Scheve & Stasavage, Taxing the Rich

Taxing the Rich: A History of Fiscal Fairness in the United States and Europe (Russell Sage Foundation and Princeton University Press, 2016) lends some perspective to what is today a burning question, at least in some camps. Kenneth Scheve and David Stasavage, the co-authors, set out to show that “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.” (p. 4)

The most powerful compensatory arguments over the last two centuries have involved military conscription. The rich benefited from the mass wars of the twentieth century in two ways. “First, labor 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.” (pp. 6-7) In an era of limited warfare where mass armies are no longer necessary this form of the compensatory argument is irrelevant.

Democracies have not increased taxes on the rich just because inequality is high, nor have they done so only when “the rich are unable to use their wealth to capture the political process.” (p. 16) Moreover, the ability to pay argument usually falls on deaf ears. Democracies are inclined to default to a “hands off” position, moved by arguments that levying high taxes on the rich is either self-defeating (they will work less, invest less, or shift their wealth abroad) or flies in the face of the equality of citizens under the law.

The authors contend that it will be possible to raise taxes on the rich only where “it is clear not just that the rich have been lucky, but that their luck has involved privileged treatment by the state.” And, they continue, “convincing compensatory arguments cannot simply be invented out of thin air. They emerge in response to concrete political and economic conditions that make such arguments credible and convincing.” (p. 47)

At the moment there isn’t much support in the U.S. for adopting the kinds of high rates that prevailed in the immediate postwar era. “Building such support would require the construction of a new compensatory argument, outside of a wartime context, which would suggest how the rich have benefitted from state privilege while others have sacrificed.” Pointing to the bank bailouts zeroes in on only a fraction of the rich. “To put it differently, it is not clear why Silicon Valley should be taxed just because Wall Street was bailed out.” (pp. 213-14)

The authors address across-the-board tax increases, not tweaks to the system, such as closing the carried interest loophole (though they do mention it in the context of the capture hypothesis). But even there it is evident how difficult it is to make any change to the tax system that negatively affects the very wealthy.