American Economics Association Reaches a New Low (in awarding the Clark medal to Gabriel Zucman)

By David Henderson.

"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-20^th 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."