In 2019, economists Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley, published a book with a quietly devastating title: The Triumph of Injustice. Its central finding was not a projection or a model — it was a historical fact, derived from exhaustive reconstruction of US tax data going back to 1913. For the first time in recorded American history, the 400 wealthiest Americans paid a lower effective tax rate than working-class families when all taxes — federal, state, local, and payroll — were counted together. The Forbes 400 paid an effective total tax rate of approximately 23 percent. The bottom half of American earners, people making less than $50,000 a year, paid approximately 24 percent. The pattern held even accounting for the value of government transfers and services. The progressive income tax that Americans argue about so intensely — with its top federal marginal rate of 37 percent, its rhetoric of asking the wealthy to pay their fair share — had been offset so thoroughly by other elements of the tax system that the system as a whole was functionally flat, or even regressive, at the very top.

The chart that accompanied this finding became one of the most discussed visualizations in political economy. It showed a U-shaped curve: the bottom deciles of the income distribution paid moderate effective rates on their modest incomes, the middle and upper-middle class paid the highest effective rates, and then rates curved back down as income approached the very top. It inverted the common assumption about what the American tax system does. The assumption was that high statutory top rates on ordinary income meant the wealthy paid proportionately more. The reality was that wealthy individuals derive most of their income not as ordinary income but as capital gains and dividends taxed at preferential rates, shelter gains in unrealized appreciation that is never taxed, benefit from a payroll tax that caps out well below the income levels where wealth is concentrated, and pay far lower effective state and local tax rates because they spend a smaller share of their income on taxable consumption.

Saez and Zucman were not neutral observers — they were committed to progressive redistribution and their book proposed a wealth tax as a solution. But the underlying data they assembled, using IRS records, Federal Reserve flow-of-funds accounts, and national income statistics, was reviewed and substantially accepted by economists across the political spectrum. The finding about effective rates was largely acknowledged. The disagreement was about what to do, not about what was happening. Understanding taxes requires understanding what this finding reveals: that the relationship between tax law as written and tax burden as experienced is mediated by a dense thicket of rates, bases, exemptions, credits, deductions, and cross-jurisdictional strategies that can make high statutory rates compatible with low effective burden.

"The tax system has become a tool for the wealthy to accumulate ever-greater fortunes while the rest of society foots the bill. This is not a natural consequence of markets — it is a policy choice." — Emmanuel Saez and Gabriel Zucman, The Triumph of Injustice (2019)

Key Definitions

Marginal tax rate — The rate applied to the last dollar of income within a tax bracket. This is the rate that applies to additional income earned, not to total income. Under a graduated schedule, all income below the bracket threshold continues to be taxed at lower rates.

Effective tax rate — Total taxes paid divided by total income. The average rate across all income, always lower than the top marginal rate under a progressive schedule. This is the figure that matters for comparing tax burdens across income levels.

Tax incidence — Who actually bears the economic burden of a tax, as distinct from who legally remits it. A tax on corporate profits is legally paid by corporations, but the economic burden falls on some combination of shareholders, workers, and consumers depending on market conditions and capital mobility.

Progressivity — A tax structure in which higher-income individuals pay a larger percentage of their income. The opposite, regressivity, describes a structure in which lower-income individuals pay a larger share.

Capital gain — The profit realized when an asset is sold for more than its purchase price. Long-term capital gains — on assets held for more than one year — are taxed at preferential rates substantially below ordinary income rates in the United States.

Stepped-up basis — A provision in US tax law allowing heirs to inherit assets at current market value, eliminating all capital gains tax liability on appreciation that accumulated during the decedent's lifetime.

Tax expenditure — A reduction in tax liability resulting from a deduction, exclusion, credit, exemption, or preferential rate. Economically equivalent to direct government spending but delivered through the tax code and receiving far less legislative scrutiny.

Deadweight loss — The efficiency cost of taxation — the value of economic transactions that would have occurred in the absence of a tax but do not occur because the tax makes them unprofitable.

Why Governments Tax

Before examining how taxes work mechanically, it is worth asking why governments tax at all. Public economists identify four major rationales.

The first is revenue: governments provide public goods — national defense, courts, basic infrastructure, public health systems — that private markets will not produce adequately because they are non-excludable and non-rival. Once a clean water system exists, it is difficult to exclude users and one person's consumption does not diminish another's. These characteristics make private provision economically infeasible at efficient scale. Compulsory taxation funds collective provision. For more on the economics of public goods, see what are public goods.

The second is redistribution: market outcomes generate substantial inequality that societies may judge excessive on grounds of fairness, social cohesion, or aggregate welfare. Progressive taxes combined with targeted transfers can reduce this inequality. The appropriate degree of redistribution involves both empirical questions (how much does inequality harm economic performance?) and normative ones (how much inequality is acceptable?).

The third is externality correction: markets produce too much of activities that impose costs on others — carbon emissions, tobacco, traffic congestion — and too little of activities that generate benefits for others — research, education, vaccination. Taxes on the former and subsidies on the latter, implemented through tax credits, can align private incentives with social welfare.

The fourth is macroeconomic stabilization: in a Keynesian framework, automatic stabilizers in the tax code reduce effective tax burdens during recessions (increasing private purchasing power) and raise them during expansions, dampening the business cycle without requiring discretionary legislative action.

Income Taxes: The Progressive Rate Structure

The US federal income tax uses a graduated bracket structure with seven rates. For 2024, the rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, applied to successively higher bands of taxable income. The crucial point is that the marginal rate applies only to income within a specific range, not to all income. A single filer moving from $44,000 to $45,000 in taxable income does not pay 22% on $45,000 — they continue to pay 10% on the first $11,600, 12% on the next $35,550, and 22% only on the final dollar above $47,150.

This architecture is widely misunderstood. Polls consistently find that significant minorities of Americans believe that earning more money can result in lower after-tax income by pushing them into a higher bracket. This is mathematically impossible under a graduated rate structure. The bracket rate applies only to income within that bracket, so each additional dollar earned always yields a positive after-tax amount.

The gap between marginal and effective rates is substantial. A single filer with $200,000 in taxable income faces a top marginal rate of 32% but an effective federal income tax rate of roughly 19%. A married filer with $600,000 in taxable income faces a top marginal rate of 37% but an effective rate of around 28%. The effective rate always lies below the marginal rate because lower-bracket income continues to be taxed at its applicable lower rates.

The Earned Income Tax Credit: Negative Income Tax in Practice

The Earned Income Tax Credit is among the largest anti-poverty programs in the United States, providing refundable tax credits to working people with low to moderate incomes. It functions as a de facto negative income tax: qualifying workers with children receive credits that can exceed their total income tax liability, resulting in a net transfer payment from the government. For 2024, the maximum EITC for a family with three or more children is approximately $7,830.

The EITC phases in with earnings — rewarding work — reaches a plateau, and then phases out as income rises toward middle-income levels. The phaseout creates effective marginal rates on affected workers that can exceed their statutory income tax bracket rate, a technical problem that tax economists have long debated. The program has strong empirical evidence for effectiveness in reducing poverty and increasing labor force participation, particularly among single mothers. Raj Chetty and colleagues, analyzing administrative tax data, found that the EITC had significant positive effects on intergenerational mobility for children in beneficiary households, suggesting that the anti-poverty effects extend across generations.

Capital Gains: The Preferential Rate and Its Consequences

The distinction between ordinary income and capital gains income is the single most important structural feature producing the disparate effective rates documented by Saez and Zucman. Workers who receive wages pay ordinary income tax at rates up to 37%. Investors who receive long-term capital gains and qualified dividends pay 0%, 15%, or 20% — rates that cap far below the top rate on ordinary income.

The origins of this preference lie in two arguments. First, many capital gains represent inflation-adjusted returns rather than real gains — if an asset purchased for $100 in 1990 is sold for $200 today, some portion of that $100 gain reflects general price-level increases rather than real economic return. Taxing the full nominal gain at ordinary income rates arguably overtaxes the real return. Second, capital formation is argued to be sensitive to tax rates: lower rates on capital gains are claimed to encourage investment and entrepreneurship by improving after-tax returns. Both arguments have merit in principle; both are also substantially weaponized in political debate to justify rates far below what the economic logic would support.

The Carried Interest Loophole

One of the most contested features of the capital gains preference is carried interest: compensation paid to private equity and hedge fund managers as a share of investment profits rather than a fixed management fee. Although carried interest is clearly compensation for services — the fund manager earns it through work managing others' capital — it is treated as capital gains under current US tax law rather than ordinary income. Fund managers earning tens or hundreds of millions in annual compensation pay 20% on their primary income rather than the 37% rate that would apply to a highly paid surgeon or corporate attorney earning the same amount as a salary.

This disparity has been criticized across the ideological spectrum. Presidents of both parties have proposed eliminating it; Congress has repeatedly preserved it under lobbying pressure from the private equity industry. The Joint Committee on Taxation estimated that taxing carried interest as ordinary income would raise approximately $180 billion over a decade.

Unrealized Gains and Stepped-Up Basis

An even larger structural advantage for the wealthy is the treatment of unrealized capital gains. US tax law taxes capital gains only when an asset is sold — a realization-based rather than accrual-based system. This creates the "buy, borrow, die" strategy used by ultra-wealthy individuals to minimize lifetime tax liability: hold appreciated assets without triggering capital gains tax; borrow against them using the assets as collateral (loans are not income and not taxable); hold until death, at which point the stepped-up basis rule allows heirs to inherit assets at current market value, completely eliminating the capital gains accumulated over a lifetime.

The mechanism is legally straightforward and entirely legal. An individual who purchased Amazon shares in 1997 and held them to death in 2030 would owe zero capital gains tax on decades of appreciation. The heirs inherit at the 2030 value; if they sell immediately, they owe nothing. In aggregate, the step-up in basis forgives an estimated $100 billion or more in capital gains taxes annually.

Payroll Taxes: The Hidden Regressive Element

The Federal Insurance Contributions Act (FICA) taxes fund Social Security and Medicare. For Social Security in 2024, the combined rate is 12.4% (6.2% each from employer and employee) applied to wages up to the taxable maximum of $168,600. Above this cap, no additional Social Security tax is owed regardless of earnings. For Medicare, the 2.9% rate applies to all wages without a cap, with an additional 0.9% surtax on high earners.

This structure creates a steeply regressive pattern above the Social Security cap. A worker earning $80,000 pays the full 12.4% Social Security rate on all of their wages. A worker earning $1 million pays the same tax on only the first $168,600, meaning the Social Security component falls to roughly 2% of their total wages. When combined with Medicare (which does apply to all wages), this payroll tax structure means that middle-income workers face combined payroll tax rates of roughly 15% — while high earners' effective payroll rate falls with rising income.

This is not incidental. It contributes substantially to the Saez and Zucman finding about the U-shaped total effective rate curve. When FICA taxes are included in calculations of total tax burden — as they should be, since they are a mandatory government levy — the progressive character of the federal income tax is substantially offset.

The corporate income tax illustrates the distinction between legal and economic incidence with particular clarity. A corporation can legally remit taxes to the government. But corporations are owned and operated by people, and the economic burden of a corporate tax ultimately falls on some combination of shareholders, workers, and consumers.

Who bears the corporate tax depends critically on how mobile capital is across jurisdictions. In a closed economy where capital cannot move internationally, a corporate tax reduces returns on domestic investment and falls primarily on capital owners — shareholders. In an open global economy where corporations can credibly shift investment to lower-tax locations, the burden analysis changes: if capital mobility is high, a corporate tax may be partially shifted onto workers through reduced investment and wages. The empirical literature has produced a wide range of estimates. Studies by economists including Larry Katz and Alan Krueger suggest that workers bear 20% to 40% of corporate tax burden through lower wages in a mobile-capital world; other researchers place the worker share higher or lower depending on assumed capital mobility. The Congressional Budget Office uses an assumption that capital owners bear about 75% of the burden and workers bear about 25%.

This debate has direct policy implications. If workers bear significant corporate tax burden, then the 2017 Tax Cuts and Jobs Act's reduction of the corporate rate from 35% to 21% — sold as a benefit to shareholders — may also have benefited workers through increased investment and wage growth. Proponents made this argument at the time. The evidence on whether the TCJA produced the promised wage growth was mixed; the nonpartisan Congressional Budget Office found that the TCJA substantially increased the federal deficit rather than paying for itself through growth, adding an estimated $1.9 trillion to deficits over the decade following passage.

The Reasons Wealthy Americans Pay Lower Effective Rates

The Saez and Zucman finding — that effective tax rates become flat or regressive at the very top of the income distribution — is explained by several intersecting mechanisms.

First, the wealthy receive most of their income as capital gains and qualified dividends taxed at 20% rather than as wages taxed at up to 37%. As income rises above a certain threshold, the composition of income shifts from labor to capital.

Second, unrealized capital gains and stepped-up basis mean that substantial appreciation in wealth is never taxed at all. Forbes 400 members hold the majority of their wealth in appreciated equity; the annual increase in value of those holdings is not taxable income.

Third, the Social Security payroll tax cap at $168,600 means that earners above that threshold pay a progressively smaller share of total income in payroll taxes. For someone earning $10 million, the Social Security component represents less than 0.1% of income.

Fourth, sales taxes — imposed by states and localities — are regressive because lower-income households spend higher fractions of their income on consumption. A family earning $40,000 may spend 90% on consumption and pay sales tax on most of it; a family earning $10 million saves and invests most of their income and faces sales tax on only a small fraction.

Fifth, the 2017 TCJA reduced the corporate tax rate from 35% to 21%, benefiting shareholders disproportionately. Combined with the lowering of the top pass-through business income rate through a 20% deduction, the TCJA disproportionately reduced taxes on income derived from capital ownership.

All of these mechanisms compound. Individually, each might be defended on some theoretical ground. Collectively, they produce a system in which the wealthiest Americans pay effective total tax rates comparable to or below middle-class workers.

The Laffer Curve: A Legitimate Insight, a Political Weapon

The Laffer curve describes the relationship between tax rates and tax revenue as a non-linear function. At a tax rate of 0%, revenue is zero. At a rate of 100%, revenue is also effectively zero — nobody works or invests if the government takes everything. Between these extremes, there is some rate that maximizes revenue; above that rate, further rate increases reduce revenue by shrinking the taxable base.

Arthur Laffer famously sketched this concept on a napkin at a Washington restaurant in 1974, in a meeting with Dick Cheney and Donald Rumsfeld. The insight itself is mathematically unassailable and has legitimate theoretical content: there is indeed a revenue-maximizing rate, and if current rates are above it, a rate cut could theoretically increase revenue.

The problem is empirical. The theoretical insight says nothing about where the revenue-maximizing rate actually is. If it is at 80%, then rates below 80% are on the "right side" of the curve, and rate increases raise revenue. If it is at 30%, then rates above 30% are on the "wrong side," and cuts raise revenue. The academic literature, synthesized by economists including Peter Diamond and Emmanuel Saez, suggests that the revenue-maximizing top marginal rate on ordinary income is somewhere in the 70-80% range — well above current US top rates of 37%. At current US rates, the empirical evidence consistently shows that rate cuts reduce revenue rather than increasing it, contrary to the supply-side argument.

The 1981 Reagan tax cuts, which reduced the top marginal rate from 70% to 28% over several years, were accompanied by large deficits, not the revenue surge that supply-side proponents predicted. The 2017 TCJA, which cut the corporate rate from 35% to 21%, increased the federal deficit by approximately $1.9 trillion over its first decade according to CBO projections. Neither episode demonstrates the self-financing revenue response that the supply-side application of the Laffer curve predicts.

International Tax Avoidance and the Global Minimum Tax

The globalization of corporate operations has created enormous opportunities for tax avoidance through profit shifting to low-tax jurisdictions. Transfer pricing — the prices charged for transactions between subsidiaries of the same multinational corporation — is the primary mechanism. A pharmaceutical company that develops a drug in the United States can license the intellectual property to an Irish subsidiary at a low intercompany price, then allow the Irish entity to earn the royalties and profits taxed at Ireland's low corporate rate. The drug's profits are effectively shifted from the high-tax jurisdiction where the research occurred to the low-tax jurisdiction where an IP holding company was established.

Gabriel Zucman's research, published in The Hidden Wealth of Nations (2015) and subsequent academic papers, estimated that approximately $7.6 trillion in household financial wealth was held offshore in tax havens, sheltered from taxation in home countries, and that roughly 40% of multinational corporate profits globally were booked in tax havens. The revenue loss to high-tax countries is estimated in the hundreds of billions annually.

The OECD's Base Erosion and Profit Shifting (BEPS) project, launched in 2013, produced a series of reforms including strengthened transfer pricing rules, limits on interest deductibility to discourage debt-shifting strategies, and requirements for country-by-country reporting of profits and taxes paid. The culminating achievement was the Pillar Two agreement — a global minimum corporate tax of 15% — reached in October 2021 by 137 countries representing more than 90% of global GDP. Pillar Two requires that multinationals pay at least 15% on profits in every jurisdiction in which they operate, with home-country governments imposing top-up taxes where foreign jurisdictions tax at lower rates.

The practical implementation of Pillar Two has proven complex, and tax lawyers have identified multiple strategies for minimizing its impact through substance requirements, qualified refundable tax credits, and other mechanisms. Whether it substantially reduces profit shifting in practice depends on enforcement rigor in signatory countries and on whether major holdout jurisdictions — including some US states and certain island tax havens — maintain carve-outs.

Tax Expenditures: The Hidden Welfare State

The US tax code contains hundreds of provisions reducing tax liability relative to a comprehensive income baseline — collectively called tax expenditures. These include the mortgage interest deduction, the exclusion of employer-provided health insurance premiums from taxable income, the deduction for charitable contributions, preferential treatment of retirement account contributions, and many others. The Office of Management and Budget estimates that major federal tax expenditures total more than $1.5 trillion per year — roughly comparable to the entire discretionary federal budget.

Tax expenditures are economically equivalent to direct government spending programs, but they receive far less political scrutiny. Because they reduce taxes rather than increase expenditures, they are invisible to analyses focused on the "size of government." They also tend to be regressive in their incidence: deductions are worth more to taxpayers in higher brackets, and many tax expenditures target activities — homeownership, retirement savings, employer health insurance — that are more common and more generously utilized among higher-income households. The mortgage interest deduction overwhelmingly benefits homeowners with large mortgages on expensive properties; renters receive nothing. Stanley Surrey, the Treasury Department official who coined the term "tax expenditure" in the late 1960s, argued that if these provisions were explicit spending programs they would receive proper appropriations scrutiny rather than persisting indefinitely as invisible subsidies; that argument has not triumphed.

For the structural forces driving rising wealth concentration that tax policy shapes, see what is inequality. For the public goods and services that taxation finances, see what are public goods.

References

  • Saez, E., & Zucman, G. (2019). The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay. W. W. Norton.
  • Zucman, G. (2015). The Hidden Wealth of Nations: The Scourge of Tax Havens. University of Chicago Press. https://doi.org/10.7208/chicago/9780226245560.001.0001
  • Diamond, P., & Saez, E. (2011). The case for a progressive tax: From basic research to policy recommendations. Journal of Economic Perspectives, 25(4), 165–190. https://doi.org/10.1257/jep.25.4.165
  • Congressional Budget Office. (2023). The Distribution of Household Income, 2020. https://www.cbo.gov/publication/59509
  • Congressional Budget Office. (2018). The Budget and Economic Outlook: 2018 to 2028. https://www.cbo.gov/publication/53651
  • Mirrlees, J. A. (1971). An exploration in the theory of optimum income taxation. Review of Economic Studies, 38(2), 175–208. https://doi.org/10.2307/2296779
  • Atkinson, A. B., & Stiglitz, J. E. (1976). The design of tax structure: Direct versus indirect taxation. Journal of Public Economics, 6(1–2), 55–75. https://doi.org/10.1016/0047-2727(76)90041-4
  • OECD. (2021). Tax Challenges Arising from the Digitalisation of the Economy — Global Anti-Base Erosion Model Rules (Pillar Two). OECD/G20 Inclusive Framework on BEPS. https://doi.org/10.1787/782bac33-en
  • Chetty, R., Friedman, J. N., & Rockoff, J. (2011). New Evidence on the Long-Term Impacts of Tax Credits. National Bureau of Economic Research Working Paper 17699.
  • Joint Committee on Taxation. (2021). Present Law and Background on Tax Treatment of Investment Fund Managers. JCX-22-21.
  • Piketty, T. (2014). Capital in the Twenty-First Century. (A. Goldhammer, Trans.). Harvard University Press.

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Frequently Asked Questions

How do progressive income taxes work?

A progressive income tax is structured so that higher incomes are taxed at higher rates, with income divided into brackets rather than taxed at a single flat rate. The crucial concept is the distinction between marginal and effective tax rates. The marginal rate is the rate applied to the last dollar of income within a given bracket. The effective rate is the average rate paid on total income — total taxes divided by total income. Because only income above each bracket threshold is taxed at the higher rate, the effective rate is always lower than the top marginal rate for anyone not entirely within the bottom bracket. In the US federal income tax, a single filer in 2024 pays 10% on the first \(11,600, 12% on income from \)11,601 to \(47,150, 22% from \)47,151 to \(100,525, and so on up to 37% on income above \)609,350. Someone earning \(100,000 does not pay 22% on all of it — they pay the lower rates on their first \)47,150 of income and only reach 22% on the portion above that. The Earned Income Tax Credit (EITC) extends the logic of progressivity downward by effectively creating a negative income tax for low-income workers: the EITC pays qualifying workers with children a refundable credit that phases in with earnings and then phases out at higher income levels, so that very low-income workers receive a net payment from the government rather than owing taxes. The EITC is one of the largest anti-poverty programs in the United States and enjoys bipartisan support. Progressivity in the income tax is partially offset by other taxes — payroll taxes (FICA) are flat up to the Social Security wage cap and then regressive above it, and most state sales taxes are regressive.

Who actually pays corporate taxes?

Corporate taxes provide a clear illustration of the economic concept of tax incidence — the distinction between who legally pays a tax and who actually bears its economic burden. The corporate income tax is legally paid by corporations. But corporations are not people; the ultimate economic burden must fall on some combination of the human beings who own, work for, or buy from corporations. Economists debate the distribution of this burden across three groups. Shareholders bear the burden to the extent that the corporate tax reduces after-tax returns on capital, lowering stock prices and dividends. Workers bear the burden to the extent that a tax on capital returns causes investment to fall, reducing productivity growth and therefore wages. Consumers bear the burden to the extent that corporations pass higher costs forward through higher prices. The balance depends on the structure of the economy. In a closed economy where capital cannot move internationally, the burden falls primarily on capital owners. In a globally open economy where capital can freely relocate to lower-tax jurisdictions, corporations and investors can escape the tax by moving, so the burden increasingly falls on the less-mobile factors — workers — through reduced investment and wages. The degree to which capital is actually internationally mobile (how responsive investment really is to corporate tax rates) is empirically contested. The standard estimate in public economics textbooks suggests that roughly 20 to 40 percent of the corporate tax burden falls on workers, though some economists argue this is an underestimate and others argue the opposite. The practical importance of this debate is substantial: it determines whether cutting corporate taxes is a tax cut for wealthy shareholders or a measure that benefits workers, and vice versa for corporate tax increases.

What is capital gains tax and why is it lower than income tax?

Capital gains are the profits realized when an asset — stock, real estate, business ownership, artwork — is sold for more than its purchase price. In the United States, capital gains realized on assets held for more than one year (long-term capital gains) are taxed at preferential rates: 0%, 15%, or 20% depending on income, substantially below ordinary income tax rates that reach 37% for top earners. Several arguments have been advanced for this preferential treatment. The most technically substantial is the 'lock-in effect': if capital gains are taxed at realization (when an asset is sold) rather than accrual (as the gain accumulates), investors have an incentive to hold appreciated assets indefinitely to defer the tax, misallocating capital. Lower rates reduce this distortion by making it less costly to sell. A second argument is that inflation may constitute part of the nominal gain, so taxing it at full rates taxes phantom income. A third argument, more political than economic, is that capital gains are a return on risk-taking that should be encouraged. Critics respond that preferential capital gains rates are a primary mechanism through which wealthy investors pay lower effective rates than workers: a hedge fund manager earning \(50 million in carried interest (long-term capital gains from managing other people's money) pays 20% federal tax; an employee earning \)500,000 in salary pays 37% on the top portion. The carried interest loophole — the treatment of fund managers' compensation as capital gains rather than ordinary income — is one of the most contested provisions in the US tax code. Emmanuel Saez and Gabriel Zucman's 2019 book The Triumph of Injustice documents that when all federal, state, local, and payroll taxes are included, the 400 wealthiest Americans paid a lower effective total tax rate than bottom-half earners for the first time in recorded US history.

Why do the wealthy often pay lower effective tax rates?

The counterintuitive finding that very wealthy Americans often pay lower effective total tax rates than middle-class workers — documented most rigorously by Emmanuel Saez and Gabriel Zucman in The Triumph of Injustice (2019) — reflects the interaction of several structural features of the US tax system. Most wealthy individuals derive a substantial portion of their income from capital rather than labor: dividends, capital gains, and business income taxed at preferential rates rather than the 37% top marginal rate that applies to ordinary income. A large share of wealth accumulation occurs as unrealized capital gains — appreciated assets that have never been sold and therefore never taxed. Under the current 'stepped-up basis' rule, if a wealthy person holds an appreciated asset until death, the heirs inherit it at the current market value and owe no capital gains tax on the lifetime appreciation. This means dynastic wealth can accumulate across generations without ever being subject to the capital gains tax. Payroll taxes add regressivity at the top: the Social Security tax applies only to wages and is capped at approximately \(168,600 in 2024, so a worker earning \)50,000 pays FICA on virtually all of their income while a worker earning \(5 million pays it on only the first \)168,600. State and local sales taxes take a larger percentage of income from lower earners, who spend a higher proportion of their income, than from wealthy individuals, who save and invest a larger share. Corporate tax cuts since 2017 reduced the effective tax rate on corporate profits, disproportionately benefiting shareholders who are concentrated in the upper wealth distribution. The combination of these factors — preferential rates on capital, the stepped-up basis provision, the payroll tax cap, and the regressive structure of consumption taxes — produces what Saez and Zucman call the 'triumph of injustice': a nominally progressive system that is actually roughly flat or even regressive at the very top.

What is the Laffer curve?

The Laffer curve is the observation that tax revenue is a non-linear function of the tax rate. At a tax rate of 0%, government revenue is zero. At a tax rate of 100%, revenue is also likely to be near zero, because no one would work or invest if the government took everything they earned. Therefore, there must be some tax rate between 0 and 100% that maximizes revenue, and the Laffer curve shows this inverted-U-shaped relationship. The concept was popularized (though not invented) by economist Arthur Laffer, who reportedly sketched it on a napkin for White House officials Dick Cheney and Donald Rumsfeld in 1974, and became the intellectual justification for the large tax cuts of the Reagan administration in the 1980s. The legitimate version of the Laffer curve insight is simply that very high tax rates can reduce economic activity enough to reduce revenue — a phenomenon the empirical evidence supports at rates above approximately 70 to 80% for top earners, though estimates vary. The politically weaponized version — the claim that current US income tax rates are on the revenue-decreasing side of the curve, meaning tax cuts pay for themselves by stimulating enough growth to increase revenue — is not supported by empirical evidence at current US rate levels. The Congressional Budget Office and nearly all mainstream economists consistently score tax cuts as reducing revenue. The Reagan tax cuts produced large deficits, not self-financing growth. The 2017 Tax Cuts and Jobs Act was similarly projected to increase the deficit, which it did. The important empirical question is not whether a Laffer curve exists (it does, as a matter of mathematical necessity) but where the revenue-maximizing rate is for any given tax, which depends on the behavioral responses of the affected taxpayers. For top income tax rates, most empirical estimates place the revenue-maximizing rate well above current US rates.

How does international tax avoidance work?

International corporate tax avoidance exploits the mismatch between national tax systems and the global operations of multinational corporations. The basic mechanism is profit shifting: moving reported profits from high-tax jurisdictions where they are economically generated to low-tax or zero-tax jurisdictions where they are officially booked. This is accomplished through several techniques. Transfer pricing manipulation involves setting the prices that different subsidiaries of the same company charge each other for goods, services, and intellectual property in ways that concentrate taxable income in low-tax locations. If a pharmaceutical company's Irish subsidiary 'owns' the intellectual property for a drug developed with US research and manufacturing, it can charge the US subsidiary high royalties for the right to manufacture and sell the drug, shifting profits to Ireland's 12.5% corporate tax rate from the US 21% rate. Debt shifting involves loading subsidiaries in high-tax countries with debt borrowed from related entities in low-tax countries, so that the high-tax entity has deductible interest payments that shift income to the low-tax lender. Corporate inversions involve US companies reincorporating in lower-tax jurisdictions — typically Ireland, Bermuda, or the Cayman Islands — through mergers with smaller foreign companies, retaining US operations while reducing tax obligations. Gabriel Zucman estimated in The Hidden Wealth of Nations (2015) that approximately 40% of multinational profits are booked in tax havens, representing hundreds of billions of dollars in annual tax avoidance. The OECD and G20 responded with the Base Erosion and Profit Shifting (BEPS) project, which produced a series of reforms including Pillar Two: a global minimum corporate tax of 15% on multinational profits, agreed by 137 countries in October 2021. Pillar Two is designed to eliminate the incentive for profit shifting by ensuring that profits are taxed at a minimum rate wherever they are formally booked, but its implementation and effectiveness depend on consistent adoption across jurisdictions.

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