Simple political economy models of electoral politics assert that in democracies the poor should soak the rich by demanding progressive income taxes and inheritance taxes on large estates. The case for inheritance taxation is especially strong since (historically) relatively few people leave large estates. In reality, however, there is tremendous variation across both time and space in such taxes. What explains this?
Yale’s Ken Scheve and NYU’s David Stasavage provide an answer in a recent article (pdf ungated) in International Organization (on progressive taxation) and a new working paper (pdf) (on estate taxes) that has interesting implications for current debates on the budget deficit. Both papers look at a long sweep of history (two centuries in the case of estate taxes) across a range of countries (19 in the estate tax paper). They find that mass warfare played a greater role in the development of progressive taxation than did the advent of electoral democracy characterized by universal suffrage.
The argument is not simply that wars are expensive and thus require more financing. Scheve and Stasavage argue (and find strong evidence) that only wars that involve mass mobilization are associated with increased taxation of large fortunes:
Fighting a war in which a large segment of a country’s population is mobilized arguably requires societal consensus in favor of the war effort. This societal consensus will be easier to maintain if there is a sentiment that the burden of the war effort is fairly shared between different social groups. In the case of a mass volunteer army, such as that used by the UK at the outset of World War I, individuals would be more likely to enlist under these conditions. In the case of a conscript army, such as that used by the UK during the latter stages of World War I, individuals or groups would be less likely to protest the implementation of such a system if there is some belief that the war burden is widely shared. There are two specific reasons why a progressive tax on top fortunes (such as an inheritance tax) might be seen as part of equal burden sharing in wartime. The ?first would be if wealthier individuals are less likely to ?fight, either because they have not enlisted or because they have avoided conscription through a deferment, an exemption, or simply because of age. In this case those who might demand that the wealthy bear a disproportionate share of the ?financial burden for a war in order to establish a greater equality of sacrifice. The second possibility would be if wealth holders benefit financially from a war that increases demand for goods produced by companies in which they hold investments. This could further strengthen demands for having wealth holders bear a disproportionate share of the ?financial burden for a war. Taken together, this leads to a prediction that wars of mass mobilization will be associated with increased taxation of top fortunes as part of a new social compact. In contrast, this will not be the case of wars fought by small, professional armies.
They are certainly not the first to make an argument of this sort but the evidence they have amassed in the two papers is much more extensive than anything I have seen. It includes both long-run macro-level evidence as well as individual-level evidence. The findings suggest that cutting estate taxes amidst large budget deficits and wars is not inconsistent with historical patterns. Of course, historical patterns are just that and they do not tell us in any deterministic sense what will or should happen in current debates.