A pricey French import goes mainstream in Democratic primary

NEW YORK (Reuters) - U.S. Senator Elizabeth Warren has carried the idea of a wealth tax onto the center stage of American politics, but the roots were planted far away, in a young French economist’s work unraveling the flow of money through global tax havens.

The more Gabriel Zucman understood about capital being hidden in places like the Cayman Islands, the more he became convinced the run-up in U.S. wealth inequality was no accident.

And beyond a point, it puts the economy at risk, he and fellow University of California Berkeley professor Emmanuel Saez argue. Too much in the hands of too few threatens to stymie economic growth, starve public health and education systems of funds, and leave the middle class pinched with debt, and less able to consume and save.

To which the Massachusetts Democrat might add: Sound familiar?

“What we don’t know,” Zucman said in a recent interview with Reuters, “is the point past which inequality becomes really bad” and undermines the ability of families to reach and sustain middle class living standards, and ultimately chips at the economy’s overall health.

Tepid growth and weakness in the middle bands of wealth and income “is a problem for aggregate demand,” said Zucman, who was mentored by Thomas Piketty, a fellow French economist whose seminal research on inequality has fed the global debate over whether workers are getting a fair shake.

Among economists the idea is not controversial. Analysts at Oxford Economics have estimated roughly $70 billion in “missing” U.S. consumption annually in part due to rising inequality.

How to address it is another matter, and one where politicians on the left, right and center have starkly different ideas.

“It is a huge problem for politics,” Zucman said, and may explain harsher attitudes towards immigration, globalization and capitalism itself.


The argument is playing out notably in the Democratic primary as candidates argue that the American middle class remains vulnerable despite the longest economic expansion in history.

Gabriel Zucman, French economist and professor at the University of California Berkeley, speaks during an interview in New York, U.S., October 25, 2019. REUTERS/Shannon Stapleton

Warren and Senator Bernie Sanders of Vermont are among those offering large structural changes, while others like former Vice President Joe Biden are taking a more gradualist approach.

The discussion has drawn one multibillionaire into the race, former New York mayor Michael Bloomberg, a wealth tax opponent whose estimated net worth of $53.4 billion placed him at No. 8 on Forbes list of the richest people in the country.

But all are speaking amid a deep reconsideration among economists and policy analysts of what’s needed and what’s feasible.

In a sense, it is a culminating chapter of the economic crisis a decade ago.

As the recovery from the Great Recession struggled to gain altitude, Occupy Wall Street protesters and the Tea Party staked out the left and right extremes.

Then came Donald Trump, who played off the latent anger around stagnant wages and lost factory jobs. Nearly three years into his presidency the recovery continues, but the fundamental issue - can the American middle class thrive if ever more wealth is held in fewer hands? - remains unresolved.

“The response to the financial crisis was almost to sort of kick the can down the road on these underlying questions,” said former Federal Reserve governor and Treasury official Sarah Bloom Raskin.


The wealthiest 1% of households did see a drop in their fortunes during the financial crisis, when their wealth fell by a massive $5 trillion, new Federal Reserve data shows.

But that was their only setback in at least the past 30 years.

As stock markets and the economy recovered, the net worth of the richest families mushroomed from roughly $15.1 trillion in mid-2009 to $34.7 trillion now. Their share of all U.S. wealth, which dipped during the crisis, resumed its steady climb, and now accounts for nearly a third of Americans’ collective worth, up from about a quarter a decade ago.

Rampant gaming of the income tax system cuts the marginal tax rate for these one percenters to near zero, Zucman contends. And don’t wait for the rich to die, he argues, because the estate tax has been gutted.

His solution is to tax the whole sum of their holdings each year to fund programs needed now to boost the economy.

Warren has included the idea in her recent plan to expand Medicare and launch other social programs. She suggests a 2% levy on any assets over $50 million, and 6% on assets over $1 billion. Sanders has a slightly different variation.

Even at those tax rates, research by Zucman and Saez suggests the share of wealth held by the richest families would still have grown in recent decades - but only slightly.


The idea faces a number of criticisms, practical as well as ideological.

Legal and constitutional challenges certainly await any U.S. wealth tax. Enforcement may be difficult, requiring efforts to track and estimate sources of wealth ranging from the mundane like stock portfolios or real estate to the exotic like artwork or the present value of mineral rights that may not be exploited for years.

It won’t help that Europe, where Zucman came of age, has largely abandoned wealth levies. Ill designed, in his view, they started at wealth levels so low they created broad opposition and lacked provisions to keep people from skirting them by moving to another country.

While some billionaires like Warren Buffet agree that taxes on the wealthy are too low, others are likely to fight back and argue they are defending American capitalism.

It isn’t, Zucman argues, a new debate.

In their recent book “The Triumph of Injustice,” Zucman and Saez noted that taxes have sometimes been criticized in America as the evil import of “European professors.”

But until Ronald Reagan’s election as president in 1980, top tax rates were much higher than today. Go back to the 1930s, under the administration of Democratic president Franklin Delano Roosevelt, and it was a common view that too much wealth in too few hands was bad for the country.

It is also true that those years of higher taxation, particularly the 1950s and 1960s, were years of strong growth and investment.

Think of the wealth tax, Zucman said, as modernizing an old idea.

“There is this tradition of tax justice and tax progressivity in the U.S.,” he said, “and it has been forgotten.”

Reporting by Howard Schneider; Editing by Dan Burns and Andrea Ricci