Emmanuel Saez and Gabriel Zucman: The Triumph of

Injustice: How the Rich Dodge Taxes and How to Make

Matthias Weber

School of Finance, University of St. Gallen

June 5, 2020

The book The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay
(Saez and Zucman, 2019) by Berkley professors Emmanuel Saez and Gabriel Zucman is
mainly a book about taxation in the United States. It contains some comparisons to other
countries and is certainly relevant beyond the US. The book gives a short overview of the
history of taxation in the US and describes how a tax system that used to be highly
progressive (meaning that richer people paid a higher share of their income in taxes than
poorer people) became less and less progressive, up to the point where the richest of the
rich pay a lower fraction of their income in taxes than the middle class, which is the case
at the moment.

The book is a book about taxation, but it is also a book about inequality. The authors
elucidate the two-way interaction between taxes and inequality. Taxation naturally
influences the development of inequality in a society. However, inequality similar
influences taxation via the influence that wealthy people have on politics and therewith
on which taxes are levied, how high tax rates are, and what the rules and norms for the
enforcement of the tax collection are.

The US used to have highly progressive taxes for most of its history, especially in the
decades after the second world war when US economy and society were thriving.
Measuring who pays how much tax effectively is not an easy task – at the end, all taxes are
paid by people, but many taxes (as one example the corporate income tax) are levied in a
way that do not make it obvious who pays. To measure the effective tax payments, the
authors largely rely on a relatively new methodology that they developed themselves,
jointly with Thomas Piketty (Piketty et al., 2018). 1

The authors describe how the tax system has slowly become ever more favorable to the
rich in the past decades. In the fifties and sixties, the richest 0.1% of individuals paid on

1
Thomas Piketty’s book Capital in the 21st Century (Piketty, 2014) is one of the major recent contributions
putting inequality in the spotlight.
1
average about half of their income in taxes whereas the population excluding the richest
10% paid on average only a quarter to a fifth. This changed slowly over the decades.
Currently, all income deciles pay with about 25% to 30% a similar fraction of income in
taxes. Taxes are mildly progressive for most part of the income distribution, but they
become even regressive at the very top of the income distribution: in 2018, for the first
time in history, the richest 400 Americans paid on average a lower fraction of their income
in taxes than the poorer half of society. This decrease in tax progressivity went hand in
hand with an increase in inequality so severe that the richest 1% of society now earn more
than 20% of national income (as compared to about 10% forty years ago), while the bottom
half of society only earn 12% (as compared to about 20% forty years ago).

There are two main direct contributors to the decrease in tax progressivity in the past
decades. The first is tax evasion and avoidance. 2 The second is a decrease in tax rates
benefitting the rich. Saez and Zucman illustrate well how these two factors often came
together, increases in tax evasion and avoidance being followed in steps by decreases in
tax rates, justified by the argument that taxes must go down as they would otherwise be
evaded or avoided. However, this argument may not stand up to scrutiny.

The authors make the point that tax avoidance and evasion are not as unpreventable as
often thought. This is in particular the case as corporate taxes, the taxes that are most
severely avoided, are not avoided by moving actual physical capital. If a firm “relocates”
to a tax haven, it merely shifts paper profits. Such avoidance or evasion was not tolerated
in the US during most of the 20th century. The law of the United States contains the so-
called economic substance doctrine, which makes transactions illegal that have as sole
purpose to reduce tax liability. This doctrine seems to have been applied much more
consequently in the history of the US than nowadays. In addition, there was a clear
consensus among lawmakers in the past that, if the law was not sufficient to curb tax
evasion or avoidance, the law should quickly be modified. The authors describe how
Congress reacted quickly in 1937 to outlaw multiple tax avoidance schemes that had
appeared such as setting up foreign personal holding corporations in the Bahamas or
Panama. Unfortunately, quick and determined reactions to tax avoidance schemes are no
longer common, not only in the US but in many countries. According to the authors, about
40% of all multinational profits are booked in tax havens, globally.

Underlining their argument with such historical examples and some data, the authors
stress that letting people avoid taxes is a choice of society. It is not an explicit or deliberate
decision, but what the law states and whether the law is strictly enforced depends on

2
The authors rightly note that the distinction of tax evasion and tax avoidance is not as clear cut as the
industry of tax lawyers and consultancy firms tries to portray. The book describes this in the context of the
US, but it holds similarly in other countries. The massive cum-ex tax fraud that cost Germany billions of tax
money, for instance, was also described as legal tax avoidance by some interested parties such as law firms,
despite the fact that it was clearly illegal (which was also confirmed by German courts thereafter).
Unfortunately, the German authorities enforced the law insufficiently with huge losses for society.
2
government and Congress (including decisions about whether the Internal Revenue
Service receives enough means to be able to enforce the law). In most of US history, tax
avoidance and evasion were kept under control and they could be curbed again in the
future.

Except for curbing tax avoidance and evasion via better laws and stricter enforcement of
the rules (including the creation of an agency regulating tax-related services similar to the
Consumer Financial Protection Bureau), Saez and Zucman offer various ideas on how the
tax system could be made fairer. This includes ideas that have been around for a while
such as a progressive wealth tax, which seems useful as it raises revenue by directly
addressing the problem of severe wealth inequality. The authors also argue in favor of
more progressive personal income taxes, taxing labor and capital at the same rate, as
income can often be shifted from one to the other (a lawyer, for instance, may found a
small company and pay herself capital income instead of labor income). 3

A non-standard idea to improve the tax system is an effective minimum corporate tax.
According to this proposal, countries would impose a minimum corporate tax rate (of, for
example, 25%). Preferably, countries would agree jointly on such a tax rate, but the beauty
of the proposal is that it is not strictly necessary: countries could partially tax foreign
companies, up to a limit determined by the proportion of sales in the home country. More
precisely, countries could collect a proportion of the tax deficit of a foreign company,
which is the tax that is missing to the minimum effective tax rate. That is, if the US
implements a minimum corporate income tax of 25% and 10% of a Swiss company’s sales
are in the US, while the company only pays a tax rate of 5% on its global profits, the US
would charge the company a tax of 2% of its global profits (the tax deficit would be 25%-
5%=20% and 10% thereof, which corresponds to the sales in the US, would be 2%). This
solution seems easy to implement and in agreement with current tax treaties.

To raise additional revenue, the authors propose what they call a national income tax
(instead of value added or sales taxes). This tax would be a flat tax in addition to the
progressive personal income tax, levied on all income independent of whether it arises
from labor or capital and on which sector it arises from. The authors suggest no deductions
and not to exempt savings.

The book makes a good case that taxation in the US has become highly unfair and makes
suggestions how to address this problem. What about the weaknesses of the book? There
are not many, but for my taste, there could have been more details about the suggested
tax reforms. The suggestions clearly go in the right direction and some of them seem rather
obvious (such as the introduction of a progressive wealth tax – at what rate exactly wealth
should be taxed is a more difficult question, though) but others are not as trivial. I would

3
Some readers may remember a textbook result that optimal capital taxes are zero. However, the models
are not supported by empirical evidence. Saez and Zucman show how actual saving behavior is the opposite
of the assumptions in those models.
3
have liked to see more detail on the corporate income tax proposal and especially on the
flat national income tax. How exactly can these be implemented and administered, what
are the legal challenges, what are the most likely induced behavior changes, which possible
drawbacks do the reforms have and how could the drawbacks be mitigated? The authors
answer some of these points, but more detail would – at least for an academic reader –
have been welcome.

Overall, the book provides a concise and well-written account of the problems with
taxation in the last decades. It provides some solutions to the existing problems and is
certainly a great starter for any discussion about optimal taxation and tax avoidance. I
highly recommend reading it.

References

Piketty, T. (2014). Capital in the 21st Century. Harvard University Press.

Piketty, T., Saez, E., & Zucman, G. (2018). Distributional national accounts: methods and
estimates for the United States. The Quarterly Journal of Economics, 133(2), 553-609.

Saez, E., & Zucman, G. (2019). The Triumph of Injustice: How the Rich Dodge Taxes and
How to Make Them Pay. WW Norton & Company.