Emmanuel Saez and Gabriel Zucman seem to think the correct answer is to assume that there is no substitution away from capital or from the corporate sector:
This paper proposes a new way to do distributional tax incidence better connected with tax theory. It is crucial to distinguish current distributional analysis from tax reform distributional analysis. Current distributional analysis shows the current tax burden by income groups and should assign taxes on each economic factor without including behavioral responses: taxes on labor should fall on labor earners, taxes on capital on the corresponding asset owners, and taxes on consumption on consumers. This allows to distribute both pre-tax and post-tax current incomes and measure the economically relevant tax wedges on each factor without having to specify behavioral responses. Tax reform distributional analysis shows the impact of a tax reform and should describe the effect on pre-tax incomes, post-tax incomes, and taxes paid by income group separately and factoring in potential behavioral responses. Various scenarios can be considered given the uncertainty in behavioral responses. We illustrate our methodology using a simple neo-classical model of labor and capital taxation.
No Western fiscal authority I have heard of thinks of tax incidence in these terms.
There is an argument that you first write down the “no-response” burden in order to arrive at the actual estimated burden, as the authors seem to note. That is not an argument for coming up with a “no adjustment” estimate and marketing it to The New York Times (and others?) as correct and based on normal assumptions, without first adjusting for incentives and capital responses and shifts in the ultimate tax burden. Would we have known about these underlying assumptions — which lie behind their subsequent calculation of wealth inequality — at all, if not for the tireless work of Phil Magness and Wojtek Kopczuk on Twitter?
Returning to the paper, it has some quite weak sentences, such as: “But it [no adjustment] also has the advantage of not being dependent on assumptions on behavioral responses.”
You might as well argue that assuming zero price elasticity of demand “has the advantage of not being dependent on assumptions on behavioral responses.” In reality, one is assuming about the least plausible behavioral response possible.
Here is some background material from Wojtek Kopczuk, which works through how the proffered inequality measures and corporate tax assumptions are related. And from Steven Hamilton. Here is also the recent David Splinter summary analysis on tax progressivity. Wojtek notes in his Twitter thread:
The bottom line: corporate tax should be felt by other forms of capital. That’s the standard assumption. CBO makes it, Auten-Splinter make it, Piketty-Saez-Zucman make it. Who does not? Saez-Zucman (2019) do not.
Here is the semantic innovation from the Saez-Zucman paper:
We think it is more useful to say that cutting corporate taxes could increase workers’ wages rather than say
that the tax burden on workers would fall.
Say both! Here are two well-known and also generally accepted AER papers suggesting that the corporate income tax places a burden on real wages.
Michael Smart agrees with me on the new Saez-Zucman piece:
Zucman has now kindly posted an early working paper to support the SZ assumption. I do not find this WP convincing. We’re simply told that the “natural description” of tax incidence is its legal incidence, i.e. 100% shareholder incidence of CIT.
I find this episode appalling, and I hope The New York Times is properly upset at having been “had.”