American Economics Association Reaches a New Low
The American Economics Association has awarded the prestigious John Bates Clark medal to University of California, Berkeley economist Gabriel Zucman. At the link you’ll find what the AEA decision makers thought made him deserving.
What’s missing? The shoddy work he did to make the data fit his story that in 2018 the tax rate on the “super-rich” fell below the tax rate on the bottom 50 percent. That contradicted one of his own findings in a previous academic article.
Economic historian Phil Magness, who was one of a number of people who caught the problem at the time, explained the details in a February 25, 2020 article titled “Harvard Finally Stands Up to Academic Duplicity“:
The issue with Zucman’s work revolves around a stunning statistical claim that he made last fall. According to his own proprietary calculations, the overall effective tax rate paid by the ultra-rich in the United States had dipped below that paid by the bottom 50 percent of earners for the first time in 2018.
Zucman released these statistics to journalists with much fanfare, where they were quickly trumpeted as “fact” by outlets including the New York Times and Washington Post to bolster Elizabeth Warren’s wealth-tax proposal. In reality, Zucman’s numbers had not even undergone scholarly peer review, as is the norm for work in the economic arena.
The weeks that followed their release also revealed something far worse than failing to adequately vet this seemingly stunning empirical claim.
Instead of objectively reporting the latest findings from tax statistics, Zucman was placing his finger on the scale. He appeared to be bending his results to conform to the political narrative of Warren’s campaign, which he was also advising at the time. Through a series of highly opaque and empirically suspect adjustments, Zucman had artificially inflated the tax rate paid by the poorest earners while simultaneously suppressing the tax rate paid by the rich.
I was among the first economists to notice and call attention to the problems with Zucman’s new numbers. Shortly after his release to the New York Times, I noticed a strange discrepancy. The tax-rate estimates he provided for the ultra-rich – the top 0.001 percent of earners – did not match his own previously published academic work on the subject, including a 2018 article in the highly ranked Quarterly Journal of Economics.
Whereas Zucman now claimed to show the ultra-wealthy paid just slightly north of 20 percent of their earnings in taxes, the most recently available year of his previously published numbers (2014) places the rate at 41 percent. I called attention to this discrepancy with a tweet, as did Columbia’s Wojtek Kopczuk and the University of Central Arkansas’s Jeremy Horpedahl. Then the floodgates of scrutiny opened.
According to Magness, here’s how Zucman did it:
At the bottom of the income ladder, he was artificially raising the depicted rate faced by the poorest earners. He did so by excluding federal tax programs that are intentionally designed to alleviate the tax burden on the poor, such as the Earned Income Tax Credit and the Child Tax Credit. By leaving out these programs, Zucman not only broke from decades of statistical conventions – he also created the illusion that the tax rate paid by the bottom quintile was nearly twice its actual level.
Later investigation revealed that Zucman further tilted the scales through unconventional assumptions about the burdens of state and local consumption taxes on the poor. To avoid the empirical impossibility of infinite sales-tax rates that arise from accounting discrepancies between pre- and post-transfer income, Zucman essentially excluded the bottom decile of earners when assigning its tax incidence. This essentially causes him to misrepresent data from the second decile from the bottom as the poorest earners.
Zucman’s handling of the very top of the distribution ventured even more aggressively into the territory of intentional data manipulation. The biggest discrepancy here came from his handling of how to assign corporate tax incidence across earnings. When economists examine corporate tax incidence, they usually distribute it across a variety of affected parties according to fairly standard assumptions about the portion that falls onto shareholders, onto other forms of capital, and onto the noncorporate sector of the economy due to various pass-through effects.
Indeed, Zucman followed these conventional assumptions in his aforementioned academic article from 2018, coauthored with Saez and Thomas Piketty. In his new statistics, however, he jettisoned all conventional literature on corporate tax incidence and adopted his own heterodox approach that effectively assigns 100 percent of actual incidence to its statutory incidence, namely shareholders.
This unconventional assumption not only conflicts with his prior work, but is sufficiently unrealistic to have caused a wave of jeers around the economics profession when it was discovered. In practical effect, however, it greatly augmented Zucman’s depicted tax rate on the top 0.001 percent in the mid-20th century and greatly reduced the same in the last few decades, mapping with the recent downward trend in corporate tax rates.
As a result of this scrutiny, the president and provost of Harvard vetoed a job offer to Zucman.
And it wasn’t just free-market types who were critical. Larry Summers, who appeared on a panel with Zucman’s co-author Emmanuel Saez, said that after examining the data that Zucman and Saez used to justify a wealth tax, he was “about 98.5% persuaded by their critics that their data are substantially inaccurate and substantially misleading.”(at the 20:40 point in the above link.) Notice, just following this part, how Summers, using his own data, cast doubt on the Zucman/Saez methodology.
John Bates Clark deserved better.
May 3 2023 at 9:59am
I’m not really surprised given how badly they botched their annual meetings this year by failing to apply Econ 101 reasoning.
May 3 2023 at 12:56pm
I believe this is symptomatic of a much larger problem influencing awards committees in every field ranging from economics to medicine, music, entertainment, and even history. What we’re witnessing today, IMO, is a resurgence of a new Lysenkoism, a dangerous mix of pseudoscience and political ideology that subjugates all formal recognition to the dominant political narrative of the day.
May 3 2023 at 4:18pm
Monte: “a dangerous mix of pseudoscience and political ideology that subjugates all formal recognition to the dominant political narrative of the day.” It seems we are infected by the disease of progressive wokeness.
May 3 2023 at 6:44pm
Yes! What Nicholas Wade in this article described as “a taste-destroying, judgment-paralyzing virus.” The Nobel, Pulitzer, Grammy, and Academy awards have all become a joke. Just look what passes as art or entertainment these days. I don’t know who said it, but they said it best”
May 3 2023 at 1:13pm
What was it that Arnold Kling called the path that economics is traveling on? The road to sociology?
Anyway, the undue focus on gross tax rates, instead of taxes net of benefits, heavily tilts the scale in favor of the narrative Zucman and his fellow travelers are pushing, even without his more brazen manipulations.
The biggest tax loophole that nobody talks about is the income tax. People with low incomes are allowed to purchase government services at a steep, steep discount, while high earners have to pay full price many times over.
Even if tax rates were in fact totally flat, or even a bit regressive, high-income households would still be paying much more in taxes than they receive in government services, and low-income households would be consuming much more in government services than their tax payments could possibly fund. All this fuss over how progressive gross tax rates are is just a distraction from the much more important fact that governments do in fact redistribute money from high-income to low-income households.
May 3 2023 at 1:28pm
The Tax Foundation has studied the issue you raise:
May 3 2023 at 5:37pm
What we call a “flat tax” should really be called “progressive taxation”. A true flat tax is a poll tax (everyone pays the same amount, regardless of income). I see no reason why it’s suddenly “progressive” when the amount increases higher than linearly with income. One might as well draw the line at increasing the rate of the rate of the rate, instead of just the rate of the rate. Or anywhere above this.
May 3 2023 at 6:03pm
A true flat tax is a poll tax (everyone pays the same amount, regardless of income).
I agree. That’s why whenever I discuss the issue I refer to a proportional tax as a flat tax rate.
May 3 2023 at 7:27pm
A poll tax is regressive since the absolute amount taken in tax is fixed and is thus a falling percentage of income as income increases.
May 5 2023 at 8:37am
No, a poll tax isnt regressive, because it isnt an income tax. The denominator is different.
For an income tax, you determine progressivity/regressivity by tax/income.
For a poll tax, it is tax/persons. If kids were taxed less, it would be a regressive tax (larger households pay a lower ratio).
May 5 2023 at 8:41am
Or in more mathy terms, a progressive tax is one in which dy/dx is greater than 1. A regressive tax has dy/dx less than 1.
May 6 2023 at 10:48pm
“No, a poll tax isn’t regressive, because it isn’t an income tax. The denominator is different.
“For an income tax, you determine progressivity/regressivity by tax/income.
“For a poll tax, it is tax/persons. If kids were taxed less, it would be a regressive tax (larger households pay a lower ratio).”
What I had in mind was that those who pay a poll tax out of a low income face a higher average rate of tax than those who pay the same poll tax out of a high income. I’ve reworded my original statement to make this clear.
A poll tax is regressive since the absolute amount taken in tax is fixed and thus takes a higher percentage of the incomes of relatively low earners and a lower percentage of the incomes of relatively high earners.
I think you’ll find this parlance would pass muster in the public finance literature.
May 8 2023 at 3:31pm
Maybe so, but that just means the public finance literature in innumerate.
Lets use an example using my favorite tax, the Georgist Single Land Tax. Lets say the tax rate is 3.5% on the unimproved value of the land.
Is that, based on income, a regressive or progressive tax? Who knows?
But it isn’t either in reality as d^2y/dx^2 = 1. I messed up my earlier comment (maybe I am innumerate). The first derivative would be .035 in this case, it is the 2nd that determines progressivity/regressivity.
But how does it map vs income? Who knows. It is “regressive” vs property values, as the tax is the same whatever is build on it. But is an empty lot more likely to be owned by someone poor or rich? And that isn’t even the question, as it is low income or high income, not amount of wealth.
And low income people would tend to live in neighborhoods with low property values. On the other hand, small farmers often have low incomes to go with large land assets. So who knows?
The point being, it is really stupid to separate the concept of progressive/regressive taxes away from the denominator of the tax.
The math works without any complications.
May 8 2023 at 3:37pm
Also, I know I am right in “common” usage, as a progressive consumption tax has been talked about many times on this site. In that case, consumption is the denominator and it is the metric, not income, being used. High consumption tends to come with high income, but not always. Someone making $75k could consume $75k while someone making $200k could consume $50k and invest $150k and would therefore pay less tax (and a lower rate) than the former.
Curt D Mueller
May 3 2023 at 4:29pm
Any response from the Award Committee? From the Association?
Vernon L. Smith
May 3 2023 at 5:16pm
I think we are seeing here a clear politicalization trend replacing traditional economic reasoning and empirical work in various professional institutions, for example in the NAS Fellows where Saez was one of only three nominees in Economics Sciences.
May 4 2023 at 1:53am
My respects, sir. Your contributions to the field of economics are notable. You continue to inspire. Thank you.
May 3 2023 at 5:17pm
“John Bates Clark deserved better.” You mean the guy who wrote in defense of the tariff?
In fairness to Gabriel Zucman, his 2019 advice to Democratic Party candidates is not why he was awarded the John Bates Clark medal, and the AEA doesn’t suggest that it should be.
What I do not care for in the blurb on the AEA website, but which David does not mention, is the use of the expression “tax evasion” (illegal) as a synonym for “tax avoidance” (legal). That is common these days but, I suggest, unfortunate and misleading.
May 3 2023 at 6:02pm
Yes, that’s the guy I mean.
I’m glad you raised this issue, Mark, because it helps point to a misunderstanding that other readers of the post might have. My objection is not to the fact that they awarded the award to someone who differs with me on taxation. My objection is to Zucman’s sneaky manipulation of the data and in ways that have no justification. If you can point me to instances where John Bates Clark did the same kind of shoddy, obviously incorrect on basic facts, and politically motivated work that Zucman did, I will happily denounce both Clark and the AEA for that too.
Mario J Rizzo
May 3 2023 at 11:19pm
John Bates Clark was one of the greats in the history of economic thought. He can be credited with the marginal product theory of distribution among other things.
May 4 2023 at 10:54pm
But let us not forget Philip Henry Wicksteed’s An Essay on the Co-ordination of the Laws of Distribution (1894).
May 4 2023 at 8:59pm
His work involved both evasion and avoidance. The Panama Papers included both forms
dennis e miller
May 3 2023 at 5:59pm
I’m not an economist and even I can agree that this is a new low in awards.
May 3 2023 at 6:04pm
Paraphrasing Beria, “Show me the discipline and I’ll find you the PC award.” Like meaningless trophies in children’s sports, these awards have no value and simply affirm that folks in any profession are so needy for attention and praise, they will ingratiate themselves to the idol du jour. Sad.
May 3 2023 at 6:26pm
The J.B. Clark medal is certainly not an award that has no value. It’s a highly distinguished award (and often a precursor to the Nobel Prize). In short, it’s a BFD.
Mario J Rizzo
May 3 2023 at 11:24pm
Bidirectional Forwarding Detection (BFD)?????
May 4 2023 at 5:58am
Big Flipping Deal. Although now I may use it to mean Bidirectional Forwarding Detection…