of U.S. inequality and seek to reduce it. But if economists dramatically understate fiscal progressivity, it may encourage reforms that go far overboard.

Prior TaxProf Blog coverage:

• David Leonhardt (New York Times), The Rich Really Do Pay Lower Taxes Than You (Oct. 8, 2019)
• James Freeman (Wall Street Journal), New Problems With Elizabeth Warren’s Inequality Math
• Emmanuel Saez (UC-Berkeley) & Gabriel Zucman (UC-Berkeley), How To Tax Our Way Back To Justice (Oct. 14, 2019)
• Richard Rubin (Wall Street Journal), The Truth About Who Pays What In Taxes (Oct. 16, 2019)