Abstract
This paper sheds new light on the massive increase of progressive taxation in the first half of the twentieth century. Existing studies have explained this increase with the mass mobilization during the World Wars and the call for a fair sharing of the burdens of these wars. My analysis suggests that this effect was not uniform across mobilizing countries. Instead, the call for higher taxation of the rich was curbed by allocational concerns about capital rebuilding in those countries whose capital stock had been severely damaged during the war. Therefore, these countries increased progressive taxes much less. I find some evidence for this thesis in an analysis of top income and inheritance tax rates in 20 developed economies and a case study of tax policy debates in Germany after World War II. My finding has importance for the understanding of progressive taxation as well as for the understanding of tax policies more generally. It suggests that the two World Wars affected the development of tax systems not only through a distributional but also through an allocational channel.
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Notes
Arguments that challenge purely distributional accounts and point out the political importance of (allocational) producer group coalitions have a venerable tradition in comparative political economy (e.g., Baccaro and Pontusson 2016; Hall and Soskice 2001; Katzenstein 1985). However, their focus has always been on the labor market and the welfare state, whereas taxation has received little attention. For a rare but important exception, see Mares and Queralt (2015).
Queralt (2016) argues that lack of access to international war financing leads to a strengthening of the tax state. However, this does not mean that taxes will become more progressive.
Other taxes (in particular the corporate income tax) might be even more important for capital formation (see Musgrave 1979). Unfortunately, a lack of data prevents me from studying these taxes systematically. However, if destruction affects taxes that less explicitly target the creation of capital, it should affect these taxes even more strongly. In this sense, the selection of income and inheritance taxes works against my hypothesis.
See Beckert (2008) for an excellent account of historical debates about inheritance taxation.
That these arguments were indeed often invoked is demonstrated by the case study of Germany below.
The point is not that allocational arguments were not discussed in non-destroyed countries. As Daunton (2002) reports, concerns about capital allocation were repeatedly raised in the UK after both World Wars. However, I argue that these arguments were much less likely to succeed.
Scheve and Stasavage briefly discuss allocational concerns under the header that taxing the rich may be ‘self-defeating’ (2016: 18) and reject this argument empirically, arguing that lower growth rates did not cause the decline of tax rates since the 1970s. This, however, tests a different mechanism than the one advanced here: a gradual decline of growth instead of a shock to the capital stock. They also discuss the effect of destruction, but from the exact opposite angle: They speculate that the rich may have lost political influence, ‘perhaps because of wartime destruction of their assets’. However, they find no evidence for this: ‘[non-destroyed countries], did just as much or more to tax the rich as did governments in countries […] that were devastated by World War I’ (2016: 91). I offer an explanation for this observation.
Based on war location, war duration, and the number of victims, Obinger and Schmitt (2017) rank the ‘war intensity’ for WWII participants as follows: Germany (highest) – Austria – Japan – Italy – Finland – UK – France – New Zealand - Australia – Canada – US (lowest).
France also suffered the largest decline of its working age population due to the war. In terms of the capital stock per employee, the war-damage might thus not have been as severe as it would seem.
In addition, high destruction countries were probably more likely to also suffer a loss of financial wealth (e.g., because they more often had to resort to printing money for financing the war).
These countries include all 13 war participants discussed above as well as seven non-mobilizing countries: Denmark, Ireland, the Netherlands, Norway, Spain (income tax only), Sweden, and Switzerland.
As I try to measure cumulative destruction over the war period, I use income in the last year of the five-year periods.
Industrial capital, though, had survived the war in a surprisingly good condition (and was on average much younger than it had been before the war, Abelshauser 2011), but his was not really clear to observers at the time.
All translations from German sources in this section are my own.
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Acknowledgements
I would like to thank Nils Redeker, Daniele Caramani, Julian Garritzmann, Thomas Brambor, Raphael Reinke, Kenneth Scheve, and three anonymous reviewers for helpful comments. Earlier versions of the manuscript were presented at the 2016 European Political Science Association General Conference and the 2016 American Political Science Association Annual Meeting.
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Haffert, L. War mobilization or war destruction? The unequal rise of progressive taxation revisited. Rev Int Organ 14, 59–82 (2019). https://doi.org/10.1007/s11558-018-9300-0
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DOI: https://doi.org/10.1007/s11558-018-9300-0