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Taxing the Rich: A History of Fiscal Fairness in the United States and Europe.

Author: Faricy, Christopher

Faricy, Christopher. “Taxing the Rich: A History of Fiscal Fairness in the United States and Europe.” Political Science Quarterly (Wiley-Blackwell), vol. 132, no. 4, Winter 2017, pp. 762–763. EBSCOhost, doi:10.1002/polq.12715.

Kenneth Scheve and David Stasavage, two political scientists, chart and analyze the trends in the taxation of the wealthy in 20 nations, primarily in Western Europe and North America, but also including Australia, New Zealand, and Japan, from 1800 to the present. At the core of their research is a database that enables them to track the highest marginal rates of income and inheritance taxation in those nations. For six of the countries, the authors also estimate long-run effective rates of income taxation – that is to say, the actual rates that the wealthiest taxpayers (defined as the top 0.01% or the top 0.05% of the income distribution) faced after taking advantage of exemptions, deductions, and tax credits.

The authors conclude that the highest marginal rates remained low until World War I when they began to rise dramatically. The increases continued until after World War II, when the rates plateaued or declined slightly until the last decades of the twentieth century, when the rates fell sharply. The authors explore explanations for the trends, paying closest attention to the dramatic increases during the first half of the twentieth century. They emphasize the role of "the arrival of an era of mass warfare in 1914" that "created the possibility for powerful new arguments for taxing the rich" – arguments that focused on "compensation to restore treatment as equals" (p. 19). The key, according to the authors, was that mass warfare, which "involved mobilization of manpower on an unprecedented scale by both great powers and smaller states," required "unequal sharing of the war burden." Consequently, "advocates of progressive taxation could now say that without heavily taxing the rich they would not be doing their fair share for the war effort" (pp. 19–20). After the two world wars, however, the force of such "compensatory arguments" waned both under peacetime conditions and during more limited wars. The authors believe that in the future, under the prevailing technologies of warfare, compensatory arguments are unlikely to acquire much traction and produce significant increases in taxes on the rich. In the process of advancing this line of argument, Scheve and Stasavage assert "that democracy's effect on progressive taxation has been overstated" by previous scholars and they also discount the idea that democracies "tax the rich more heavily when inequality is high" (pp. 14–15).

Their quantitative data offers no surprises for fiscal historians who have studied the United States, Great Britain, Canada, and France, the countries that figure most centrally in the authors' discussions of what shaped the patterns of taxing the rich. With regard to the historiography pertaining to the U.S., the authors' statistical findings reinforce the trends that I have described and analyzed, with support and refinement by Steven Bank, Ajay Mehrotra, and Joseph Thorndike, among other fiscal historians. In a footnote, the authors assert that their study "differs in its account of when and why wars have mattered" (p. 240, n. 43). But the authors do not explain what they mean and, in their analysis, neglect the role of other important factors such as social movements (including those of the wealthy), constitutional structures, administrative capacities, and economic organization. In the process, they oversimplify the fiscal history – an inherent risk in constructing interpretive frameworks across many nations.

This weak contextual analysis is most apparent in the authors' discussion of the long swing toward progressive taxation that began in the late nineteenth century and peaked during World War I. For example, they completely ignore the role of Henry George, his "single-tax" ideas, and the movement these ideas helped spawn. Single-taxers advocated a dramatic shift of the base of property taxation so that it would socialize the monopoly profits embedded in the price of land. Not only was the argument "compensatory," but it also had a great impact on the way in which many Americans, including influential members of Congress and the administration of Woodrow Wilson, wished to structure taxation of the wealthy. Also missing is a discussion of a rigid barrier to adopting a federal property tax aimed at the wealthy – the requirement of Article I, Section 9 of the U.S. Constitution that "direct" taxes be allocated to the states according to the distribution of population. Thereby, the founders protected slave owners, who were among the wealthiest Americans, from federal taxation of property. And, it turned out that establishing Section 9 had headed off Henry George at the pass. Of course, the same Constitutional provision provided the basis for the Supreme Court's decision in the 1894 Pollock decision overturning a federal income tax. Without the Constitutional barrier, the movement to tax the rich more heavily, driven by democratic forces and the growing concentration of wealth, might well have gained significant momentum in the nineteenth century.

Another significant omission is a discussion of the great wave of corporate mergers that began in the 1890s and helped set the stage for the adoption of the highly progressive taxation during World War I. The resulting growth of monopoly power and monopoly pricing fueled the democratic attack on protective tariffs that paved the way for the adoption of progressive income taxation. In addition, this corporate merger wave provided a critical motivation and rationale for the adoption of the taxation of the excess-profits (not just wartime profits) of corporations during World War I. This tax, which many of its advocates hoped would be a permanent anti-monopoly measure as well as a revenue raiser, helped overcome the administrative difficulties of implementing income taxation (underestimated by the authors), and accounted for about two-thirds of the tax revenue garnered by the federal government during the war. The tax played a major role in enabling the U.S. to fund a higher percentage of its war costs through taxation than any of the other major belligerents, and increased the effective rate of taxation on the wealthiest Americans. The last effect is not captured by the authors in their calculation of the effective rates of the personal income tax.

If scholars would pay closer attention to historical context, while refining the statistical data, particularly to expand and improve estimates of effective tax rates and to assess those rates for alternative definitions of the wealthiest taxpayers (preferably the top 1.0%, in my view), they could build on the foundation this book has established. One of the hypotheses they might then examine is that throughout the twentieth century, the progressive taxation of wealth in the U.S. was more aggressive, and perhaps more unstable as well, than in the other major industrial nations.

The authors have developed a data set that holds promise for the comparative international analysis of the taxation of the rich, especially during the two world wars of the twentieth century. At the same time, as the authors believe, it could aid in understanding the international possibilities for future reform. With regard to the U.S., I agree with their general sense that significant increases in taxes on the rich will depend on some combination of "massive political or economic shocks" or making "credible and compelling" claims "that current government policies are heavily biased toward the rich" (p. 218).

DMU Timestamp: November 27, 2019 01:26

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