Does war drive progressive income taxation?

Here is evidence for the Roberts Higgs thesis and, if I recall correctly, some recent remarks by Thomas Piketty on revolution and tax progressivity (does anyone know the link?).  Juliana Londoño Vélez writes:

Abstract    I argue that progressive income taxation in the twentieth century is a product of the exigency of war and not of democracy. I obtain long-run series of the top marginal personal income tax rate for a large sample of OECD countries, and use data on wars of mass mobilization and democracy from the Correlates of War data set and Scheve & Stasavage (2012) to test this hypothesis. My results suggest that wars of mass mobilization (i.e. wars in which more than 2% of the population served in the military) cause substantial increases in tax progressivity. These effects are persistent and do not vanish upon the conclusion of war.

The full paper is here (pdf), taken from the generally interesting Berkeley Economic History Lab list, as cited by Barry Eichengreen.  As Barry notes, see also the revised and much improved version of Lemin Wu’s paper on the Malthusian trap (pdf).

Comments

Yup.

The Short 20th Century was also responsible, along with Social Security, worker's rights, the Progressive Movement, Communism and anarchism, for such monstrosities as the Federal Reserve, the quantity theory of money, as well as deficit spending as fiscal stimulus (the last two theories are strangely connected, given that in fact rarely does monetary stimulus do anything beyond the very short term, i.e., given that money in fact is largely neutral).

Given that in modern times, it is the middle and lower income strata, with emphasis on lower, that do most of the dying and suffering for the homeland. That the this burden of cost falls heavily upon them might motivate them to see greater wealth transfer via government services, along with, increased contribution to the general pot by the more well off, as compensatory. Historically, elites were heavily involved in any fighting and dying and taxes were regressive.

Nyongesa February 24, 2015 at 1:47 am

Given that in modern times, it is the middle and lower income strata, with emphasis on lower, that do most of the dying and suffering for the homeland.

I am unconvinced that is true actually. In absolute numbers, perhaps a case could be made. In relative numbers? Not likely. Not in America until Vietnam anyway. Since Vietnam, America's ruling class has conspicuously avoided serving. Not in Britain or Germany until recent times. Former students from Eton were vastly more likely to die in both World Wars than anyone else.

A disproportionately share of Israeli casualties have been junior officers and a disproportionate share of those are said to have come from the equivalent of Israel's upper class - the Kibbutzim.

As far as I know, officers still have higher casualty rates than ordinary soldiers. It is just that a much reduced fraction of leaders in business and politics have been officers in the past. That's not obviously a bad thing.

As a percentage of over all numbers, officers ought to have higher casualty rates. Doesn't always work that way. I expect that it is a good measure of a functioning Army and a healthy society. If the elite is not willing to die for their country - and they aren't any more in America - why should anyone else? I bet more soldiers die in Arab armies than officers.

We have had articles that show leaders in business are better if they have a military background. I think it is a bad thing that so many political leaders did not serve. And I think it is obviously a bad thing. The modern disjuncture between the people with all the money and the people with the guns cannot last. I don't think it will turn out badly for the people with the guns.

My guess is that second and first lieutenants bear the brunt of the officer, and total, war casualties. And captains.

Ruling classes haven't been able to join the military as flag or field officers probably since the Spanish-American War. The military has been rather egalitarian since then. The reasons our ruling classes avoid the military are the same as for all of us prols - its a volunteer system now.

Today we recruit officers from the lower reaches of the middle class through ROTC programs, and this has even started to becometrue of the the service academies.

lower reaches of the middle class

You've got something against schoolteachers and shop keepers?

Where's the source for that? I find that claim to be unlikely (in most armies and most wars)

Given that in modern times, it is the middle and lower income strata, with emphasis on lower, that do most of the dying and suffering for the homeland. -

Um, no. The military is very chary about taking anyone with a criminal record. For decades, it has been statutorily impermissible to induct anyone who scores below the 11th percentile on an IQ test and it has been the practice in recent decades to not recruit anyone who scores below the 16th percentile. The lower strata of human capital do not qualify for military service. As for the officer corps, if I'm not mistaken, it is very unusual nowadays for anyone therein to be lacking a baccalaureate degree. The enlisted ranks are drawn from the broad working class, by and large, and are not in this respect different from 70% of the workforce. It's probably true that people of an elite, patrician, or professional-managerial social background are unusual in today's military. That 13% have other options which pay better with less instability and less discomfort. The honor culture is weaker than it was 60 years ago and boyhood is less rough-and-tumble.

When you are talking about impact, it doesn't matter what SES level a person is when they enter the military, what matters is what happens after. It's a fallacy to think in terms of going to war and coming home, buying a ticky-tacky house and going to college on the GI Bill and becoming a find upstanding community leader like your WW2 vets. The model of coming home from war are the Vietnam Vets; men who were ruined for participation in civil society and practice of self-care. People now think that because we venerate "those who serve" that this same dynamic of a ruined group of people is not still in play but sadly it is. We've lost a whole generation of men and women to PTSD, to severe injury, to believing the best way to solve a problem is to shoot it, who think traffic jams are times to practice ramming other cars to get them out of the way; men and women who regardless of their entering SES now have morals of an alley cat and cannot function if they are not in a state of high alert. They can no longer cope in the civil society you and I know, they are no longer trustworthy, they are not leaders, they are morally bankrupted and destroyed. So it isn't who is dying that says something from an economic impact perspective, but rather that ALL SES levels are distinctly impacted by an entire swath of their cohort who cannot participate economically like those who didn't spend a decade in Baghdad and Peshwar etc.

The percentage of veterans with PTSD is approx. 10-15% the percentage in the general population is about 8%. Moreover it's reasonable to assume veterans are more likely to be diagnosed and more perhaps even more likely to be falsely diagnosed.

War makes the state, and the state makes war..

How is it that this paper isn't even citing Higgs?

Higgs, Peter W. "Spontaneous symmetry breakdown without massless bosons." Physical Review 145.4 (1966): 1156.

An oldie, but a goodie.

"I argue that progressive income taxation in the twentieth century is a product of the exigency of war and not of democracy"

Even when the war is to defend democracy?

The dichotomy does not make any sense. Does she fancy the Congress which enacted the tax increases in 1941 was less 'democratic' than the one which had done so in 1932?

The immediate cause of the English Civil War was Parliament's refusal to vote a subsidy for Carles I, once fighting commenced Parliament raised far more money than the original subsidy, and rates of taxation in England have never fallen below the new level. The same with the American and French Revolutions, after both the level of tax collection increased dramatically and permanently.

The argument I heard many many years ago, the 1980s and the iidea was clearly far older, was that the new government now had more legitamacy and thus could require more from the populace. Louis XIV could not of dreamed of extracting the manpower that the Republic, who was founded partly out of outrage at corvee, expected as its due in the Levee en Masse.

The US Civil War, WWII all increeased national legitimacy, as did the cold war. Each allowed the state more power than the pre crisis regime could have ever imagined. Eventually Nixon took it to its logical conclusion by declaring war on drugs, cancer, etc... There is no end, and revolution will only make it worse.

As the English Civil war (or the Boston Tea Party) shows, fights over taxation are sometimes actually about how much power the taxing authority should have. If you overthrow the unpopular authority, then a new one is allowed to tax more.

But sometimes the fights are because people want to hold onto their money. I don't think state legitimacy allows big increases in taxation. Rather I think good forms of government are a common cause of both legitimacy and state coercive power.

English civil-war type cases happen when a state is illegitimate enough to be unpopular and weak enough not to get away with it. But generally, has come about through modern bureaucratic sophistication.
An imperial despot in 800BC might claim state ownership of everything, but lose it all through corruption. Stalin got much closer to actually implementing the ideal, without being more legitimate. Sweden's government is legitimate, but is less acquisitive.

A more legitimate state also allows the state to borrow more because it looks like it will be around for a long time to pay back its debts. The stable English regime that emerged in 1688 looked to lenders like a good risk, which it has so far proven to be.

Your begging the question. What made the English regime that emerged in 1688 "legitimate" was precisely the loans that allowed them to wage war. They were a good bet because they got the loans (from the oh-so-legitimate whig oligarchs who had become rich by looting stolen property and violating the traditional rights of the peasantry), they did not get the loans because they were a good bet. If legitimacy is the starting point, the Stuarts were clearly the legitimate sovereigns.

The Jacobite regime was not reliable when it came to enforcing usurious contracts. The money lenders of Europe were familiar enough with history to know that lending to too big to fail Princes had brought down the Medici, the Fuggers, and others. Cheap loans to the revolutionary regime were the price they had to pay for a state that would legally entitle them to their pound of flesh. Saves them the expense of legbreakers. I suppose this makes the regime a good bet on the whole, but this doesn't mean that the particular loans to the sovereign were going to be repaid rather than rolled over until default.

The taxes imposed on Americans in the 1760s were to pay off debt that originated in the wars of the late 17th century, not the 7 years war as is commonly supposed. Taxation of the colonies was an absolute necessity due to the nature of compound interest. Parliament knew it was an illegal violation of the colonial charters (though they invented some justifications) but they offered the colonies access to a free-trade zone, a privilege not in their charters, to off-set the loss of their charters. Anyway, my point is, a) sovereign debt is never a particularly good bet (at least before fiat currency and even after since paying you back really requires the same old coin-clipping as always) and b) the Revolutionary war really wasn't abnout representation. By 1776 the Americans had taken that option off the table despite the fact that it had been proposed and would have certainly been enacted at some point. The Americans seemed to move the goalposts, because it wasn't about representation, it was about being asked to take on a massive debt that (propaganda aside) was not theirs, but the whig oligarchs'. c) the mechanism is actually that the availability of cheap loans to the sovereign creates the mass mobilization wars that lead to the need for higher tax rates. Democratic regimes actually exacerbate this problem as, unlike the king whose son will inherit the family business, they don't worry as much about the long term sovereign credit. They might not even be in power when that shoe drops. d) money lenders often need to throw good money after bad to ensure that they collect on previous loans to the sovereign, so an unstable regime may have easy to loans (which makes it appear a stable regime).

At the national level, American conservatives discovered the answer to progressive taxation in 1983: the regressive payroll tax. Not only did the large increase in payroll taxes adopted in 1983 help offset cuts in the progressive income tax (almost $3 trillion in offsets through 2014), but just as important, the increase turned many working Americans into tax protesters. It was so successful that conservatives tried to repeat the strategy again a couple of years ago but thus far have been unsuccessful (fool me once, shame on me, fool me twice, shame on you). Coupled with the successful devolution effort in turning over to states (which with only a few exceptions have highly regressive taxes) what were formerly national programs, it's difficult to imagine a return to highly progressive taxation. I should add that the 1983 strategy would not have succeeded without help from Democrats as well as Republicans. It was sold to working Americans as necessary to "save" social security. With strong support from President Reagan, it passed the House with more votes by Democrats than Republicans and in the Senate with more votes by Republicans than Democrats. Voters often complain that Democrats and Republicans can't work together to solve the nation's problems. Opposition to progressive taxation proves that isn't true.

"At the national level, American conservatives discovered the answer to progressive taxation in 1983: the regressive payroll tax."

That's a weird narrative you are attempting to write. considering that the additional taxes were dedicated to SS and Medicare and it was an overwhelmingly bi-partisan effort. Seriously, you counter your own argument in the same paragraph.

"With strong support from President Reagan, it passed the House with more votes by Democrats than Republicans..."

At the point in time that you are proclaiming Tip O'Neill a determined conservative, you've lost touch with rational argument and set down in the land of topsy turvy ideology.

Rational argument is not the point. Getting the memes in circulation is. It does not matter if the memes do not make sense if people repeat them and incorporate them into their worldview. Eventually, Rick Pearlstein and Paul Krugman will succeed in making the memes the standard narrative of academic historians.

The question of regressive taxes is an empirical one; if the taxes are regressive, the party vote is irrelevant. During the Reagan years, the highest marginal tax levels fell, and regressive taxes that only applied to the first dollars earned on all wages (but not capital gains) increased. Tip O'Neil is who he is, but he also allowed / facilitated the passage of various regressive tax measures - in addition to his other, more liberal actions.

I agree with your empirical approach. Here's my empirical take:

Increasing FICA to boost the long run stability of SS and Medicare was a bipartisan measure.

Surely this is hugely reductive. The paper basically says, 'there were wars in the 20th century with OECD participants and involving 2% or more of the population, there was also massive social change during this century, ergo war is the prime factor in social change'. I'm not saying that war isn't a factor, but given the sample size, I don't see how you could possibly pinpoint war as the exact cause versus any of the other narratives during the century i.e. the rise of communism. Not an expert but if you read a lot of the literature from the interwar period for example, you definitely get the feeling that the prime cause of the changes is about the rise of communism/national socialism rather than the First World War itself. I guess you could make an argument that the rise of these new politics are themselves linked to the first world war, but isn't this again reductive? Maybe Marx was right and it was inevitable all along? I don't see how we could possibly tell, so doesn't this make these sorts of statements/papers a pointless exercise?

Switzerland and Sweden vote No.

Does Switzerland have highly progressive taxes? I thought it's income taxes were fairly low even for the rich. And Sweden is historically not a very pacifistic country. Although I grant that the increase in income tax probably happened after it became less aggressive.

I'm relatively confidant that both countries current taxes are far more progressive today than they were 100 years ago and neither country has fought a war during that period.

Add to that Ireland whose neutrality goes back to about '22

So, it seems as if we simply not mentioning the opponents of democracies? - 'My results suggest that wars of mass mobilization (i.e. wars in which more than 2% of the population served in the military) cause substantial increases in tax progressivity.' Because really, the Soviets didn't bother with 'tax progressivity' before, during, or after WWII or the succeeding Cold War.

The same applies to Cambodia and Vietnam, though for different reasons. It might be applicable to either side in the Iran-Iraq War, though as both fueled their war with oil, it is quite possible that neither side found much need for increasing progressive taxation, particularly in the light of the mass conscription required to sustain an 8 year war with more than a half million dead soldiers. (Whether direct confiscation is the same as progressive taxation when fighting total war is another question, as noted by wikipedia - 'Iranian workers had a day's pay deducted from their pay cheques every month to help finance the war, and mass campaigns were launched to encourage the public to donate food, money, and blood for the soldiers.' http://en.wikipedia.org/wiki/Iran–Iraq_War#Home_front )

Bar a brief period around 1965, the ratio of military spending to domestic product declined almost monotonically over the period running from 1953 to 1978. The commonality of military service among those born after 1938 is lower that was the case for the Korean War cohorts and those who came just after. There was no general mobilization during the VietNam War. Regarding the Iraq War, the mobilization consisted of shifting 2% of domestic product to the military sector, penny ante compared to Korea, much less WWII.

It does drive a lot of people to do things they would not otherwise do. Especially large scale burial plot corps and their advertising agencies.

What's her point, that the government raises taxes when it's spending a third of domestic product on the war effort? This required a 'study'? Did she remark that there was a large increase in the ultimate bracket during the early depression years?

The taxation of activity, such as income, rather than wealth, drives war. During times of war, the wealthy need the lives of the citizenry to preserve and protect their wealth, and thus they need the citizenry to believe that the government places no higher value on the lives of their sons than on the lives of the sons of the wealthy. At present that belief is maintained primarily through propaganda and manipulation of social identity. Progressive income taxation is a part of that propaganda and manipulation. It is publicly presented as a tax on wealth, though it isn't in reality.

Here’s a solution: tax wealth’s avoidance of combat.

How much should the government pay you for threatening you with the draft?

Here’s a not-so-modest proposal to tax wealth for avoidance of combat (defined herein to mean any duty in a combat zone):

Since we’re worshiping markets these days, let’s let the wealthy set the retainer fee paid to young men who are obligated to serve if called for combat duty. The size of the monthly check sent to each combat retainee is set equal the minimum bid that lets the son of a wealthy family escape combat duty. Combat duty, like the draft itself, would be dependent on a lottery system, but among those within the armed services.

Q: But how would you fund such a retainer paid to millions of young men?

A: Tax net assets. Property rights are ultimately just a social construct protected by the government so when time comes to defend the government the beneficiaries of that social construct should pay for it.

Q: You said “let the wealthy set the retainer fee” — why wouldn’t they just set it to $0 so they pay no such wealth tax?

A: They set the retainer fee by bidding against each other to keep their own sons out of combat roles.

Q: That’s outrageous! A market to let the wealthy openly buy their way out of combat roles?

A: Yes, you heard right. The wealthy already frequently manage to avoid the draft, let alone combat roles. Let’s open the process so we can discover the market price of avoiding the risk of combat service, as valued by the wealthy.

Q: What’s the difference between this system and the “commutation” system used in the Civil War where $300 could buy your way out of the draft?

A: The differences are enormous:

1. Those still vulnerable to the draft were not paid $300 each — there was no net asset tax revenue to fund it — and therefore deeply resented the system. The draft riots are often attributed to the system of “commutation”. 2. The $300 figure was not reached by market mechanisms where the wealthy were trying to outbid each other. 3. The $300 figure was a one time payment — not an on-going series of payments that adjust up and down depending on the risks of war — the way any rational insurance premium should.

There are others, but together just these differences could add up to hundreds of billions of dollars a year in transfers and much greater social stability.

Q: If the poor are more willing to serve then why not just pay them what they demand rather than what the rich are willing to pay?

A: The wealthy need for us to believe that the government places no higher value on the lives of their sons than on the lives of the sons of the poor. At present that belief is maintained primarily through propaganda and manipulation of social identity. This unfairly exploits people who have strong altruistic tendencies. This is unsustainable. It squanders society’s social capital. Hypocrisy in high places doesn’t pay in the long run.

Q: But “Hypocrisy is a tribute that vice pays to virtue.” isn’t it?

A: Hypocrisy isn’t legal tender. Money is.

Q: Well, how can you ever expect such an absurd idea to make it through the political process when the wealthy are so influential over that process compared to the families that are struggling enough already trying to raise sons, let alone monitor the political process?

A: I’ll answer that question with another. Which would you prefer: A tax on wealth, or attacks on wealth?

The original income tax in 1913 (a time of peace) had a highest marginal tax rate that was 7 times the lowest marginal rate. At the peak of WWII, the highest marginal rate was 4.7 times the lowest marginal rate. During the War on Terrorism, the highest marginal rate was 3.5 times the lowest. How is war causing progressivity?

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