Tax the Rich?

If you’re wondering whether former Bernie enthusiasts and Trump supporters might find common ground in progressive tax policies that benefit the 99 percent, well, it’s doubtful that Taxing the Rich by Stanford political scientist Kenneth Scheve and NYU politics professor David Stasavage will sustain your hopes. Even so, the book offers findings, and an argument, that deserve to be taken seriously.

Reading Scheve and Stasavage, it’s hard to imagine any possibility of a significant increase in the taxes of the wealthiest. Our authors view the far more progressive tax code of the mid-20th century as more of a historical exception than a policy victory. Political conflict and action receive relatively little attention, leaving the reader to conclude that she shouldn’t expect voters to demand—much less attain—tax hikes on the rich, even as inequality continues to rise. On one hand, this dour assessment almost feels refreshing. But, on the other hand, Taxing the Rich misses important opportunities to provide readers with analysis oriented towards action.

Ranging across numerous OECD countries and over the last two centuries, Taxing the Rich examines the rise and fall of progressive taxation. Neither high levels of inequality nor the expansion of suffrage, Stasavage and Scheve argue, caused top marginal rates on the rich to rise. Globalization didn’t force countries to reduce rates either. Instead, “changing perceptions” about what qualified as a “fair tax system” first triggered, then later reversed, a broad social commitment to taxing the rich more than the rest. Stasavage and Scheve examine perceptions about tax fairness, as expressed in political debates over tax rates on the highest earned incomes and on the wealthiest households. “The most politically powerful arguments for taxing the rich,” Scheve and Stasavage conclude, have been those insisting that “the rich should be taxed to compensate for the fact that they have been unfairly privileged by the state.”

Be careful not to draw too much encouragement from this conclusion. Not every unfair advantage, Scheve and Stasavage observe, pushes polities to hike taxes on the wealthy. In fact, only in those moments when voters and policy-makers have believed that the rich were benefitting unfairly from an ongoing war did top marginal rates on earned income leap.

Historically, our authors find that such “compensatory arguments” have only hit their mark during World War I and World War II. Faced with mass conscription and wartime deprivation, average citizens came to an agreement with their political leaders: the rich owed the rest compensation in the form of higher taxes. Expensive and capital-intensive, wreaking extensive economic destruction, exacting a terrible toll on human lives, the total wars of the 20th century made compensatory arguments—in favor of higher taxation on the largest incomes—appear almost self-evident in a number of industrialized countries. In Scheve and Stasavage’s analysis, “the era of the mass army, and therefore the conscription of wealth, was to a great extent technologically determined,” because equipping modern militaries costs so much money.

So there’s nothing like modern war for raising taxes on the wealthy. This finding holds true across countries, despite variations in political institutions and economic structures.

Taxing the Rich recognizes that a nation’s tax code reflects something more than an attempt to balance the need for revenue against the possible disruptive effects on the economy. Ideas matter a great deal, too. Ideas about fairness matter especially. But ideas are something more than an assemblage of words. By removing words from their institutional and national contexts, Taxing the Rich often misses meaning.

Only when the rich appeared to benefit unfairly from an ongoing war did top marginal rates on earned income leap.

Take the authors’ thesis that total war sparks compensatory arguments and provides them tinder. To support this argument, the authors code, count, and categorize the type of arguments made in the British Parliament before and after World War I. They also draw our attention to extensive rhetoric in the United Kingdom, United States, Canada, and France about the urgent need for a “conscription of wealth” or a “conscription of income” to offset the “conscription of men.”¹

But “conscription” language signaled something more than a compensation claim on the wealthy, at least in the United States. During World War I, propagandists in Washington, DC, and citizens all across the county, endorsed the “conscription” of wealth, income, wages, and dollars. These slogans powerfully evoked the obligation of all inhabitants to help fund the wartime state. From farmers enjoying high prices to workers receiving high wages to women factory-workers to African Americans supplied with new job opportunities, “conscription” rhetoric enjoined everyone to forgo consumption and to invest in war bonds, at the same time as it defended the broadening of the income tax base and the increase in top marginal rates on the wealthiest earners (among other tax innovations).

In other words, World War I signaled the arrival—and World War II marked the consolidation and expansion—of a new relationship between citizens and their government in the United States, and elsewhere. The citizen assumed the obligation to contribute taxes directly to the federal government. The state, in turn, assumed responsibility for allocating the tax burden equitably across classes, in order to meet the needs of the rapidly developing industrial nation. The global wars of the 20th century advanced a new fiscal order, one that made the modern liberal state possible. High top marginal income tax rates manifested a much deeper political transformation, one overlooked by Scheve and Stasavage.

More than an artifact of war, then, the progressive income tax filled a page in a new social contract. After World War I, top marginal rates on earned income never returned to prewar levels in any of the countries studied by Scheve and Stasavage (except in the Netherlands). In the 1920s, the federal government and federal social spending grew faster than ever before in the United States.²

In the Great Depression and World War II, the modern liberal state hit its stride. By increasing top marginal rates and the number of households subject to income taxes, as well as by introducing new payroll taxes, the New Deal financed new programs to provide employment and to improve infrastructure, along with new social protections like Social Security and unemployment insurance.

After World War II, the modern liberal state spent more and taxed more—and more progressively—than it did after World War I. Scheve and Stasavage would likely attribute this to the higher costs of the Second World War, both in economic and human terms. But it’s equally true that the Left held a stronger position in 1946 than it did in 1921 (when “austerity” governments rose to power in many industrialized nations).

In the United States, for example, the tumultuous 1919–1921 period witnessed a violent backlash against organized labor, leftist radicals, immigrants, and African Americans. Resurgent Republicans and conservative courts hemmed in the modern liberal state, even if they could not manage to entirely eradicate either progressive taxation or the enlarged federal government.

In 1946, by contrast, broad-based and steeply progressive federal income taxes were entrenched more firmly (although far from uncontested). So too was the federal government’s role as a guarantor of labor rights and other social protections. The “conscription of wealth” rhetoric and imagery of World War II had identified “freedom from want” as both compensation for Americans’ wartime sacrifices and an expanded section in the postwar social contract.

So yes, ideas matter. But power and politics matter, too. Taxing the Rich presents tax policy as a matter of logic and reasoning, an outcome best explained by the strongest argument in a given context. But wartime concepts were interpreted—and applied—differently after World War I in comparison to World War II, because groups holding different views about fiscal fairness and economic citizenship held different positions with respect to political power.

In the three decades after World War II, tax progressivity hit its high water mark throughout the OECD. In the prewar United States, the total yearly amount of income taxes collected barely pushed 1 percent of GDP, but averaged 7.7 percent of GDP after 1946. Top marginal rates on wages and salaries reached 91 percent.

Eventually the tide turned against progressive taxation all across the OECD. Why did top marginal rates on earned income fall more for the rich than for the rest?

According to Stasavage and Scheve, “compensatory war sacrifice arguments simply no longer worked” after about 1970. As memories of the World Wars faded, new military technologies lessened the toll that war exacted on the general population. Assertions about the “fairness” of taxing the rich more than the rest grew less compelling. High levels of tax progressivity could not be sustained.

When top tax rates on marginal income fell, it signaled the eclipse of the modern liberal vision in the United States and the demise of social democracy in Europe.

Yet all sorts of “compensatory” arguments in favor of increased tax progressivity remained potent well into the 1970s in the United States. Vietnam sparked outrage about draft deferments for the sons of the rich and the profits made from military contracts. In 1972, George McGovern seized the Democratic nomination for President by demanding “tax justice,” in a campaign focused on combatting the growing political and economic power of corporations and the wealthy.

Still, the total tax burden shouldered by the rich fell relative to the rest in the United States beginning in the 1970s.

Part of the explanation lies in the way the modern liberal state had hid how it paid for much of what it provided to citizens—especially the white middle class—with tax exemptions, tax credits, subsidies, and guarantees meant to induce private enterprise to provide social benefits through markets.³ These methods made it difficult for many Americans to recognize what they gained from their federal government. And they made it easier for opponents to charge that liberals squandered the taxes paid by the many on programs for the lazy, impoverished few (quite often figured by critics of these programs as black).

Consequently, after about 1970 tax progressivity grew more vulnerable as a new generation of businessmen and politicians in both parties seized upon prevailing anti-tax populism and coupled it with reworked arguments about the supreme importance of individual asset-ownership and of investment (eventually rechristened “supply-side economics”). In 1978, they secured a cut in taxes levied on capital gains (i.e., investment income) that flowed mostly to wealthy households. In 1981, Reagan slashed top marginal rates on earned income.  Taken together, these tax cuts pulled down the effective rate the richest paid on their total yearly income. Household inequality—now framed as a natural byproduct of economic growth—soared in the United States and across the OECD, whether measured before or after taxes and transfers.

The decline of tax progressivity, much like its rise, indicated a broader political transformation. When top rates on marginal income fell, it signaled the eclipse of the modern liberal vision in the United States and the demise of social democracy in Europe.

As for the future of progressive taxation, Taxing the Rich paints a bleak picture. Absent a war that conscripts the masses and fattens the upper classes, even arguments that frame tax progressivity as compensation will meet little success, our authors predict. That is because even where tax policy very clearly favors only very rich households—as with the carried interest exemption—“compensatory” logic points to simply closing that loophole, not to raising rates on the wealthy.⁴

But the historical record includes several notable peacetime victories for tax progressivity. In the United States during late 19th century, for example, Populists and the progressive movement pointed to the greater ability of the most affluent to shoulder the burden of taxation. At the same time, they demanded that the progressive income tax replace the tariff; since ordinary citizens bore its load as consumers in the form of higher prices, while industrialists enjoyed protection from foreign competition. Compensatory rationale worked in tandem with ability-to-pay logic to speed the passage of the 16th Amendment. Similarly, when New Dealers raised top marginal rates, they reasoned that the most well-off could easily afford to increase their financial contribution to society, which now required increased federal spending.

National crises prompt reconsideration of what citizens owe society and how those obligations vary by class. War presents only one such occasion. From Sanders supporters to Trump voters, Brexit sympathizers to Syriza backers, voters across the industrialized west today recognize that the economic policies of the last several decades—particularly tax policies—have benefitted the rich at the expense of the rest. In the United States, opinion polls indicate general support for increasing the tax burden of the wealthy. A small majority explicitly favors higher taxes on the rich as a means of redistributing wealth. Taxing the Rich underscores the challenge faced by proponents of tax progressivity. The book misses an opportunity to stress the importance of politics. Progressive taxation will only come from protecting and restoring the voting rights of citizens likely to favor it.