, 34 tweets, 11 min read
Time for my substantial comments about the @gabriel_zucman and Emmanuel Saez tax series. I'll run with numbers for top 0.01%, over 1962-2014. I'm still to fully digest top 400 and projections to 2018. So, first things first: the QJE and the paper show different patterns:
Just to make sure it is not missed: these are very different patterns. Between 1962 and 2014, the QJE series shows 3.3pp drop. The book one shows 18.7pp drop. Volatility differs to.
What makes them different? This (improved) animation illustrates and the thread goes over it more slowly:
Before going any further, let's note that there are other estimates of progressivity. Here is a thread about CBO numbers:
Here is my thread about progressivity figures from Auten and Splinter, based on a recent note by David Splinter, with comparison to SZ
And my animations of Splinter's figures
And comparison of progressivity over the years in different Saez-Zucman sources
Many different sources. One of them shows a big decline in progressivity. Others, including Piketty, Saez and Zucman (2018) show that the US system is at least mildly progressive and has not deteriorated that much (at least until 2018, which I'll come back to).
Why different results? Partial data, different concepts, assumption.
1) Measuring income is hard, many categories both at the top and at the bottom are not easily observed and assigned (pensions, corporate retained earnings, transfers, retirement accounts, tax evasion etc.)
2) is refundable portion of EITC a negative tax? What about transfers? In kind benefits? What should we put in the denominator when defining tax rate? Should we demand that everything adds up to national income or focus on measures that approximate individual circumstances?
3) who pays the corporate tax? who pays payroll tax? who pays sales tax? Consumers, producers, where in the distribution?
Aside: would I write an editorial that the sky is falling based on one paper that shows dramatically different patterns than the rest of the literature? Hmmmm.
I'm chilling out for the next few tweets as @DinaPomeranz gently suggested and @dynarski demanded.
So why is sky falling in the S-Z book? Recall this animation. There are just two changes of relevance here. One is corporate tax incidence. This is what turns very mild decline in progressivity into rapid drop. The other somewhat important one is treatment of capital gains
Just a reminder, this figure stops in 2014 for two reasons:
1. the original QJE paper stops there too
2. 2018 is a projection, tax filing deadline for individual taxpayers who requested an extension (common) is tomorrow
But, making things very responsive to corporate tax changes is what makes 2018 numbers move too, and since this is the big one here, it is also an explanation for why 2018 drops so much in their figures
So what is the assumption? Now we get to talk about corporate tax incidence. The topic so exciting that I (not being a specialist on corporate taxation) leave it to the last class of the term, hoping that I'll run out of time.
I'll just do the big picture and hope somebody will correct what I got wrong. Study of corporate tax incidence goes back to Harberger in the 1960s (or maybe even before). Who bears the burden the corporate tax? Shareholders? Sure, but all of it?
If corporate tax rate increases investors should invest less in corporations. They will move money elsewhere. Where? Noncorporate sector. Other types of businesses for example.
For example, growth of largely noncorporate pass-through businesses is the key feature for understanding changes in the top of the US distribution in recent years, as this great paper by @omzidar and Smith/Yagan/Zwick shows academic.oup.com/qje/article-ab…
Other types of capital may respond - real estate for example. Whatever it is, as capital escapes corporations, the noncorporate rate of return declines, and boom! corp tax makes noncorporate investors worse of, rate of return in corp sector goes up and reduces the burden there
The bottom line: corporate tax should be felt by other forms of capital. That's the standard assumption. CBO makes it, Auten-Splinter make it, Piketty-Saez-Zucman make it. Who does not? Saez-Zucman (2019) do not.
Aside, and I'll promise I'll chill again. Would they be allowed to do in a refereed paper? I very seriously doubt it. Not without very strong arguments. Done.
Is it reasonable to assume that other capital bears the burden of the corporate tax? I'm willing to debate, open to discussion. But they don't push this. Instead, they argue here gabriel-zucman.eu/files/SaezZucm… that you should do things differently for reforms than for current burden
It's new, I haven't thought much about it, worth reading, but this is at the very least controversial. That's the kind of things to debate academically, not throw as a grenade in public. It is about definitions not economics. It is also definitely problematic...
What does that mean that over 50 year horizon of these types of exercises one should rely on statutory incidence? We teach in econ 101 that statutory and economic incidence are not the same.
Anyway, by all means do consider alternative assumptions. In this particular case, the whole story is the new assumption. There is no major decline in progressivity absent that. If you think it's a fact, you have to think that incidence of corporate tax is solely on shareholders
As another aside, note that even the Piketty-Saez-Zucman assumption was very strong. In particular, no burden was put on workers. Higher corporate tax, possibly lower wages.
Auten and Splinter and CBO put part of the burden on wages. Good evidence for that, see for example recent papers by @FuestClemens, @APeichl and Siegloch aeaweb.org/articles?id=10… or @J_C_Suarez and @omzidar aeaweb.org/articles?id=10…
@FuestClemens @APeichl @J_C_Suarez @omzidar Why does it matter? If corporate tax is only on shareholders, its burden is concentrated at the top. Changes in corporate tax revenue translate into changes in the rate at the top. That's the trend in Saez-Zucman. That's what drives 2018 after corporate tax cut.
Everybody else puts part of the burden on other capital and/or a bit on workers (not in PSZ though). That makes changes in corporate revenue spread out more thinly over the distribution. This is the difference even between PSZ QJE and Saez-Zucman. That's the whole difference.
The one remaining point is capital gains. They smooth them. That makes the series less volatile. It breaks national accounts (that @gabriel_zucman has been adamant you should not do when applied to transfers). It seems it doesn't change the big picture.
But for completeness and direction for an improvement: capital gains accumulate over time. You should spread them over accrual period. That's not just a correction for the year when realized. The 3% assumption is ad hoc. Maybe palatable now but not when inflation was high
Final aside and the last time I am not chill. What I did not like about the whole thing. @nytimes article and editorial were out, details of what these figures represent were not. It wouldn't be difficult to say: we changed corporate tax incidence assumption, but it was not said
@nytimes I can understand publisher constraints. I don't see though why technical appendix can't be released to researchers. Clearly, things were released to journalists. And if there are constraints, then perhaps one should wait with publicity until things are in the open. /end (Chilled)
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