Gabriel Zucman: “Some People in Economics Feel That Talking About Inequality Is Not What Economists Should Be Doing”

The rising scholar of taxation and inequality talks to ProMarket about the problems excessive economic power poses for open political systems, how states can tackle profit-shifting, and critics who have dismissed his work on distributional issues as “a French economics.”

 

 

Gabriel Zucman

Straightforwardly normative critiques of capitalism are these days rather sparse among mainstream economists in rich countries. Nonetheless, in the aftermath of the financial crisis, a clutch of researchers that we might dub “the Piketty School” have mounted a positivist critique of capitalism on the turf of neoclassical economics itself. Its practitioners have painstakingly assembled sprawling historical and geographical tax and income datasets to paint a picture of an economic system fostering extensive concentrations of capital that in the very long term provoke political destabilization. Piketty School narratives resonate perhaps now more than ever given that anti-establishment movements have taken charge of the state in a handful of Western countries.

 

In the United States, Gabriel Zucman has assumed the mantle as one of the Piketty School’s leading exponents. Starting with his 2008 master’s thesis on France’s “solidarity tax”—a project supervised by Thomas Piketty himself at the Paris School of Economics—Zucman has homed in on taxation of wealth (or the lack thereof) and how this impacts the wealth distribution overall in rich countries.

 

Now a professor of economics at UC Berkeley alongside another high-profile Piketty collaborator, Emmanuel Saez, Zucman has steadily gained prominence in academic and public debates on tax evasion, particularly after the Swiss bank leaks and the Panama Papers revelations. He and his colleagues are working now with several governments to use the data leaked in those scandals to estimate the full extent of tax evasion and help states stop it. He is also a vocal critic of how corporations, and the digital platforms in particular, have used tax havens that, in his words, steal the revenue of other countries. In 2015 he published the English version of The Hidden Wealth of Nations: The Scourge of Tax Havens, which has also appeared in 17 international editions.

 

Zucman recently met with ProMarket to discuss his work on what he calls “one of the most important questions of our time,” as well as how his research has been received among fellow economists inside the world’s ever-more-unequal superpower.

 

[This interview was conducted on May 10, 2018. It has been edited for length and clarity.]

 

Q: As a political scientist and not an economist, I see your work as striking right to the heart of one of the key issues of political economy, which is whether liberal states actually have compulsory power over multinational corporations and highwealth individuals. Does that properly characterize what your research is about?

 

Absolutely. At a high level, what interests me is how you can combine an open world, a globalized world, with fairness, and justice, and in particular, tax justice.

 

Many people have this view that these two things are conflicting with each other, that you can’t tax multinational companies in a globalized world, that they will move to low-tax countries, or they will avoid taxes by shifting profits to Bermuda, or places like that.

 

There is this view that you can’t tax rich people, high earners, or very wealthy individuals, or they would hide assets or, again, move to low-tax places. What I want to do in my research is to try to explain how important these phenomena are, to quantify these things, to understand why we’ve let these phenomena of tax avoidance and tax evasion prosper, what are the policies and the policy failures that are responsible for this.

 

Third, how we can design better policies to address these issues, and in particular how we can try to combine openness with a relatively progressive tax systems, proper taxation of capital income and wealth, with the proper taxation of wealthy individuals. And so I’m trying to come up with innovative policy solutions, because otherwise my view is that if we don’t find a way to combine openness and tax justice, what’s going to happen is that people are going to retreat from the globalization and say, “Well, it doesn’t work.”

 

If globalization means ever-lower taxes for the rich and for multinational companies, and ever-higher taxes for those who presently don’t benefit from globalization—for retirees, for small businesses—then it’s a scam. It doesn’t work.

 

That’s not sustainable. I really believe that. That’s why this is one of the most important questions of our time. So that’s where most of my research is.

 

“If globalization means ever-lower taxes for the rich and for multinational companies, and ever-higher taxes for those who presently don’t benefit from globalization—for retirees, for small businesses—then it’s a scam.”

Q: I don’t want to ask you too much about your research today, because you have so much of it out already in the press and people can read it there. But it seems that given the limitations of the data you’re looking at, the estimates you’ve made of tax evasion might be underestimates still.

 

It’s very hard, of course, to measure tax evasion, tax avoidance, and the revenue costs of all of this for governments around the world. What I try to do is approximate the full view with whatever data is there—which is limited and imperfect.

 

There is, generally speaking, a lot of opacity about wealth in particular, which is in part the nature of the subject, in terms of tax evasion, of course. It’s always going to be hard to measure tax evasion. But when you think about wealth more generally, right now our institutions create a lot of opacity in the sense that we don’t require people to, for instance, declare their assets. There’s no wealth tax.

 

We have registries for real estate, but not for financial assets. Even the registries that exists for real estate are very incomplete, in the sense that people can just own real estate through shell corporations, so that’s what will show up in the registries.

 

What I want to say is that, as a society, we have achieved a stage where who owns what is extremely opaque. We could do much better. Historically, we’ve done better. When land registries and real estate registries were created centuries ago, there we caught most of people’s wealth. We could do much better. That’s, again, a political choice.

 

To answer your question, yes. What I’m trying to do in my research is first bring some new data sources that people have not been able to study in the past, sometimes because they did not exist. For instance, recently I’ve used data leaked from financial institutions in tax havens, like the Panama Papers.

 

Most of the time, I’m trying to combine the different data that exists to try to have a comprehensive—as comprehensive as possible—and consistent picture of what I’m interested in, be it income, wealth inequality, tax evasion, or corporate tax avoidance.

 

Q: Paul Tucker’s new book talks about technocrats and central bankers as potentially “overmighty citizens,” referring back to the British nobles who were called “overmighty subjects” because they amassed more power than the actual monarchs. This phrase “overmighty citizens” actually seems a good moniker for the superwealthy people whose power seems to evade the political structures that we have today.

 

I agree.

 

Q: Do you think that they represent an actual threat to liberal constitutionalism and the rule of law?

 

I think that extreme inequality certainly poses a very serious threat for democratic institutions. It’s hard to say what really is too extreme. What’s the point beyond which the rich are so powerful that they control the political process? I think that’s the main, most important reason about why we care about inequality, because inequality affects the political process.

 

Wealth is power, and extreme concentration of wealth means an extreme concentration of power. That should concern all of us.

 

Q: I see two different sides to this, partly that they can evade the rule of law, but partly that they capture, and they appear to—at least in this country and maybe even in yours—have captured the state. Not only are they free of the state’s coercive power on the one hand, but they’re wielding the state’s coercive power in their own interests, increasingly.

 

That’s exactly what I meant when I said wealth is power. It’s the power to control the state for your own benefit. You see this very clearly in the United States, where inequality has increased enormously. And at the very same time as inequality arose, tax progressivity declined. Basically, the rich cut their tax rate.

 

That’s a striking illustration of this notion that, yes, when there is such an extreme concentration of power, then the big policies increasingly are done for the benefit of those who already have a ton of power. You’re in a plutocratic or oligarchy trap, from which it’s very hard to escape.

 

“When there is such an extreme concentration of power, then the big policies increasingly are done for the benefit of those who already have a ton of power. You’re in a plutocratic or oligarchy trap, from which it’s very hard to escape.”

Q: That’s my next question. From what I’ve read of your work, you always seem to have a lot of optimism that the state can use policy levers or technocratic strategies to rein this in. But if institutions themselves have increasingly become extractive, rather than inclusive—if the corrosion is happening at the institutional level, do you think those levers are sufficient?

 

The reason why I’m optimistic is because I see that things changed in our history. Progress happened. Sometimes you have the feeling that there’s no solution but new solutions are invented, and new ideas matter. It can take time for these ideas to have an influence, but in the long run they do matter.

 

Even in my own area of research, I started doing research about 10 years ago, when there was very limited, almost no exchange of information between tax havens and foreign countries’ tax authorities.

 

When you told people in this area, “One very basic thing that should be done is to force banks in Switzerland and places like that to send information to the areas or tax authorities in other countries about who owns wealth there,” people would reply, “Oh, that’s crazy. That’s never going to happen.”

 

Either it’s impossible, “How are you going to convince the Swiss banks?” Or it’s impossible because the institutions are captured by the very wealthy. They’re all evading taxes, so you know it’s a nonstarter and it will never happen. Now it exists. That’s the law. There is an almost global system of automatic exchange of banking information in place. It happened in just 10 years, from nothing to a global framework.

 

Of course, it’s not sufficient and is not addressing many of the key problems, but it’s still very tangible and very concrete progress in a relatively short period of time.

 

Q: What is your feeling about the potential of the United States and France to address these big problems within a 10- to 20-year time horizon?

 

I’m, again, relatively optimistic. These days, I do a lot of work and I try to think about how to properly tax multinational corporations in a globalized world. I think that there are very concrete policy solutions to the problems that exist today.

 

Today the big problem is that about 40 percent of the profits of multinational companies are artificially shifted to places like Bermuda, Ireland, Cayman Islands, or Singapore, where there is almost no production taking place, but the profits are booked there. You could radically address that issue by changing the way that we tax corporations.

 

What we could do is we could say, for instance, take Apple. If Apple makes a hundred billion dollars in profits globally, and 20 percent of its sales are in the US, then the US could say, “We’re willing to consider that 20 percent of Apple’s profits have been made in the US, and that’s what we’re going to tax.”

 

The beauty of this is that the customers that are in the US, Apple can’t move them to Ireland or Bermuda, so the tax base becomes inelastic. The US, France, the UK, or any small country could do that unilaterally. Any country could say, “Now this is going to be the way that we compute what’s the amount of profits that are taxable in our country.”

 

You don’t need an international agreement. That would put an immediate end to profit shifting and the abuse of transfer pricing.

 

Q: Yes, I’ve read your New York Times piece about that. How are proposals like that received in general by a policy audience, in your experience?

 

I think people understand that this is a solution, that this is feasible. They understand all the more so when you tell them this is already how it works within the US. US states have their own corporate income taxes—California, New York—and that’s how they compute profits, and it works well.

 

It’s the same in Germany. German municipalities have their corporate taxes. That’s how they do it. The European Union—the European Commission has proposal to do something which is exactly close to that within the EU. These are proposals that are on the table that are being discussed.

 

But it takes too much time, especially in the EU, to make progress. We are still at the stage where we believe it’s important that all countries agree. EU institutions say that you need unanimity on tax matters to make progress. Too many policymakers are still in this spirit where, “Oh, it’s very important that everybody agrees, that there is international cooperation and international agreement.” Whereas I think that on this particular question, the solution is to move unilaterally.

 

If we wait for Luxembourg to give its green light, if we wait for Ireland, or if we wait for Malta, these are all countries within the EU that gain enormously from the current system, because they attract a ton of profits from abroad, to take in an artificial way.

 

By applying even tiny tax rates to these huge profits, they make a ton in tax revenue. And so of course they have a vested interest in the status quo. We can’t wait for them to change their mind. They will never change their mind.

 

Q: I can imagine a future where the UK will also be aligning in that direction

 

Yes! The solution is not to wait for them to change their mind, because it will never happen, unless you have economic sanctions against the countries that benefit from stealing the revenue of other countries.

 

There are two possibilities. You can have economic sanctions, like trade tariffs, for instance. Or you can say, “We’re going to change our own laws, the way that we tax international companies, to protect our tax base, to make it irrelevant for firms to declare they have profits in Malta or in Ireland,” by doing the system that I described.

 

Q: There’s another book that’s recently come out called The Moral Economists that talks about this resurgent materialist critique of capitalism. It orients Piketty, Atkinson, and you—without mentioning you, but by extension—vis-à-vis a more affective critique of capitalism, an emotional or moral discussion of the costs that it imposes.

 

Obviously, the materialist critique seems to be easier to move forward with given the tools that economists have today. But it seems like you and your collaborators want to distance yourself a bit from this more moral line of critique and focus specifically on the materialist problem of inequality. Is that true?

 

I think there’s a role for different forms of critiques and approaches to the current social problems. I think these various points of view are complementary to each other. It’s not like there is one…

 

Q: But the author’s point is that there isn’t really, currently, a line of research that’s making that critique at all. The primary critique at this point is the inequality-driven critique…

 

Maybe.

 

Q: You don’t think so.

 

I see a lot of thinking about the problems with capitalism and potential solutions in many social sciences. I try to contribute to that at a very modest level, with a very specific and limited, incomplete approach, but an approach that I think is necessary in establishing facts.

 

Long-run series about inequality or estimates of tax evasion, of tax avoidance, there is a demand from the public for that type of information. I feel that it’s a way to be useful at a modest level by doing that. It is not at all sufficient. It is just a very small part of the broader thinking in the social sciences.

 

Q: Do you get much pushback from people inside your discipline?

 

Of course, yes. I get pushback, let’s say not as much on the substance oftentimes as on the approach. Some people in economics feel that economics should be only about efficiency, and that talking about distributional issues and inequality is not what economists should be doing, that it’s something that politicians should be doing.

 

Sometimes I have reactions like that. “Why should we care, as economists, about inequality?” That’s a question I hear a lot.

 

Q: In Piketty’s Capital in the Twenty-First Century, in his introduction, he talks about the influence of American economists on this, specifically, doesn’t he?1)Piketty writes in Capital: I experienced the American dream at the age of twenty-two, when I was hired by a university near Boston just after finishing my doctorate. This experience proved to be decisive… I did not find the work of US economists entirely convincing… To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with other social sciences. (pp. 31-32). Do you find, as a French economist working in America, that that critique is valid?

 

There are certainly some American economists who think that way, but there are also many American economists—and not only American, but all over the world—who study inequality, who study wellbeing, who’ve been preoccupied by questions of distribution for a very long time.

 

One criticism that I’ve received recently in a seminar room was, “Oh, but what you’re doing, it’s a very French way of looking at things. It’s kind of a French economics.” I don’t think that’s fair. I think that many people, including in this country, care enormously and have done a lot of research on these questions and on inequality.

 

Q: When I was talking about your optimism that the state can tackle these issues, I wanted to ask you if you think that your country’s history feeds into that optimism at all. Even leaving aside the revolution, France has done a pretty good job redistributing wealth—in comparative terms.

 

Well, let’s say that inequality has increased less in France in recent years than in the US, and inequality, immobility in Western European countries has increased less than in the US. It has nonetheless increased, and there are very serious problems. It’s not a reason for saying that everything is perfect or working well, which is not the case.

 

The US has experimented with many things and for half of the 20th century was a relatively egalitarian country, at least in terms of the distribution of income and wealth. The US invented the very high tax rates on top earners. The US, for almost half a century, had 80, 90 percent marginal income tax rates, 90 percent estate tax rates. France never had 90 percent estate tax rates or 90 percent marginal income tax rate. The US used to see itself as much more equal than Europe in the 19th century. That’s what Tocqueville, when he came to the US, he celebrated the American egalitarian ethos in some sense.

 

Some economists have the view, “The French are equal, kind of socialists. In the US, on the other hand, we only care about efficiency. We know we’re not an equal society. We’ve never cared about that. There’s always been income inequality.”

 

Everything in that statement is wrong. These things change a lot, and it’s a very naive and historically wrong view. France used to be very unequal for a long time. It cares about equality, but the US used to care even more and used to be even more equal than France.

 

For further discussion about Piketty, listen to Kate Waldock and Luigi Zingales discuss “Capitalism in the 21st Century” in an episode of the Capitalisn’t podcast:

 

 

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.  

References   [ + ]

1. Piketty writes in Capital: I experienced the American dream at the age of twenty-two, when I was hired by a university near Boston just after finishing my doctorate. This experience proved to be decisive… I did not find the work of US economists entirely convincing… To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with other social sciences. (pp. 31-32).