Paul L. Caron

Thursday, May 26, 2016

Hemel Reviews Taxing The Rich: A History Of Fiscal Fairness In The United States And Europe

TaxingFollowing up on last week's postDaniel Hemel (Chicago), Taxation as Compensation (reviewing   Kenneth F. Scheve (Stanford) & David Stasavage (NYU), Taxing the Rich: A History of Fiscal Fairness in the United States and Europe (Princeton University Press, 2016)):

According to Scheve and Stasavage . . . , “the story of taxing the rich has more to do with politics” than with fiscal constraints . . . . For Scheve and Stasavage, “politics” specifically means rhetoric: their answer to the “why” question focuses on the types of tax fairness arguments that advocates for redistribution have employed. Scheve and Stasavage direct their attention (and ours) to three particular tax fairness claims. The first is what they call the “equal treatment” argument: “the fairest system involves equal treatment for all” (p. 6). The second is what they describe as “the ability to pay doctrine”: each additional dollar of taxation represents less of a sacrifice for someone earning $10 million a year than for someone earning $10,000, and so a progressive tax system imposes a roughly equal burden on the rich as on the poor even while the rich pay much more in dollar terms. The third type of argument is “compensatory”: “taxing the rich more heavily than the rest serves to correct or compensate for some other inequality in government action” (p. 5). According to Scheve and Stasavage, the last type of argument is the only one that historically has justified highly progressive rate structures. ...

[E]ven if we accept that compensatory arguments have been uniquely successful in persuading industrialized democracies to tax the rich heavily in wartime—we quickly run into a problem of external validity. Perhaps it is true that compensatory arguments—and not inequality-based arguments or ability-to-pay claims—have persuaded democracies to tax the rich in the wake of mass mobilization for war, but why does that mean that compensatory arguments will be any more successful than inequality-based or ability-to-pay claims during peacetime? And why does it mean that compensatory arguments are the only arguments that will persuade democracies to raise taxes on their wealthiest citizens? Political psychology follows no iron law. The arguments that convinced voters to support high taxes on the rich in earlier eras might not be the same arguments that persuade democracies to raise taxes on the rich today.

Finally, we might wonder whether arguments about tax fairness in parliaments and the public sphere are the main act in the political story or a mere sideshow. Scheve and Stasavage say that their theory prioritizes “politics,” but it seems that their theory really prioritizes persuasion. Missing from Scheve and Stasavage’s analysis is any accounting for power. Their core claim is that advocates for redistribution prevailed in wartime debates because they had the strength of the better argument, when perhaps the redistributionists prevailed because they acquired the strength of the better bargaining position.

Recall that mass mobilization, at least according to Scheve and Stasavage, was a product of the particular constellation of military technologies that existed at the time of World War I and World War II, and that no longer exists today. As the authors put it, “[t]he era of the mass army . . . depended on a state of technology in which men and supplies could be moved en masse by rail yet where the remote delivery of explosive force was not yet advanced enough to avoid the need for mass infantry” (pp. 170-71). Manpower was uncommonly valuable under those conditions, and while the wealthy are the segment of society with the lion’s share of capital, the poor and middle class are the segments with the lion’s share of the bodies.

It should be no surprise, then, that when the masses possessed the factor in higher demand, they were able to extract a higher price. Put differently, the poor and the middle class were in a strong position to bargain for larger capital contributions from the rich because the poor and the middle class had what the rich could not themselves supply: bodies—and, particularly, young able male bodies. Politicians may have dressed these dynamics up in the rhetoric of tax fairness, but the taxation of the rich during the era of the mass army can be explained by price theory as much as moral theory.

Book Club, Scholarship, Tax | Permalink