Five years ago, the billionaire Warren Buffett highlighted the fact that although the top marginal tax rates were rising for the wealthiest Americans, his effective tax rate was lower than his secretary’s. Buffett was (and still is) in favor of increasing taxes for America’s wealthiest, and the White House subsequently named an initiative after him: Under the Buffett Rule, proposed by Obama in 2011, Americans who make more than a $1 million a year would be taxed at a minimum rate of 30 percent. The rule, though, was blocked by Senate Republicans the following year.
Tax season and election years inevitably raise questions of whether taxes should go up or down, why, and for whom. No presidential candidate has been more vocal on the need for taxes than Bernie Sanders, who promises he’ll raise taxes on everyone—especially the highest earners—in order to fund a number of initiatives that he believes will reduce inequality.
One thing that's often missing from this debate: historical context. Relative to the past 200 years of U.S. history, how heavily are the rich being taxed today? Kenneth Scheve and David Stasavage, professors of political science at Stanford University and New York University respectively, looked into when countries have taxed their wealthiest citizens most heavily, and what societal conditions might have produced those tax rates. In a project that took five years, the two constructed databases of tax rates and policies in 20 countries over the last two centuries in order to answer those questions. They recently published this research in a book, Taxing the Rich: A History of Fiscal Fairness in the United States and Europe.
One of their motivations for starting the project was a disconnect they noticed between rising inequality and static tax rates. “With inequality rising over the last three or four decades, why have there not been public policies that seem to address that in an important and substantive way?” says Scheve. But while it would seem intuitive that taxes would increase at the times when inequality is highest, Scheve and Stasavage found that this relationship hasn’t held true over the course of history.
What they noticed, as they plotted the past 200 years of the average top marginal tax rates in wealthy countries, was that even when countries had adopted a modern, progressive tax system in the 19th century, rates remained pretty low—rarely exceeding 10 percent for the richest citizens. Over the course of the 20th century, though, they saw the top tax rates trace an inverted-U shape, with countries adopting very high rates in the 1950s. Since then, though, average tax rates for the rich have fallen to about 40 percent.
Average Top Marginal Tax Rates in 20 Wealthy Countries, 1800-2013
Which led Scheve and Stasavage to wonder: What in the middle of the 20th century caused tax rates to spike? They didn’t find much evidence that stretches of inequality overlapped with these high tax rates. And they considered that maybe tax rates went up when more-liberal politicians were in power, but tax rates went up only slightly during those times.
Instead, the explanation they found most plausible was that the mid-20th-century differed from all other periods in a crucial way. “The key events we see in driving that inverted U-shape are mass mobilization for war,” Scheve explains. When countries (especially democratic ones) mobilized for war, questions about fairness came to a head, because—even during nationwide drafts—it was most often the lower and middle classes that were on the front lines. “The actual rhetoric of the times was, if you're going to conscript labor, you need to conscript capital,” Scheve says.
Scheve explains that while fairness always comes up in tax debates, this argument carried a particular resonance with politicians and the public. “This was the real story about the rise of progressive taxation during the 20th century,” he says. “It wasn't so much the story of modernization, democratization, and rising inequality, but it was really a story about how … these massive conflicts [were] being fought with soldiers. It was under these circumstances that it changed the fairness debates.”
Scheve and Stasavage explain the story of taxation in the past two centuries with what they call the compensatory theory of taxation—the (fairly intuitive) idea that higher tax rates will be accepted as fair only if there’s a consensus, across all earners, that the rich are getting more benefits from the state than they’re contributing in tax revenues. This isn’t a radical idea, but what they’re suggesting is that the threshold for this compensation is actually extremely high: In this case, it took the lower and middle classes’ fighting (and sometimes dying) in big numbers to protect their country for really high marginal tax rates to seem acceptable.
While millions of people certainly do feel that the rich should be taxed more heavily—Sanders’ supporters, to name one group—the fairness argument, Scheve and Stasavage say, is not nearly as relevant today as it was six or seven decades ago. “You could imagine new compensatory arguments being developed, but in some ways, that's not something that's happened. And it's hard for us to imagine exactly what those could be,” says Scheve, adding that “it's really those underlying conditions that are driving things, not everyday partisan politics.” And though millions of Americans have been deployed to fight in wars in Iraq and Afghanistan in the 15 years since 9/11, the effort has not been felt on the mass level, as the drafts of the mid-20th century were.
The takeaway then, in the context of the current election, is that history doesn’t suggest that the top tax rates will be going up dramatically anytime soon. If a Democrat becomes the next president, it’s possible that effective tax rates will go up slightly. “Don't expect the rich to be paying higher rates than everybody else, but do expect there to be political pressure that the rich at least pay the same rates as everybody else,” Stasavage says. “The political context that got these top marginal rates of 80 or even 90 percent was a very particular thing linked to mass warfare. And that is an era that—thankfully, given the warfare part—that we're out of.”