In their new book Taxing the Rich, the American political scientists Kenneth Scheve and David Stasavage assert that taxes on the wealthy can rise — and rise sharply — if one condition is satisfied. That condition is war, and indeed a particular kind of war. In this four-part excerpt from the book, the authors describe, first, the three main historical arguments for taxing the rich; second, the roots of taxation; third, the power of the “conscription of wealth” argument; and lastly, the outlook for higher top tax rates.
When and why do countries tax the rich? It’s hard to think of a timelier question today or one for which there are more sharply colliding views. We know that taxes on the rich today aren’t what they were half a century ago, but how did we get from there to here? We know even less about how those high taxes of the 20th century happened in the first place. Was it the effect of democracy, or a response to rampant inequality? Much of what is written today about taxing the rich takes the form of advocacy that is focused above all on the present. But taking a step back and showing the long history of taxing the rich can teach us about our current situation.
What a country decides about taxes on the rich has profound consequences for its future economic growth and the distribution of economic resources and opportunities. Given the stakes, it’s surprising how few comparative studies exist of taxation of the rich over the long run. Many people have asked this question only for recent decades, or for a single country. The last book to treat the question extensively was published more than a century ago, by Edwin Seligman.
We argue that societies do not tax the rich just because they are democracies where the poor outnumber the rich or because inequality is high. Nor are beliefs about how taxes influence economic performance ultimately decisive. Societies tax the rich when people believe that the state has privileged the wealthy, and so fair compensation demands that the rich be taxed more heavily than the rest.
When it comes to thinking of what tax policy is best, few would disagree with the notion that governments should be — in part — guided by fairness. It is a term used frequently by those on both the political left and right. How can this be? History suggests that the concept of fairness is up for grabs. Standards of fairness in taxation vary greatly across countries, over time, and from individual to individual.
When scholars write about fairness and taxation they most often adopt a normative point of view; that is, they ask what governments should do. But fairness isn’t just a normative standard; it also matters for what governments do in practice because it influences the policy opinions of citizens. Ordinary people are more likely to support heavy taxation of the rich if it adheres to the fairness standards that they themselves hold. While many theories of politics assume people are concerned only with maximising their own income, there is abundant evidence that humans are also concerned about issues of equity and fairness. These concerns don’t mean that people aren’t also concerned about self-interest — no one likes paying taxes — or even that self-interest isn’t their prime concern. Individuals may also care about the efficiency of a tax system and whether it taxes people so heavily that they stop producing at all. Opinions about tax policy can be informed by both self-interest and efficiency, as well as fairness.
Political support for taxing the rich is strongest when doing so ensures that the state treats citizens as equals. Treating citizens as equals means treating them with “equal concern and respect,” to use the phrase adopted by the philosopher Ronald Dworkin. The idea that people should be treated as equals is, of course, part of the bedrock of modern democracy. This criterion narrows the field for what counts as an effective fairness justification for a tax. It cannot be an argument that refers to how people are inherently different or how some are inherently more worthy than others. Nor, of course, can it refer to pure self-interest.
Even so, simply saying that people should be treated “as equals” or “with equal concern and respect” does not allow us to proceed deductively to identify the precise tax policies that satisfy this criterion. There are multiple ways to plausibly treat people as equals in taxation, and this is what debating tax fairness is all about. We take an inductive approach and focus on the three arguments that have been the most common and the most persuasive in political debate: equal treatment, ability to pay, and compensatory arguments. We refer to these arguments as three ways to treat people as equals.
The greatest political support for taxing the rich emerges when compensatory arguments can be credibly applied in policy debates.
This happens when it is clear that taxing the rich more heavily than the rest serves to correct or compensate for some other inequality in government action. Compensatory arguments are most likely to emerge in democracies precisely because the very idea of democracy is that citizens should be treated as equals. If the rich have been privileged by some government intervention while others have not, then it is fair that they should be taxed more heavily to compensate for this advantage. Symmetrically, if the state has asked others to sacrifice while the rich have not borne the same burden, then again taxation of the rich can compensate. Compensatory arguments push policy toward heavier taxation of the rich, but in many cases the straightest route to fairness is to remove the initial privilege in the first place.
Therefore, compensatory arguments are most powerful in cases when a government is obliged to take an unequal action that somehow favours the rich.
The compensatory theory is not the only fairness-based argument for taxing the rich. Over the past few centuries, the most common fairness-based argument for taxing the rich has been the ability to pay doctrine. According to this doctrine, a dollar in taxes for someone earning a million dollars a year represents less of a sacrifice than it does for someone earning a more average salary. Ability to pay arguments have existed since at least the 16th century, and they underpin the contemporary theories of optimal taxation most favoured by economists.
For many, the ability to pay doctrine suffices as a reason to tax the rich more heavily than the rest. Others object to this notion. They may question how the ability to pay doctrine can be applied in practice.
How much more should a rich person pay? They may also ask why ability to pay says nothing about how disparities in income or wealth emerged in the first place. Maybe the rich were just more talented or exerted more effort than others? People who criticise the ability to pay doctrine do not deny that a dollar in taxes represents less of a sacrifice for a rich person than for someone else; they simply do not accept that this is the right criterion by which to judge fairness.
In the face of doubts about ability to pay, a salient alternative is to suggest that the fairest system involves equal treatment for all. Both rich and poor should pay the same tax rate — a “flat tax.” We use the phrase “equal treatment” to refer to fairness arguments suggesting that the same exact policy be adopted for all. Since the 16th century, opponents of progressive taxation have suggested that the basis of a republic is equal treatment for all, as illustrated by the norm of one person one vote. Therefore the same exact policy should be applied to taxation. The logic that equal treatment requires a flat tax is not perfect; having all pay a lump-sum tax, where each person pays the same amount, would also respect equal treatment, yet many today would consider such a tax unfair. Nevertheless, arguments based on equal treatment have carried great power in debates about taxing the rich.
The strongest argument
Some of the earliest examples of compensatory arguments involve suggestions that the rich ought to pay a higher rate of income tax because the poor bear the brunt of indirect taxes on common consumption goods. The idea is that to maintain themselves, the poor must consume a greater share of their income each year. However, over the last two centuries the most powerful compensatory arguments have involved a different sort of tax — military conscription.
This one simple fact goes a long way toward explaining both the rise of heavy taxation of the rich in the early and mid-20th century and the subsequent move away from this policy over the last several decades. The mass wars of the 20th century were fought in a way that had a strong economic rationale but which privileged the rich along two dimensions. 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.
This was what those on the political left claimed and what those on the right were forced to concede. It was a powerful new argument for progressive forms of taxation, and it shifted mass and elite opinion on the question of taxing the rich in a leftward direction.
Compensatory arguments are less credible in the case of more limited wars of the sort that the United States has fought of late. If the bulk of the population is not sacrificing for war, then how is it credible to ask the rich to pay a special sacrifice as compensation?
Finally, the choice between limited war or mass mobilization has been dependent on the state of military and related technologies. In the 20th century the advent of the railroad made mass mobilization possible. When mass mobilization did eventually occur in 1914, compensatory arguments for taxing the rich emerged. In the twenty-first century the advent of precision weapons and drone technology means that mass armies are no longer necessary and may even be undesirable. Therefore, we are unlikely to see a repeat of the 20th-century forces that led to heavy taxation of the rich. The compensatory theory explains why it was the wars of the early and mid-20th century that brought heavy taxation of the rich and not prior or subsequent wars.
In this passage, we learn that the three main arguments for taxing the rich — equal treatment, ability to pay, and compensatory arguments — appear in various guises in early debates on taxation from Florence to France to the United Kingdom.
What may be the first modern reference to the ability to pay principle dates from Florence in the early 16th century. The first critiques also date from this era. In 1500, the city’s governing council had introduced (or actually reintroduced) a progressive tax on land income known as the decima scalata. The tax was a subject of great controversy, and these debates attracted the attention of Francesco Guicciardini. He wrote a short text, which has become known simply as La Decima Scalata, in which he presented imagined discourses of two orators before the council, one opposed and one in favour.
Guicciardini himself was opposed to the tax, but it is presumed by historians that his text reflects the positions taken by both Florentine proponents and opponents of taxing the rich. The discourse in favour of the decima contains a passage that mirrors ability to pay positions taken centuries later: “However, the equality of a tax does not consist in this, that the rate each person must pay should be the same from one to another, but that the payment should be of a kind that one and the other are inconvenienced to the same degree.”
The opponent of progressive taxation in Guicciardini’s discourse had several responses to this ability to pay claim. The first was that the rich needed to spend more than the poor to maintain their standing.
The second was that, in a republic, people ought to be treated as equals in the sense of having equal political rights without striving to use the tax system to obtain either equality of sacrifice or equality of outcomes:
“I admit that equality is a good thing in a republic, indeed a necessary one, because it is the foundation of liberty. But the equality that we are seeking is as follows: that no citizen may oppress another, that each is equal before the law and its magistrates, and that the vote of each man who is eligible to participate in this Council has the same weight as that of any other.”
Florentine critics of progressive taxation also made one further comment — maybe the rich deserved their money because they had earned it. In other words, ability to pay isn’t the right criterion to judge fairness in taxation. This has been common in critiques of the ability to pay doctrine up to the present day.
After the end of the Revolution all attempts to implement direct and progressive taxation of income were abandoned, but in 1798 the French government did establish a tax on doors and windows. This would join three contributions voted in 1790—1791 and would become the fourth of the quatre vieilles. Some would claim that the incidence of this tax was progressive. However, the final point to remember about the quatre vieilles is that their combined incidence was very low. During the income tax debates of 1907, the French Ministry of Finance produced an estimate showing that French households with high revenues paid only about 2 per cent of their annual income on these four taxes combined.