TAXING THE RICH
A history of fiscal fairness in the United States and Europe
Kenneth Scheve and David Stasavage
Princeton University Press
266 pages; Rs 1,477.00
Sure, banks are more tightly regulated than before and there has been some movement to tie bonuses to long-term performance, but, by and large, politicians have stayed clear of raising taxes on the rich. Intuitively, taxing the rich would have widespread appeal especially among sections of the electorate who feel they've been left behind. So why haven't politicians of all stripes responded?
In a new book titled Taxing the Rich - A History of Fiscal Fairness in the United States and Europe, Kenneth Scheve and David Stasavage, political scientists from Stanford and New York University, attempt to answer this perplexing question.
Drawing on a unique dataset that spans two centuries of tax data from 20 countries, the authors find before World War I, taxes on the rich were very low. It is only in the first half of the twentieth century that taxes rose, peaking around 1950s. Subsequently, though, they fell sharply.
One would have expected that as political ideology plays a big role in tax policy, the ascendency of left-of-centre political parties to power would coincide with high tax rates on the rich. As would demands to address rising inequality. But the explanation the authors posit for the rise and subsequent fall of taxes on the rich is perplexing, to say the least.
According to the authors, the high tax rates levied on the rich during the middle of the last century were not driven by populist left-of-centre parties coming to power. Nor were high tax rates a policy response to rising inequality or for that matter greater democratisation. Instead, the authors contend that the sharp increase in tax rates levied on the rich during the 1950s was a consequence of the two World Wars.
The political rationale for raising taxes on the rich during this period largely centred on demands for "fairness". Now, fairness is a rather nebulous concept. Standards of fairness, as the authors themselves say, are likely to vary greatly over time and from individual to individual
But the authors contend that, "First, labour was conscripted to fight while capital was not. Second, owners of capital benefited from high wartime demand for their products. Heavy taxation of the rich (owners of capital) became a way to mitigate these effects and to restore at least some degree of equality of treatment by the government."
The subsequent lowering of tax rates, too, had little to do with the prevailing economic ideology at the time but, as the authors point out, more to do with "weakening over time of war-based arguments about equality of sacrifice."
The arguments are puzzling. Politicians, especially those on the left, should ideally respond to rising inequality by taxing the rich heavily. The logic is pretty straightforward. High inequality could impact opportunities available to the not so affluent to progress in life. It could also lead to the political process being captured by the elite. Further, it is also likely to have the backing of a large section of voters.
But Mr Scheve and Mr Stasavage find that there is little evidence to suggest that increasing inequality leads countries to adopt higher taxes on the rich. The authors find that while left-of-centre governments are associated with a higher tax rate on the rich, "this increase takes a couple of years to occur and is small in magnitude." What the authors do find is that high rates on the rich do reduce inequality.
One could argue that this is partly because of the capture hypothesis. The rich under any dispensation are in a better position to lobby. They are more likely to influence politicians than ordinary voters through campaign contributions.
While the authors don't find any conclusive evidence to support this argument, they rather strangely suggest that "Now just because we fail to find a relationship between how campaigns are financed and how heavily the rich are taxed does not mean that there is no truth to the capture hypothesis."
This is an area the authors should have examined in greater detail. Why don't left-leaning governments raise taxes? Is the pressure from donors that much? Or do political parties of all stripes largely conform to the broad political consensus when in power?
The other conundrum this study poses is this: it basically implies that short of another major war, taxes on the rich are unlikely to go up. As the authors themselves say, the forms of compensatory arguments used in the past to justify higher taxes on the rich are likely to be irrelevant now. So how, then, might governments finance greater public spending?
A history of fiscal fairness in the United States and Europe
Kenneth Scheve and David Stasavage
Princeton University Press
266 pages; Rs 1,477.00
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At a time when public discourse in the West has largely centred on the issue of rising inequality - the growing concentration of wealth among the top one per cent - and the lack of opportunity, it is surprising that these concerns haven't really translated to more forceful demands for raising taxes on the rich.
Sure, banks are more tightly regulated than before and there has been some movement to tie bonuses to long-term performance, but, by and large, politicians have stayed clear of raising taxes on the rich. Intuitively, taxing the rich would have widespread appeal especially among sections of the electorate who feel they've been left behind. So why haven't politicians of all stripes responded?
In a new book titled Taxing the Rich - A History of Fiscal Fairness in the United States and Europe, Kenneth Scheve and David Stasavage, political scientists from Stanford and New York University, attempt to answer this perplexing question.
Drawing on a unique dataset that spans two centuries of tax data from 20 countries, the authors find before World War I, taxes on the rich were very low. It is only in the first half of the twentieth century that taxes rose, peaking around 1950s. Subsequently, though, they fell sharply.
One would have expected that as political ideology plays a big role in tax policy, the ascendency of left-of-centre political parties to power would coincide with high tax rates on the rich. As would demands to address rising inequality. But the explanation the authors posit for the rise and subsequent fall of taxes on the rich is perplexing, to say the least.
According to the authors, the high tax rates levied on the rich during the middle of the last century were not driven by populist left-of-centre parties coming to power. Nor were high tax rates a policy response to rising inequality or for that matter greater democratisation. Instead, the authors contend that the sharp increase in tax rates levied on the rich during the 1950s was a consequence of the two World Wars.
The political rationale for raising taxes on the rich during this period largely centred on demands for "fairness". Now, fairness is a rather nebulous concept. Standards of fairness, as the authors themselves say, are likely to vary greatly over time and from individual to individual
But the authors contend that, "First, labour was conscripted to fight while capital was not. Second, owners of capital benefited from high wartime demand for their products. Heavy taxation of the rich (owners of capital) became a way to mitigate these effects and to restore at least some degree of equality of treatment by the government."
The subsequent lowering of tax rates, too, had little to do with the prevailing economic ideology at the time but, as the authors point out, more to do with "weakening over time of war-based arguments about equality of sacrifice."
The arguments are puzzling. Politicians, especially those on the left, should ideally respond to rising inequality by taxing the rich heavily. The logic is pretty straightforward. High inequality could impact opportunities available to the not so affluent to progress in life. It could also lead to the political process being captured by the elite. Further, it is also likely to have the backing of a large section of voters.
But Mr Scheve and Mr Stasavage find that there is little evidence to suggest that increasing inequality leads countries to adopt higher taxes on the rich. The authors find that while left-of-centre governments are associated with a higher tax rate on the rich, "this increase takes a couple of years to occur and is small in magnitude." What the authors do find is that high rates on the rich do reduce inequality.
One could argue that this is partly because of the capture hypothesis. The rich under any dispensation are in a better position to lobby. They are more likely to influence politicians than ordinary voters through campaign contributions.
While the authors don't find any conclusive evidence to support this argument, they rather strangely suggest that "Now just because we fail to find a relationship between how campaigns are financed and how heavily the rich are taxed does not mean that there is no truth to the capture hypothesis."
This is an area the authors should have examined in greater detail. Why don't left-leaning governments raise taxes? Is the pressure from donors that much? Or do political parties of all stripes largely conform to the broad political consensus when in power?
The other conundrum this study poses is this: it basically implies that short of another major war, taxes on the rich are unlikely to go up. As the authors themselves say, the forms of compensatory arguments used in the past to justify higher taxes on the rich are likely to be irrelevant now. So how, then, might governments finance greater public spending?