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Tuesday, April 26, 2016

Why the Era of Soaking the Rich Is Over

A Strange Hope for Liberty

Scheve and Stasavage’s Taxing the Rich: A History of Fiscal Fairness in the United States and Europe (Princeton University Press, 2016) is a shocking book. Given the title, I absolutely did not expect it to bolster libertarian morale. But Taxing the Rich offers libertarians more credible hope for the future than any openly libertarian book published in the 21st century.

The heart of S&S’s unintentionally delightful thesis:

1. Democracies have no inherent tendency to “soak the rich.”

2. Instead, democracies adopt high, progressive taxation in the face of compelling “compensatory” arguments for redistribution.

3. Only major wars of mass mobilization make compensatory arguments compelling.

4. Modern warfare has made major wars of mass mobilization obsolete.

5. Therefore, tax the rich policies are a thing of the past, at least for developed countries. They won’t be coming back.

Highlights from the key chapter, entitled “The Conscription of Wealth”:

The reason wartime governments increased taxes on the rich more than the rest was because war mobilization changed beliefs about tax fairness. It created an opportunity for new and compelling compensatory arguments that increased support for taxing the rich.
Comparing public tax debates before, during, and immediately after World War I in the United Kingdom, France, Canada, and the United States, we demonstrate that as a result of the war both elites and ordinary people changed the type of fairness arguments they employed when justifying their preferred tax system.

The British case:

Calls for progressive taxation to equalize war sacrifices came in two forms. The first was simply more progressive income taxation, the “conscription of income,” while the second was a capital levy or literally the “conscription of wealth.”
These demands came in part from the expected places, such as the Trades Union Congress, which held “that, as the manhood of the nation has been conscripted to resist foreign aggression… this Congress demands that such a proportion of the accumulated wealth of the country shall be immediately conscripted.”
However, the arguments were also reflected in publications like the Economist, which had previously opposed high levels of income taxation.
The Economist opposed a capital levy, but it did support “direct taxation heavy enough to amount to rationing of citizens’ incomes.” It also explicitly endorsed an article in the Economic Journal by Harvard economist Oliver Sprague entitled, “The Conscription of Income.”
In the article Sprague argued: “Conscription of men should logically and equitably be accompanied by something in the nature of conscription of current income above that which is absolutely necessary.”
The conscription of income was a clear compensatory policy. The state was asking the young with lower incomes and less wealth to fight in the war. Fairness demanded that this sacrifice be compensated with higher taxes on income and wealth.

To back up this claim, S&S catalog all the arguments about income taxation made in the UK Parliament before and during World War I. Witness the transformation of rhetoric:

Taxing the Rich then takes a necessary digression into military history, explaining the rise and fall of mass mobilization as a function of military technology. Punchline:

The era of the mass army, one where countries have mobilized a substantial fraction of their citizens to fight, was dependent on a specific state of technological development. As the precision of weapons delivered from the air has increased, it has become unnecessary, and perhaps undesirable, to mobilize a mass army for conflict. …
Given the nature of enemies that a country like the United States, or other large industrial powers, are likely to face going forward, it seems even more unlikely that mass mobilization will take place.
What does this imply about taxing the rich? The twentieth-century conditions that created powerful compensatory arguments for taxing the rich are unlikely to be repeated anytime soon. These conditions were far from accidental; they were driven by long-term trends involving international rivalries and military technology.

Of course, the fact that Scheve and Stasavage thrill me as a libertarian and a pacifist hardly shows they’re right. But they flesh out their big picture with a mass of compelling evidence.  Overall, an outstanding book.

Cross-posted from Econlog.

  • Bryan Caplan is a professor of economics at George Mason University, research fellow at the Mercatus Center, adjunct scholar at the Cato Institute, and blogger for EconLog. He is a member of the FEE Faculty Network.