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I'm sorry, Dave

David Heinemeier Hansson (dhh@hey.com)

Updated 2026-07-27 15:59:46

Thursday, January 22, 2026

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“[I]ntelligence, that counterentropic conjoined twin of information, must become the most powerful force in the universe, the energy to which all other physical laws must eventually kneel…Intelligence was destiny, manifest.” — Ian McDonald, “Verthandi’s Ring”

Not a lot of people expected that AI would come for the mathematicians before it came for the truck drivers, but it did. The other day, an AI model disproved the Jacobian Conjecture — an 87-year-old open problem that human mathematicians had struggled to solve. The greatest living human mathematician, Terence Tao, turned to AI to help him understand the solution. Around the same time, AI solved a very important open question in quantum cryptography. Solving Erdos problems has now become almost child’s play for the best AI models. And this is the worst AI will ever be at math. Model capabilities, and the amount of compute available, both continue to increase at rapid rates. (Meanwhile, long-distance trucking employment is slightly higher than it was a decade ago.)

I don’t expect mathematicians to actually lose their jobs en masse, of course.1 But it’s becoming clearer and clearer that humankind has invented machines that are smarter than we are. Intelligence isn’t defined for machines the same way it is for humans — AI’s capabilities are spiky in different ways than ours — but it’s undeniable that the technology is improving rapidly in every domain of cognitive capability. It’s still possible to find some mental tasks that humans are better than machines at, but those final advantages tend to disappear almost as quickly as we can identify them. “AGI”, or “ASI”, or whatever you want to call it, is certainly here.

And yet…the world remains much the same. In lots of sci-fi books, as soon as artificial superintelligence arrives, it bootstraps itself to even more godlike intelligence in an explosive “singularity” that rapidly transforms the entire physical universe. Lots of people, especially “AI safety” and “effective altruist” types, expected things to play out basically the same way in reality. But looking around, not much has changed since we entered the intelligence explosion. There’s a huge data center boom, and most people use AI on a daily basis, but we still live basically the same lives — driving to work or taking the train, sitting in front of a computer, scrolling on our phones, collecting a paycheck. People are staying in their jobs longer, but employment hasn’t been disrupted in a significant way:

Meanwhile, we’ve had decently robust productivity growth, but nothing really amazing:

A lot of people I know are surprised by this. Ruxandra Teslo writes:

Walking around the world today one might notice that it is weirdly unchanged…To many, this is surprising. Just the other day I was at a conference where someone remarked that if he could have seen today’s AI capabilities a few years ago, he would have been astonished — and would have assumed the world by now would look far more transformed, with much higher GDP growth.

And Clifford Sosin writes:2

Superintelligence arrived. You probably didn’t notice, because it turned out to be kind of incremental…Don’t believe me? Run the test. Talk to Fable 5 for an hour, then talk to your ten smartest friends. Which one is smarter? Don’t worry, they won’t be offended…We were told to expect something bigger. Once machines crossed some line, the system’s IQ would climb to heights we couldn’t follow, and we’d be sharing the planet with something that designs warp drives and thinks thoughts as far past us as mine are past my dog…What we got is a tool that writes excellent code, beats people at a startling range of tasks, and will clearly reshape the economy. It’s also, somehow, incremental. No takeoff. No explosion. That’s the strange part.

Teslo blames bottlenecks — governance and other “frictions” — for the slow economic impact. But some others are advancing a more radical hypothesis3 — that intelligence itself is subject to diminishing returns.

One of these is Francois Chollet, an AI researcher who specializes in measuring AI’s capabilities. In a highly controversial series of tweets back in March, he conjectured that intelligence might be subject to diminishing returns:

One of the biggest misconceptions people have about intelligence is seeing it as some kind of unbounded scalar stat, like height. "Future AI will have 10,000 IQ", that sort of thing. Intelligence is a conversion ratio, with an optimality bound. Increasing intelligence is not so much like "making the tower taller", it's more like "making the ball rounder". At some point it's already pretty damn spherical and any improvement is marginal.

Now of course smart humans aren't quite at the optimal bound yet on an individual level, and machines will have many advantages besides intelligence -- mostly the removal of biological bottlenecks: greater processing speed, unlimited working memory, unlimited memory with perfect recall... but these are mostly things humans can also access through externalized cognitive tools.

In fact, this is a possibility I myself had raised in a post a year earlier:

It seems possible that humans are simply incredibly specialized in a few types of cognitive tasks — extracting patterns from sparse data, synthesizing various patterns into “intuition” and “judgement”, and communicating those patterns in language — and that we’ve basically approached the theoretical maximum in those narrow areas…That would explain why AI has gotten much better at things like math and coding and forecasting over the last year, but why the basic chatbot interface doesn’t seem much more “intelligent”. It would also explain why when you talk to Terence Tao about math, it’s like talking to a superhuman, but when you talk to him about where to get lunch or which movies are the best, he’ll just sound like a fairly smart normal dude. AI will eventually get better than Tao at math…but it may never get much better than the most thoughtful, eloquent humans at deciding where to get lunch or recommending movies. It may simply not be mathematically possible to get much better than we already are at that sort of thing.

Why would intelligence top out like this? Well, if we think of intelligence as the ability to extract information from data, then even an infinitely advanced model endowed with infinite compute will be limited by the fact that there’s a limited amount of information that can be extracted from the data.

For one thing, data itself is in limited supply. You can’t transform the world unless you can (in some generalized sense) understand it, and you can’t understand the world unless you can measure it, and our ability to measure the world is inherently limited and finite.

This is basically the hypothesis advanced by Arvind Narayanan and Sayash Kapoor:

We think there are relatively few real-world cognitive tasks in which human limitations are so telling that AI is able to blow past human performance (as AI does in chess). In many other areas, including some that are associated with prominent hopes and fears about AI performance, we think there is a high “irreducible error”—unavoidable error due to the inherent stochasticity of the phenomenon—and human performance is essentially near that limit….We predict that AI will not be able to meaningfully outperform trained humans (particularly teams of humans and especially if augmented with simple automated tools) at forecasting geopolitical events (say elections).[emphasis mine]

Sosin says something similar:

We hold a thin scatter of facts about the world, and intelligence or reasoning is whatever fills the space between them…Where the space between the facts behaves well, this is close to godlike…Coding, math and most administrative work are [like this]. What makes them easy is that they have relatively smooth solution spaces and are tractably verifiable…Most of what matters doesn't behave like that. The universe is mostly the emergent behavior of complex systems…The limit is contact with reality. A smarter reasoner fills the gaps between known facts in simple areas faster and better, but it doesn't produce new facts.

Sosin makes an important point here, which is that the limitations of intelligence aren’t necessarily about limited data. Even if we can keep on collecting infinite data, the cost of extracting additional information from that data might explode to infinity. This is the idea of chaos. Even in a deterministic universe where the present states of all particles are enough to perfectly determine the future, our ability to predict the future can be inherently limited; the tiniest infinitesimal error in our measurement of the present explodes into a huge error when we attempt to extrapolate even a small distance into the future.

So although we don’t know yet, it’s possible that humans were already hitting the point of diminishing returns with regards to individual cognitive capacity, and that superintelligent machines will never be as far beyond us as we are beyond dogs. But even if that’s true, I can think of at least three reasons why machine superintelligence could still deliver huge productivity gains.

Smart matter

The most obvious advantage that machine superintelligence confers is replicability. The number of human intelligences is fixed by the fertility rate, and we don’t know how to substantially boost that rate; in fact, it’s falling inexorably, and the human race is set to shrink.

AI isn’t bound by those limitations. By building more data centers with more compute, you can run more agents in parallel — essentially, you get more cognitive work. It’s not free, but nor is it limited. It’s good old physical capital; unlike human capital, you can just build more of it whenever you like, simply by reinvesting some portion of your economic output. Imagine if we suddenly discovered a way to manufacture more land in any city on the planet; this is similar.4

Of course, lots of tasks are physical ones, and for these you need physical machines — basically, robots. This is probably why so many AI people are now working on robotics, world models, physical AI, and so on. The roboticization of the world has a huge tailwind — the battery revolution, which allows energy to be stored and moved around much more easily. Conveniently, we got the physical tools to turn dumb matter into smart matter just as we also got the digital tools.

(It’s also worth noting that like the energy in batteries, the intelligence in robots is divisible. A robot the size of an ant can be remotely controlled by a data center the size of a football field. This is also a capability that human intelligence lacks.)

This doesn’t mean economic output will explode to infinity. But what it does mean is that humans will be able to use physical capital — GPUs and robots — to do more and more tasks at once, including many cognitive tasks that we used to do the hard way. In the long-run steady state, this should increase the capital-to-labor ratio of our society; each human will essentially leverage an army of intelligent machines. It’s basically another industrial revolution, and it has very little to do with whether artificial intelligence is smarter than human intelligence in any sort of head-to-head matchup.

Distributed tacit knowledge

The German company Zeiss makes the best glass on the planet. If one of the mirrors that Zeiss makes for ASML’s EUV chipmaking machines were the size of Germany, the biggest bump on that mirror would be just one millimeter high. Only a few other companies — and maybe no other company on Earth — can match that. Zeiss’ mirrors also have a number of other amazing properties, like not distorting much due to temperature changes.

How does Zeiss make glass this good? No one knows — not even the people at Zeiss. If the technology were capable of being written down on a blueprint, China would have hacked Zeiss and stolen it, the way Huawei hacked Cisco and Nortel. If the technology were capable of being explained by a former Zeiss employee, or even several former Zeiss employees, China would have paid those people many millions of dollars to spill the beans.

Zeiss’ technology basically can’t be stolen, because it’s tacit and distributed. It consists of a vast number of little tricks and techniques that a huge number of individual employees use on a daily basis. These people don’t always even realize all those little things they’re doing that make the glass come out so good. And each employee knows a different set of tricks and techniques. The knowledge exists at the level of the organization itself, and is thus very hard to steal or recreate.

This is true of lots of corporate technology. A big part of the reason China can cut off the supply of rare earths to the rest of the world any time it wants to is that other countries aren’t very good at refining rare earths. Rare earths are difficult to separate from each other in solutions; it takes a ton of little chemistry tricks to do it cheaply at scale. Chinese refiners have spent four decades building up those little tricks and techniques; American or Japanese refiners won’t simply be able to replicate their efficiency overnight, and so it’ll continue to cost much more to produce rare earths outside China.

Except in the age of AI, this might change. Suppose American rare earth refiners give their employees a bunch of equipment to record everything they do — smart glasses, gloves, and so on — in addition to sensors distributed throughout their plants. AI will be able to synthesize all that information and very rapidly suggest small ways to improve the production process. Many of those little experiments will fail; others will succeed and will quickly be adopted, allowing another round of experimentation and improvement to begin very quickly. Crucially, AI’s ability to do this doesn’t depend on its raw intelligence — only on its ability to handle huge amounts of data very quickly.

In other words, in the age of AI, distributed tacit knowledge might not be nearly as big of a barrier to technological diffusion. This could improve economy-wide productivity, as lagging firms catch up to leading firms much more quickly. A more equal distribution of productivity would also make the economy more competitive, creating more surplus for consumers (though possibly reducing the incentive for firms to innovate, by making technology less excludable).

AI’s ability to quickly produce distributed tacit process knowledge might also supercharge productivity growth at the frontier. Imagine if any company could optimize any production process five times faster than today. The whole economy would speed up, as components got cheaper, turnaround times and product cycles got shorter, and scale-up got much faster.

And as with the previous example, improving the production of distributed tacit knowledge wouldn’t depend on AI’s raw intelligence. It would spring from AI’s ability to act like a computer — to interface directly with sensors, to handle lots of data, to perceive tiny details, and to do everything very very quickly.

Cloud laws

For decades, researchers in the field of natural language processing tried to figure out the principles behind human linguistic communication. They made frustratingly little progress; the processes by which humans convey information to each other through words just don’t seem to obey simple laws, like the ones that govern electromagnetism or the circulatory system.

Then along came AI, and suddenly linguistic communication seemed like a solved problem. LLMs can reliably sound like a human being, even if we don’t understand how they manage to do it.

What if there are lots of other aspects of the Universe that work the same way — too complex to understand in terms of simple laws, but not so complex that they just dissolve into unknowable chaos? It’s possible that we can reliably control these complex phenomena with AI, even if we never reduce them to the kind of principles that we can teach a grad student in a textbook. In fact, I wrote an essay called “The Third Magic”, where I suggested that this might be equivalent to a whole new scientific revolution:

Another way of saying this is that there may be laws of the universe that humans can’t understand but AI can. I call these “cloud laws” — causal regularities that can be exploited by technology, but which are too diffuse and complex for an individual human being to either intuit or communicate.

Human language seems to obey cloud laws, so why not other phenomena too? Perhaps social sciences like economics, sociology, and political science obey similarly complex regularities, and AI can help us find them. Perhaps there are physical processes — plasma, or topological materials, or aerial turbulence, etc. — that obey cloud laws instead of chaos?

In other words, thanks to AI, we might be on the precipice of a new age of scientific advancement. And this won’t necessarily depend on how smart AI is in comparison to a single human; it’ll depend on its computer-like ability to hold huge amounts of data in its working memory and extract complex patterns from that data.

If this turns out to be true, it means Francois Chollet is wrong. Chollet hypothesizes that groups of humans, using pre-AI computing tools, can approach AI’s level of scientific competence. But human collaboration is bottlenecked — it’s limited by our ability to intuit patterns at an individual level, and to communicate these patterns from one individual to another. AI, being a computer, just doesn’t have this sort of limitation; it can work with vast, diffuse patterns without having to break them into pieces or simplify them in order to compress them into the tiny pipelines of person-to-person explanation.

So even if AI never gets much better than humans at the kind of science that humans have done heretofore, it might open up whole realms of scientific discovery that have previously been totally inaccessible to even the largest groups of the smartest humans. If much of the Universe turns out to be ruled by cloud laws, we could be on the precipice of a scientific renaissance.

The common thread in all three of these examples is that AI may revolutionize productivity not by being much smarter than a single individual human — not by simply solving harder and harder math problems — but by marrying human-style intelligence to the vast, inhuman capabilities of computers. We could simply be thinking about the benefits of intelligence wrong — arrogantly privileging the kind of mental tasks we humans happen to do especially well, while ignoring the value of the tasks we do poorly.

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Why? Several reasons. Tenure still exists. Humans who can do math at a high level will still be needed if we care about understanding the results that AI spits out. Human math teachers will still probably be valuable. And most importantly, humans will be needed to tell AI what kind of math we want it to solve, and why.

Or at least, prompts AI to write.

I think there is a widespread, tacit assumption among many intelligent humans that the quality that had made them stand out among their peers was the fundamental stuff of the Universe, the font of all value. I will write more about this at some point, but I think it helps explain why the idea that intelligence is just one production factor among many seems so unthinkable, heretical, and revolutionary to so many people in the tech industry.

Yes, I know we can reclaim land from the ocean. But the opportunities for this are fairly limited, and the cost is often very high.

DTZ005 `datetime.datetime.now()` called without a `tz` argument --> tests/test_duplicate.py:17:10 | 15 | "datetime_col" TEXT)""") 16 | # Insert one row of mock data: 17 | dt = datetime.datetime.now() | ^^^^^^^^^^^^^^^^^^^^^^^ 18 | data = { 19 | "text_col": "Cleo", | help: Pass a `datetime.timezone` object to the `tz` parameter BLE001 Do not catch blind exception: `Exception` --> tests/test_plugins.py:16:12 | 14 | db.execute("select * from pragma_function_list()") 15 | return True 16 | except Exception: | ^^^^^^^^^ 17 | return False 18 | finally: | B018 Found useless attribute access. Either assign it to a variable or remove it. --> tests/test_update.py:46:5 | 44 | def test_update_invalid_pk(fresh_db, pk, update_pk): 45 | table = fresh_db["table"] 46 | table.insert({"id1": 5, "id2": 3, "v": 1}, pk=pk).last_pk | ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 47 | with pytest.raises(NotFoundError): 48 | table.update(update_pk, {"v": 2}) |

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In my writing about wealth concentration and oligarchy, I ~~steal a lot from~~ lean heavily on the truly work of Gabriel Zucman, who is a hugely important researcher (winner of the 2023 Clark Medal) who is also starting to play a major role in policy. I’ve talked to him before, but this seemed like a good time to bring him back.

. . .

TRANSCRIPT:
Paul Krugman in Conversation with Gabriel Zucman

(recorded 7/23/26)

Paul Krugman: So, hi everyone. Paul Krugman here, bringing back Gabriel Zucman, probably the best guy for thinking about inequality, especially wealth issues. And since I’ve been writing about that and stealing a lot of Gabriel’s research, I thought we should talk again. So, hi Gabriel.

Gabriel Zucman: Hi Paul, thanks for having me on.

Krugman: Yeah. So, you have been writing—and now I’ve been, you know, cannibalizing it—a lot about wealth concentration. Why don’t you tell us about your reasons for focusing on wealth.

Zucman: Basically, because there’s a fundamental tension in democratic societies between extreme wealth and the very possibility of a well-functioning democracy. And it’s not a new idea—don’t get me wrong. All the thinkers of democracy have written about this, all the way back to Aristotle, more than two thousand years ago.

Krugman: Right.

Zucman: But there was a period of time after World War II when many people thought that this issue belonged to the past. And it corresponded to a very particular moment in history when extreme wealth had largely disappeared after World War II, after the shocks of the first half of the twentieth century.

But now, of course, it’s making a dramatic comeback. And so we are back to this discussion of: how do we deal with this tension? How do we organize the economy and our society to prevent the forms of capture of the political process, in particular, that are associated with extreme wealth?

Krugman: Now, there’s a question. I mean, I’ve been on the inequality beat for an alarmingly long time—since you were a small child, actually. But in the early nineties, let’s say, it was all income rather than wealth. And a lot of it was top quintile, and maybe top one percent. And now you’re telling us that we need to focus on the wealth rather than the income of the top 0.0002 percent. Why that shift? Why wealth rather than income?

Zucman: Well, it’s for two reasons. Number one is a macroeconomic reason, which is that wealth as a whole has been growing much faster than income. So if you look at the ratio of total household wealth to GDP in the US in 1980, it was around 200–250%, and today we are past 500%. This means that the total wealth of the country is equivalent to more than five years of annual production, five years of annual GDP. The second reason is that wealth itself has become much more concentrated, and the rise of wealth inequality, especially at the top of the distribution—at the very top—has been massive and has been even faster and stronger than the rise of income inequality.

So we all know about the rise of the top one percent; the top one percent’s share of total income has increased from about ten percent of income in the US in 1980 to about 20% today. But at the top of the wealth distribution, the increase has been even much more dramatic than that.

Krugman: At the risk of derailing it slightly, one thing that I myself have gone back and forth on—and certainly I get from comments on things I write—is a question comparing the wealth of the top 0.001%, or whatever: should we be comparing it to total wealth or to total income? And I know you’ve used wealth to GDP, and I have some thoughts, but you’ve done it both ways. Which do you use, and why would you use it? I don’t know which is right, but what are your thoughts?

Zucman: I think both statistics are interesting and capture different aspects of reality. So if you’re interested in wealth inequality, in the concentration of wealth, the most meaningful statistic is to divide the wealth of the super-rich by total wealth in the economy. So, for instance, if you look at billionaires—roughly the top 0.1 percent of the population—they own about seven percent of total US wealth today. In 1980, they used to own about one percent of total US wealth. So it gives you a sense of the rise in wealth concentration. If you look at the super-top, you know, the oligarchs, the twenty wealthiest families—a very, very small fraction of the population—their total wealth is 2.0 to 2.2% of total household wealth in the economy. So I think that if you care about wealth inequality, these are the relevant numbers.

Now, it’s also interesting to compute another statistic, which is the wealth of those top groups, and in particular the oligarchs, relative to total income or total output in the economy, because it gives you a sense of their influence on the economy and also because it gives you a sense of how much revenue there is at stake from taxing their wealth. So let me illustrate. If you get back to the 20 wealthiest people in the country, they have about 2 to 2.2% of total US wealth, and that’s equivalent to about 12–13% of total US GDP.

Okay, so now you’re dividing a stock—their wealth—by a flow. And what it means is that if they spend their wealth—of course, they’re not going to do that in a given year, but imagine that they spent all their wealth in a given year—then they could buy 13% of all the goods and services produced in a given year in the US. So it really gives you a sense of just how big they are relative to the economy as a whole. And also it gives you a sense of what’s at stake with taxing billionaires. Because, of course, the way we think about tax revenue and about government budgets, is often in relation to GDP.

And so here, what you have with billionaire wealth is that there’s a potential tax base; we are not taxing billionaire wealth today, which has been skyrocketing. That’s the flip side of the rise of wealth concentration. The positive aspect in all of that is that now there’s a lot of tax revenue at stake from potentially taxing the wealth of billionaires.

Krugman: Yeah. I mean, my version is, I mean, most people have very little wealth, right? Wealth is highly concentrated, and what most people have is income. But the very top has wealth, and in some sense, the wealth-to-income ratio is telling you how many minions they can buy, how much influence they can buy in the economy and in politics. Is that kind of what you’re saying, or is there something else?

Zucman: No, exactly. When I say that expressing their wealth relative to total income gives a sense of the influence they have, precisely it gives you a sense of how much they can spend on buying media companies, on funding electoral campaigns. Billionaires accounted for nineteen percent of total political spending during the 2024 federal election cycle.

Krugman: Right.

Zucman: They can fund think tanks and foundations, and influence the prevailing ideology like that. So it’s in that sense that it’s really useful, I think, to express their wealth relative to the value of the total income of people in the country.

Krugman: So again, what’s your take on why total wealth has grown faster than income?

Zucman: There are different stories, and I think the one that makes most sense to me and that seems most consistent with the data is that there’s been a number of policy changes since the 1980s that have favored wealth and capital, broadly speaking. So, for instance, you used to have rent controls for housing in many countries; when you lift rent controls, the value of housing wealth tends to go up. Many countries used to have pretty high corporate income tax rates, of almost fifty percent on average at the world level in the 1980s. Well, when the government takes half of the profits of companies, it capitalizes into stock prices; it reduces the market value of companies. But then when governments slash the corporate tax—and it has declined from about 45–50% to about 20–25% today at the global level—well, that again capitalizes into stock prices, and now it boosts the market value of companies, of equities.

And you’ve had deregulation in many sectors that has boosted the profitability of corporations. You’ve had a significant change in the division of value added between labor and capital—the rise of the capital share, the decline in the labor share. That means more profits, more income for shareholders; again, it boosts the value of corporate equity. So all of these changes, they don’t happen like that out of nowhere. They are, of course, heavily influenced by policy.

So, for instance, changes in factor shares—labor and capital shares—have been partly affected by the decline in union power. When unions are stronger, you tend to get a bigger labor share. When unions are weaker, you get a bigger capital share. Also in the way that we organize international economic relations, globalization. When we organize things without any kind of international tax coordination, or to put it differently, if we organize global economic integration by allowing total tax competition—no minimum taxes, no minimum tax rates—then capital owners can threaten to outsource production or to shift profits to low-tax places, and again, it reinforces the power of capital, hence the value of wealth.

Krugman: Okay, But going back maybe twenty-five, thirty years ago—and again, I’ve been in the decrying-inequality business for a long time—we were saying, “You know, there’s a huge rise in income inequality, but it hasn’t really shown up in wealth.” And that really started to change. It’s not just that wealth has increased, but as you say, a huge increase in concentration in a few hands. So, what’s your story? I think I know what your story is about what drives this increasing concentration of wealth, but what is the mechanism? What’s it all about?

Zucman: I think there have been different factors at play, so it’s not just a one-issue story. The thing that seems important to emphasize from my perspective is the dramatic changes that have happened with taxation, particularly in the US. Many people have forgotten, but the US used to have a sharply progressive tax system where capital was heavily taxed, where high incomes were heavily taxed, where large inheritances were heavily taxed. In fact, it probably used to have the most progressive tax system in the world between the 1930s, the New Deal, and the late 1970s. And then during the 1980s, it went all the way in the opposite direction.

And perhaps what’s most striking is what has happened with the income tax. So when Reagan enters the White House in 1981, the top marginal income tax rate in the US is 70%. At the time, it’s the highest top marginal tax rate of all industrialized countries in the world. And then in 1986, you have the big tax reform, the Reagan tax reform, that slashes this top rate to 28%, which at the time was the lowest tax rate among industrialized countries. So it’s a really big change in just five years. And you’ve had that for the income tax, but also for the estate tax. The corporate tax rate used to be 50% after World War II; after the 2018 Trump Tax Cuts and Jobs Act, it’s been reduced to 21%.

And so all of these really big changes, all going in the same direction, have had a massive effect on two things. So, first of all, on the incentives for very wealthy people to try to earn super high incomes. When the top marginal income tax rate was close to 100%—more than 90% in the 1940s and 1950s—there was just no incentive to try to earn a ton of money, because you knew that past some point, almost any extra dollar would go to the IRS. So why bother? Why try to bargain a super high compensation as a CEO? It was just pointless. Now when the top marginal income tax rate is 28%, it becomes really profitable to try to earn super high incomes, right? Because you get to keep most of the money for yourself. So there is this incentive effect.

And there’s of course the pure mechanical effect, which is that with lower tax rates, you have more disposable income when you’re very rich, that you can save and use to grow your wealth. And that’s why I think those changes to taxation, which have been particularly powerful in the US, have played a very important role in the particularly fast rise of US inequality.

Krugman: Now when you talk about incentives, if I were a right-winger, I’d say, “Well, the old system discouraged people from innovating, being job creators, and all that.” And I think that’s not what you mean, right?

Zucman: Well, then it becomes an empirical question, right? In principle, it could be true. You could say, “Well, when people face those super high top marginal income tax rates, it discouraged people from innovating, from launching businesses.” But then you look at the data and you realize that in those decades after World War II, GDP growth was higher, in fact, than it’s been since the 1980s. Investment rates were no lower; in fact, they were higher. US capitalism, broadly speaking, seemed to work okay in that period of time. So of course you don’t know the counterfactual. You don’t know what would have happened if the tax rates had been much lower at the top in those decades. But what you can know as a fact is that these quasi-confiscatory rates on high incomes—and we’re talking about rates that apply to only super high incomes of several millions of today’s dollars—just didn’t kill innovation and growth and capitalism. And you have to think about who you are discouraging, what type of behavior you’re discouraging when you tax very high incomes at very high rates.

Krugman: Right.

Zucman: You could say, okay, perhaps it’s going to discourage innovation, but you know, are scientists or innovators really motivated by the extra income they’re going to be able to make above five million dollars in income? You know, perhaps, perhaps not. You’re also discouraging people who want just to capture rents, who want to create private universities that sell fake diplomas, for instance, or want to exploit patents and squeeze as much money as possible from consumers or patients or sick people, and so on.

So there’s always in the economy people who are motivated by innovating, creating knowledge, and broadly speaking undertaking activities that are positive-sum for the economy as a whole. But there’s also people who are motivated by rent extraction, by different activities that are inherently zero-sum or even negative-sum. And suddenly, when you have 90% top marginal income tax rates, you’re discouraging this type of zero-sum rent extraction, which is the plausible reason why this policy was so effective, at least relatively effective, in the postwar decades.

Krugman: The classic example from my angle has been that corporate CEOs have always basically set their own salaries. But in 1959, extracting a salary that was 500 times that of your average worker just made everybody mad at you, and you didn’t get to keep much of it anyway. And nowadays you do. So…

It looks as if—and certainly from your work and those of us who pick up on it—we have had this process since the late seventies of this concentration, this oligarchy rising in our society, and that taxes have a lot to do with it. So the question is: what are the remedies? I know that we’ll get to wealth taxes in a minute, but we had a workable recipe, which was high corporate taxes, high estate taxes, high top marginal rates. Is there a reason why we can’t just reconstitute that regime, or why we shouldn’t—either as a possibility or desirability?

Zucman: I think we could do it and it would make sense, but also, probably, it wouldn’t be enough. First of all, one of the outcomes of the first Gilded Age at the beginning of the twentieth century was the creation of the progressive income tax in 1913 and the progressive estate tax in 1916. So we instituted taxes to prevent or to curb the rise of concentration that was observed at the time and that many people were worried about.

Krugman: Right.

Zucman: It made a big difference, but also there was, and there’s always been, a kind of fundamental limitation, I think, with this historical experiment, which is that when you’re extremely wealthy—and think about billionaires—it’s, in fact, very easy to own a lot of wealth without having to report any or any significant amount of income. And so it’s, in fact, relatively easy to avoid the income tax. And we kind of knew about that from various anecdotes and case studies.

For instance, a few years ago you had revelations by ProPublica on the taxes paid by US billionaires, and you saw people like Jeff Bezos and Elon Musk in some years reporting very little income, paying very little income tax. There’s even one year when Bezos says, “Look, I’m so poor that I’m going to claim the child tax credit,” and he receives the child tax credit! So we kind of knew about these limitations of the income tax, but it’s only relatively recently that we’ve come to understand that this is a structural feature of income taxation in the US and globally—a structural feature that the super-rich have not yet entered into the system. The income tax is just not the right instrument to tax them.

And so that’s why, in addition to the income tax, you need some kind of tax based on wealth. Because for the very rich, it’s easy to manipulate income to pretend they have no income. So, for instance, Bezos, as CEO of Amazon, didn’t pay himself a wage, he instructed Amazon not to distribute dividends, he didn’t sell shares, and so he didn’t realize capital gains, and so his taxable income was really low. There’s no tax evasion there; it’s all perfectly legal. But, of course, his ability to pay taxes as one of the world’s richest men is, of course, extremely high. And so that’s why, for people like him, the right tax is based not on income, but on wealth, which is much harder to manipulate than income. And that was partly one of the reasons for having an estate tax, which is a tax on wealth, but it’s not enough because the estate tax is just a one-time tax at the time of death. And so you can be in a situation where the wealthiest people in the country, year after year, pay no or almost no income tax. And it’s only when they die—when the estate tax was still functional—that we tried to make them pay a little bit of tax.

That’s the limitation of the US experiment with progressive taxation, which is that it never really tried to make the ultra-wealthy pay personally on an annual basis. And I think that it is this limitation that we need to overcome in the 21st century. And basically, that has to involve some kind of annual taxation based on wealth.

Krugman: Let’s talk about corporate taxes first. We used to collect a substantial amount of corporate taxes. There’s a lot of dispute about exactly who pays them, but your position, as I understand it, is that basically they fall on stockholders. Why did we retreat so much on corporate taxes, and could that be reconstituted or should it be?

Zucman: So first of all, yes, you’re right that the corporate tax used to be a big source of tax revenue for the US. It peaked in the early 1950s at something like six to seven percent of US GDP in tax revenue, just from the corporate tax. That was with a nominal tax rate for the federal corporate tax that was slightly above 50 percent, but the effective rate was also 50 percent. It meant that out of any dollar of profit made, 50 cents went to the government.

Krugman: Right.

Zucman: And today we are down to about 1.5% or so of GDP in tax revenue—1.5 to 2%—from the corporate tax. So it’s a big decline. The standard story is that it’s going to reduce corporate investment, which is going to translate into a decline in the capital stock, and then workers are going to be less productive because capital is good, it complements labor, and so eventually it reduces wages, and so it’s bad for ordinary workers. That’s the standard story, which, frankly, doesn’t have a lot of empirical support for it. But why not? As an intellectual story, it makes some sense in principle.

The other reason, which has been even more powerful in practice, is international tax competition. It’s the idea that we cannot tax corporations at higher rates because otherwise they move to other countries, and that there is this kind of law of nature: the race to the bottom with corporate taxation is something we just have to accept as a law of nature, like gravity. And that also is wrong, because, of course, it’s not a law of nature. It’s a choice that we make collectively to accept international tax competition, or to fight it and to curb it. So I think what this all means is that, of course, we could revert to higher corporate tax rates. That’s definitely something that the US, or in fact any country, can do.

But what I want to say is that, also, it wouldn’t be enough, because the corporate tax is just a flat tax on corporate profits. So someone who owns just one share in Amazon, indirectly is going to pay the same tax rate through the corporate tax as Jeff Bezos, who owns ten percent of Amazon. It’s not progressive, and so that’s why it’s structurally limited.

Krugman: Okay. In the abstract, if our concern is great wealth and we’re looking for some way to limit that and also raise some revenue—though I think in many ways the social and political implications are even more central than the revenue—the history shows remarkably little experience with wealth taxes, right? I mean, we don’t have a lot of evidence, and a lot of people say that they’re unworkable, citing what they claim to have been the history of France. So why don’t you talk to me about the history of wealth taxation?

Zucman: Yeah, I mean, the US never had an annual progressive wealth tax, at least at the federal level. There’s, in fact, a pretty long history of wealth taxation at the state level in the 19th century, with so-called generalized property taxes that were taxes not just on real estate and land, but also on financial assets, typically at flat rates, so not rising with wealth. There’s a long tradition in the US that’s been largely forgotten.

The more relevant history is the European experience with progressive wealth taxation. Many European countries used to have progressive wealth taxes. And I agree that the track record is not good. By and large, they were not big successes. But, of course, there are two ways to look at that experience. You can say, “Well, some countries tried wealth taxes, it didn’t work very well, hence it will never work.” End of story. Or you can try to study this experience and try to understand what were the problems and what lessons can be drawn, and whether the issues can be overcome.

And this is what I’ve been doing with many others in my work, and the conclusion I’ve reached is that, yes, they had issues, these European wealth taxes, but the issues can be fixed.

The biggest issue is that those wealth taxes didn’t even attempt to try to tax billionaires. Look at France, for instance. France is really a striking illustration. The French wealth tax was created in 1981 when a Socialist president comes into power and he has an absolute majority in parliament, and so he creates a wealth tax. But immediately he says, “Okay, we are going to exempt from the wealth tax people who own more than 25% of the shares of a company.” Okay? So if you’re a big shareholder in a company, no matter whether it’s listed on the stock market or not, if you own a ton of stock, that’s going to be removed from the base of the wealth tax. This will be tax-free. But, you know, the wealth of billionaires is precisely that: it’s owning a lot of shares in a company. So what France did in 1981 was like if the US today created a wealth tax and said, “We’re going to exempt Warren Buffett from the wealth tax, or we’re going to exempt Elon Musk from the wealth tax because they have so many shares in their businesses.”

You know, it really makes little sense. And the consequence is that the effective wealth tax rate for French billionaires in 2016, on the eve of the abolition of the wealth tax, was just 0.005% of wealth. They didn’t pay it. And it’s not because they illegally hid assets. No, no, it’s because they were legally exempted from the wealth tax.

Krugman: Why did Mitterrand do that? Do you know?

Zucman: The way the story is often told is that some of the top billionaires complained and went to see him, and they said, “We’re going to move to Switzerland if you do that.” And so that’s how they got that exemption.

But the deeper explanation, I think, is that there was no real commitment on the part of Mitterrand or the Socialist Party to having a tax on billionaire wealth, partly because they thought it would be impossible, that we had to accept international tax competition as a kind of given, that France would be powerless to do anything about that; partly because it was never a big priority for them. They bet on other policies to transform society that didn’t involve progressive taxation, but that involved things like the nationalization of some companies or labor market regulations. But progressive taxation was not part of their ideology, so to speak. They were not very committed to that.

And also, I think in the 1980s, you could make the case that the government revenue at stake was just not very important. So it was not worth fighting for this. I think that was their view. And perhaps you could make that argument in the 1980s or 1990s, but today, it’s impossible. Look at what has happened to the curve—the wealth of billionaires has skyrocketed. So now it becomes really important to include them in the base. So that was the main problem: billionaires were legally exempt.

The other big problem—and it’s related, of course, to the first one—is that those European countries never tried to do anything to fight the risk of out-migration by the super-rich. They just thought that, “Okay, we are powerless. If they want to leave, what can we do?” And that’s just not true. For instance, in the US, there is citizenship-based taxation, meaning if you are a US national, you have to pay taxes in the US no matter where you live. So you can move to Monaco or Switzerland if you want, but you still have to pay federal taxes.

Krugman: Right.

Zucman: France or Germany could have done that; they could have done a variation on that idea. But the big blind spot of the social democratic experiment in Western Europe has been, in my view, this inability to confront the forces of international competition, and international tax competition in particular.

Krugman: So that’s it. Do you want to enlarge on that? Because I think that’s an interesting point.

Zucman: Yeah, these social democratic governments never invested intellectually in trying to organize international economic relations and make those consistent with their ambitions for democratic transformation. Or, to put it differently, the social democratic project was always thought of as a purely domestic endeavor. And when they realized that there was competition from other countries—tax competition in particular—their reaction was not, “What can we do about that? How can we rewrite the rules of global commerce? How can we forge international agreements, or how can we design unilateral policies to protect ourselves from those forces?” Their reaction was not that. Their reaction was, “There’s international competition. We cannot do anything about that. We just have to adapt.” And so we have to embrace the race to the bottom with capital taxation.

And that’s how, in fact, it’s socialist governments, or Labour governments in the UK, or the SPD in Germany, that have slashed the corporate tax rate. Scandinavia, too, moved from a comprehensive income tax where capital and labor are taxed the same, to so-called dual income tax systems where capital income is taxed at lower, flat rates than labor income. Always for the same reason: they never tried to think about how to make social democracy compatible with a globally integrated economy.

Krugman: That makes sense. Although I think that the EU has a kind of minimum VAT rule, right? So the tax that falls on working people, you cannot make it too low, but the tax that falls on billionaires...

Zucman: Yeah, that’s a very good point. The only form of tax harmonization that you have in the EU is on VAT. So when it comes to taxing consumers, the middle class, the poor, all of a sudden we can craft common rules. But when it comes to taxing companies or the rich, what can we do? You know, nothing.

Krugman: So if Ireland goes and poaches corporations—although I think it’s mostly US corporations there, but anyway—Ireland can do that, but they can’t offer shoppers bargains. It’s pretty wild.

Zucman: Yeah, exactly. That’s a very particular worldview, but that’s been central, in fact, in how European construction has proceeded so far. And I think if you want to rationalize this view, deep down there is the idea that it’s not just that international tax competition is a law of nature, but also that it’s a good thing, frankly. That it’s something we should embrace because those welfare states in Western Europe are too big and they need some kind of external outside pressure to force governments to be more efficient—to starve the beast a little bit. And I think many people, even left-of-center people at one point embraced this idea that we should welcome it—it’s going to make us more efficient. We should welcome international tax competition.

And why not? You can make that case, but I think it has two problems. One is that it’s a pretty undemocratic way to decide things. It assumes that voters are going to structurally choose policies that overtax capital or the rich, and hence the need for constitutional constraints or external forces. And, of course, the other problem is that international tax competition, the way that it has unfolded, has fueled the rise of inequality, because the main winners from this are multinational companies and their owners, or people who derive most of their income from capital income, the wealthy, and so on.

Krugman: Right. Sort of Reaganite ideas may have actually had a lot of impact even in Europe.

Zucman: They did. Even though it was never formulated that explicitly, I think this ideology was very influential, in fact.

Krugman: So you’ve been pushing for, in fact, some kind of global accord that basically makes it possible to do more wealth taxation. I’ve been re-reading your G20 paper on all of this. I don’t think this is anything likely to happen anytime soon, but what’s the state of the idea?

Zucman: It will happen, but patience.

Krugman: Yeah, patience. Well...

Zucman: The beginning of all of this was in 2021: there was an agreement among 130 countries for having a minimum tax of 15% on the profits of big multinational companies. And, frankly, very few people had seen that coming, because the prevailing view was, “You know, it’s impossible to get an agreement like that. Small countries like Ireland benefit so much from international tax competition. It’s just utopian.” But it happened in 2021.

And then, in 2024, Brazil had the presidency of the G20, and they wanted to put new ideas on the agenda, and they asked me what I thought. And what I told them is: “Look, I think we should do for billionaires what we’ve been able to do for multinational firms. So let’s try to have an agreement on a minimum annual amount of tax owed by billionaires.” They commissioned a report from me, and some progress was made at the G20, but then, of course, Trump was reelected, so nothing can happen at the moment at the G20 level.

But what’s really interesting is what is happening at the national and, in fact, subnational level these days. Because right after the Brazilian G20 in 2024, the French National Assembly adopted the minimum tax on billionaire wealth that I had proposed. So it’s a tax of 2% on the wealth of people with more than 100 million dollars or euros in net wealth. And it’s a minimum tax, which means that if you already pay an income tax the equivalent of two percent of your wealth or more, you have nothing more to pay. But if you pay less than that, you have to pay the difference to reach the two percent minimum. So it’s the fairest and the most targeted tax that you can imagine, because it’s just on the ultra-wealthy, but not only that, on those among the ultra-wealthy that avoid taxation today.

So France voted for that; it was then blocked by the very conservative Senate. But there is the beginning of an international movement in that direction. You’ve had a bill crafted under French legislation that’s been introduced in Belgium, perhaps soon in the Netherlands, and in Spain. At the moment in the UK, they’re talking a lot about that with the new Prime Minister, Andy Burnham.

And then, of course, most important in my view, is what is happening in California with Prop 40, the California billionaire tax, which is going to be on the ballot in November. This would be a one-time tax of five percent on the wealth of California’s billionaires. Frankly, it’s very important for California, for funding healthcare, Medicaid in particular. But it’s even more important for the US and, in fact, for the world as a whole. Because if California passes the California billionaire tax in November, I think this will really be the beginning of the US and international movement to tax the wealth of the super-rich.

Paul Krugman: Okay. And this is a one-time tax, and it’s retroactive, right? It’s based on your wealth last year.

Zucman: Yeah, exactly. So it has several characteristics. It’s one-time and not annual. And it’s only for billionaires, not for you and me. It’s on billionaires, and it’s on those billionaires who were residents of California as of January 1st of 2026. So it’s too late to avoid the tax, meaning if you were living in California at the beginning of this year, you would still have to pay the tax. So in that sense, there’s a small retroactivity here. And these two characteristics combined—the fact that it’s one-time and based on being a resident as of January 1st of 2026—mean that it’s nearly impossible for any billionaire to avoid the tax by moving to another state. So it also means that if it passes, it’s bound to generate a lot of tax revenue.

The arithmetic is quite simple. The billionaires of California have about two trillion dollars in wealth. So if you tax them at five percent, you get a hundred billion in tax revenue. Another kind of illustration of how big the billionaire wealth tax base has become, which I think is quite striking, is the following: if you look at all the income of Californian people as reported in their tax returns—you know, AGI, adjusted gross income for California as a whole—it is the same number as the wealth of California’s billionaires, 250 people. So, their wealth is 100% of California’s AGI. Meaning, if you have a five percent tax on the wealth of billionaires, it generates as much revenue as a five percent tax on the income of all people in California. So that’s just a very striking illustration of what we were discussing earlier, which is just how massive the wealth of the billionaires has become and hence its implications for public finance.

Krugman: Yeah, one of the things in California is it does have high personal income and high personal wealth, but that’s a few hundred people. They really skew the numbers. And so, how’s it going? I mean, it’s a little bit disappointing to see all of the “don’t be evil” guys from Google and all of that scrambling to protect themselves from taxes. But how are you feeling about the proposition?

Zucman: Well, I’m not surprised by that, right? They have good reasons to hate this, because this is the one tax that they would have to pay. You have to realize that they pay very little today. The billionaires in California pay in income tax the equivalent of just 0.2% of their wealth. So, you know, moving from 0.2% to 5%, even if it’s one-time, it’s a big difference for them, even though their wealth has increased like 200% over the last two years. So from that perspective, it’s a drop in the ocean.

But I think the polling is good. It’s going to be a battle just because the billionaires are spending tens of millions, hundreds of millions already, to stoke fears and try to defeat the proposition on the ballot. But I think the logic, frankly, is so compelling, and also billionaires are not very popular at the moment in California, like everywhere else, so I think it has a good chance to pass.

But what I want to say is that, first of all, it’s important for California because there’s a big shortfall of federal funding for healthcare as a result of the One Big Beautiful Bill Act. And so California needs to find broadly a hundred billion in revenues to just preserve Medicaid. So that was the main reason for having this on the ballot in the first place. And so if it doesn’t pass, you’re going to see the number of uninsured people rise a lot in California. Under business as usual, it’s going to increase from six percent to ten percent. So that’s why it’s important.

But more fundamentally, in my view, it’s important because it’s the one concrete measure that can begin to make a difference to oligarchic wealth and power.

And don’t get me wrong, five percent one-time is not enough, but this is what’s going to pave the way, I think, for eventually some kind of federal wealth tax and federal annual wealth tax. And the reason why there’s good reason to view it like that is because this is what happened for the income tax at the beginning of the 20th century, which was first implemented by a number of states, like Wisconsin in 1911, before becoming federal policy in 1913. So that’s why it’s really important. And I can tell you that the whole world is watching California. I think people in France are like, “This is amazing! Go California, tax the billionaires!” And this is going to be a blueprint for what we’ll do in France, in the rest of Europe, and frankly, globally.

Krugman: States as laboratories of anti-oligarchy. Let’s hope for the best. Thanks a lot, and onward with the project. Take care.

Zucman: Thank you so much, Paul.