Taxing the Rich: A History of Fiscal Fairness in the United State and Europe. By Kenneth Scheve & David Stasavage. Princeton, N.J.: Princeton University Press. 2016. Pp. xv, 266. $29.95.
INTRODUCTION I. CONCEPTS, CONDITIONS, AND CONSEQUENCES A. The Received Wisdom B. Political Concepts C. Historical Conditions D. Present-Day Consequences II. UNAVOIDABLE TRADEOFFS: AGENCY, CONTINGENCY, AND HISTORICAL COMPLEXITY A. Agency B. Contingency C. Historical Complexity CONCLUSION: IMPLICATIONS FOR THE FUTURE INTRODUCTION
In 1957, the anti-statist public intellectual Ayn Rand published Atlas Shrugged--a best-selling dystopian novel depicting a United States devastated by excessive taxation and government regulation. (1) The book was an instant success and quickly became a classic text among American libertarians. (2) Although Rand wrote her novel at the height of postwar New Deal liberalism, when the top marginal federal income tax rate in the United States exceeded 90%, (3) her book was a didactic, anti-New Deal story meant to convey the importance of the "prime movers" or "producers"--the gifted elite who, like the Greek god Atlas, carried the weight of the world on their shoulders. (4)
In Rand's account, prime movers played a pivotal and indispensable role in American capitalism. They were the drivers of economic growth and prosperity. Without their talents and efforts, market capitalism itself would come to a crashing halt. Rand's fictional narrative portrayed how the rise of unbearable government regulation and high levels of progressive taxation would eventually drive producers to go on strike, thereby destabilizing the economy and society, and bringing an end to human prosperity. An activist state, fueled and propelled by a "soak-the-rich" system of taxation, was, for Rand, the source of all evil. (5)
While top marginal tax rates in the United States have dramatically declined since Rand wrote her magnum opus, the relationship between progressive taxation and economic prosperity remains a perennial concern. Indeed, well before Rand published Atlas Shrugged, thinkers and commentators debated whether high levels of taxation on the rich shaped the behavior of the affluent, and whether potential changes in such behavior had an adverse effect on overall economic growth. Despite much investigation, these remain unsettled empirical questions and highly controversial political ones. (6)
In their insightful new book, Taxing the Rich: A History of Fiscal Fairness in the United States and Europe, Kenneth Scheve and David Stasavage explore this topic from a slightly different register. Rather than examine the economic consequences of taxing the wealthy, these authors take a step back to ask the broader, and perhaps more compelling, historical question: "When and why do countries tax the rich?" (7) Instead of simply questioning whether Atlas shrugs, they seek to explain empirically why Atlas has not shrugged, especially when top marginal tax rates have reached astronomically high rates. In other words, Scheve and Stasavage address the more fundamental question: Under what conditions have governments been able to ensure that Atlas does not shrug? More specifically, the authors seek to explain why modern democracies have been able to tax the rich without negative consequences.
To address these timely and highly significant queries, the authors have conducted an impressive comparative and historical study. Using a data set of tax laws and policies from twenty industrialized democracies across nearly two centuries, the authors persuasively document how, what they refer to as, "compensatory arguments" made during wartime have led to robust taxation of the rich. (8) They also supplement their large-[R], quantitative investigation with brief qualitative case studies of several Western nation-states and their twentieth-century tax laws and policies. These historical case studies, unsurprisingly, support the book's central claim that specific ideas about fairness became increasingly persuasive during twentieth-century conflicts when technology facilitated mass mobilization for war. Along the way the authors attempt to debunk the conventional wisdom behind the rise of progressive taxation--the spread of democracy and the increasing salience of inequality--to show that calls for fairness and equality of sacrifice during wartime were the primary, if not exclusive, cause for high taxes on the rich.
Scheve and Stasavage have provided an outstanding historical account of the rise and fall of high taxes on the rich in the United States and Europe. As political scientists, they have taken seriously the primacy of political ideas and beliefs in structuring policy debates and influencing legal outcomes. They have convincingly chronicled how conceptions of taxation have changed with changing political, social, and economic contexts. They have made a major contribution to the comparative-historical literature on fiscal policy. The authors, in short, have written an analytically rigorous account--akin to a legal brief--identifying the key variables behind the rise and fall of "soak-the-rich" taxation.
Yet, in the process of providing a global, panoramic view of Western fiscal history, the authors have flattened the richness of the past. Their otherwise fascinating account does not pay sufficient attention to pre-war patterns of tax law and policymaking that laid the groundwork for subsequent changes. It does not appreciate the intensity of opposition to heavy taxes on the rich, even during wartime. And their story unabashedly embraces technological determinism, as it unfailingly accepts the conventional notion that wars are discrete events that can be easily disentangled from peacetime.
The book's analytical rigor in supporting its central claims comes with a price: the apparent tradeoff of simplifying the complexity of the past. In their social scientific efforts to identify and defend the one key independent or explanatory variable, the authors frequently elide the interdependency of historical factors, especially in their overly determined explanations of the post-1970s decline of taxes on the wealthy. Similarly, in their search for a generalizable theory to explain the rise and fall of steeply progressive taxes, Scheve and Strasavage discount the importance of human agency and historical contingency. Rather than uncover the plasticity and complexity of previous historical moments, the authors construct an overly deterministic model of historical change that too neatly categorizes the messiness of the past. As a result, they conclude their study with a rather pessimistic prediction about the future of progressive taxation--a prediction that may misinterpret or exaggerate the lessons of history.
This Review Essay is divided into two parts. Part I examines more closely the book's central claims and its original contributions to the comparative and historical literature on taxation and fiscal policy. The authors adroitly show how ideational constructs have interacted over time with changing material conditions to shape tax laws and policies. Part II explores the unavoidable tradeoffs that come from conducting a broad social scientific study of the past. It explains how the benefits of the book's analytical rigor come at the perhaps unavoidable cost of obscuring historical complexity. This Essay concludes by examining the book's main implications for the future, and how the authors' predictions about the fate of progressive taxation may be overly pessimistic.
CONCEPTS, CONDITIONS, AND CONSEQUENCES
To be sure, Scheve and Stasavage are not the first scholars to explore when and why countries tax the rich. Indeed, part of their goal is to challenge the "received wisdom," which relies mainly on the spread of democracy and increasing inequality as explanatory factors for the rise of steeply progressive taxation. (9) In the process of challenging these two traditional explanations, the authors posit their central claim: "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." (10)
Throughout the rest of the monograph, the authors elaborate on their thesis. They explain the political concept that captures the notion of "fair compensation." (11) They identify the changing historical conditions--especially new technologies which fostered the mass mobilization for war--that provided lawmakers with opportunities to leverage salient political concepts to enact highly progressive income and inheritance taxes on the rich. And they conclude by discussing the consequences of the combination of political concepts and historical conditions--consequences both for the rise and fall of "soak-the-rich" taxation and for present and future tax policy.
The Received Wisdom
There are two versions of what Scheve and Stasavage describe as the "received wisdom" or conventional explanation for the rise of high taxes on the rich. The first, which the authors claim is the "dominant narrative of the politics of redistribution," (12) highlights the importance of democracy. (13) The second underscores increasing economic inequality. (14) Neither, according to Scheve and Stasavage, sufficiently explains the rise of high taxes on the rich.
The initial "democracy hypothesis" (15) itself has two parts. The first holds that as suffrage expands, all political parties begin to select tax policies that appeal to newly franchised poor and middle-class voters--voters who inherently have a greater economic self-interest in shifting the tax burden to wealthy taxpayers. (16) "With an expanded suffrage," write Scheve and Stasavage, "parties of the right would face an incentive to shift left in order to remain electable." (17) Therefore, according to this argument, the expansion of the franchise should lead directly to higher taxes on the rich, regardless of which...