We might agree that everyone should pay their “fair share” of taxes while fundamentally disagreeing about what that might look like.

April 15: it’s not anybody’s favorite day.

And it’s no secret that taxes—specifically who should get to pay less of them and which candidate’s plan will do more to fuel the economy—have been a focal point of almost every presidential race in memory, with candidates often courting voters with promises to lighten their financial burden. But in the years since the 2008 recession and the subsequent Occupy Wall Street movement, which took aim at the financial industry and the top 1 percent of earners among whom most of the nation’s wealth is concentrated, public conversation around taxes has shifted to include increasingly insistent demands that, in the face of widening inequality, the wealthy should pay more.

In this election, Senator Bernie Sanders has made the growing gap between rich and poor—along with a call for campaign finance reform to curb the influence of moneyed interests on policy—the central issue of his campaign, forcing his rival Hillary Clinton to also put inequality front and center and address claims that she is too cozy with the Wall Street elite. But it’s not just the Democrats who are having this conversation. At the other end of the political spectrum, Ted Cruz has said that “Today the top 1 percent earn a higher share of our national income than any year since 1928,” a statement that closely mirrors Sanders’s familiar declaration that “the gap between the very rich and everyone else in America is wider today than at any time since the 1920s.” And a 2015 Associated Press-GfK poll found that a majority of Americans—68 percent—agree that wealthy households pay too little in taxes. Although proposed tax strategies differ by party—Sanders is aiming for a 54.2 percent tax on the richest while Cruz prefers a flat 10 percent tax for all—such universal agreement on the notion that the rich are too rich would seem to signal that we’re on the brink of major change.
 

book cover: taxing the rich

Not so fast, say NYU politics professor David Stasavage and Stanford political scientist Kenneth Scheve. In their new book, Taxing the Rich: A History of Fairness in the United States and Europe, the authors conclude that the mere fact of high or rising inequality—as described in a rallying cry like “We are the 99 percent”—hasn’t historically been enough to cause governments to raise taxes for the rich. That only happens when people believe that the state is unfairly privileging the wealthy, and the taxes will compensate for the imbalance—the prime example of which occurred during the mid-20th century, when arguments centered on the idea that the wealthy should pay more in return for the sacrifice of so many in the two World Wars.

The professors also examine—and ultimately refute—other commonly held beliefs about the politics of progressive taxation, including the idea that squeamishness about raising taxes is a uniquely American phenomenon. In examining tax history in 20 countries in Europe and the Americas over the past two centuries, they find that changes in top tax rates in the US have tracked closely with international trends. “This is important because a lot of people write about the current situation in the US today as if it was abnormal because inequality is increasing while top tax rates have fallen,” Stasavage explains. “Like it or not, the US today may actually be more ‘normal’ than we think.”

In advance of tax day and the New York primary, NYU Stories corresponded with Stasavage, who is teaching in Abu Dhabi, and Scheve about their most surprising findings, the presidential candidates’ different stances on taxing the rich, and the idea that as an electorate we might agree that everyone should pay their “fair share” of taxes while fundamentally disagreeing about what that might look like.

 

How did you define “rich” for the purposes of this book?
Since the work of Thomas Piketty and Emmanuel Saez, the idea of a “top 1 percent” of income earners has become very popular. We ask when and why the top 1 percent and smaller groups, such as the top 0.1 percent, pay higher tax rates than others.

photo: headshot of David Stasavage

In your study of tax rates for 20 countries from 1800 to 2013, when were tax rates for the rich the highest? Where do our current US rates fall in that context?
Tax rates reached their peak during the middle of the 20th century, and in particular in countries that participated in the two world wars, with some countries (US, UK) even applying top marginal rates in excess of 90 percent. Today we are way off that peak with a top rate in the US of 39.6 percent.

Arguments about taxes tend to revolve around what is "fair," and yet you find that in the context of income tax, there are several different definitions of fairness.
Over the centuries, there have been three main fairness based arguments for and against taxing the rich in democracies: equal treatment arguments, ability to pay arguments, and compensatory arguments. Opponents of taxing the rich have based their argument on the principal of equal treatment—in a democracy everyone should pay the same tax rate just like everyone has a vote that counts the same. Proponents of taxing the rich have most often appealed to a different fairness criterion—ability to pay. Fairness for them means equalizing affordability. Finally, in some cases proponents of taxing the rich have also been able to make compensatory arguments for doing so to offset some other unfairness. These apply when the state has asked the poor and middle class to sacrifice but the rich have not shouldered the same burden. The most prominent time this happened was with the two World Wars.

Do differences in this area tend to break across party lines?
Democratic candidates like Bernie Sanders and Hillary Clinton have naturally been more inclined to use ability to pay arguments— the rich should pay higher rates because they can better afford to do so. Some of the Republican candidates have been more likely to appeal to equal treatment—everyone should pay the same rate just like everyone has one vote. The key difference between now and the middle of the 20th century is that in an era of limited warfare instead of mass warfare, the old compensatory arguments for taxing the rich can no longer be used. If the bulk of the US population hasn’t been asked to sacrifice for wars in Iraq and Afghanistan, then why would it be fair to single out the rich and say that they need to do so?

What were the political arguments used during the World Wars that enabled the government to increase taxes on the rich?
During the two World Wars governments made use of universal conscription to mobilize armies of unprecedented size. But even “universal” conscription wasn’t so universal. Older people were exempted for obvious reasons, and older people tend to have more wealth than younger people. Also, conscription applied only to labor and not to the capital that people owned. In this environment, political parties of the left and even on the right called for a “conscription of wealth” via taxes on the rich to restore fairness in the war effort. This was a powerful compensatory argument that moved countries to tax the rich whether they were led by governments of the right or left.

You suggest that taxes for the rich declined after these wars (under Reagan and Thatcher) not so much because the right came up with new arguments in favor of lower taxes, but because the left changed their arguments. How so?
Arguments from the left for taxing the rich had real bite in 1945; the bulk of the population had sacrificed massively during the war and therefore it was fair that the rich should also sacrifice by paying higher taxes. By 1980 this wartime compensatory argument was no longer credible. As we show in the book, Democrats in the US and Labour supporters in the UK were then forced to say simply that high taxes on the rich were “fair” but without saying what “fair” meant. This created an inevitable opening for those on the right to argue maybe the fairest thing was to have the rich pay similar rates to everyone else.

Much political debate about wealth inequality, especially since the 2010 Citizens United Supreme Court decision, has centered around the idea that taxes on the rich won't increase because the rich don't want them to—and the rich control politics. Is it that simple?
There’s no doubt about the role of money in US politics. But imagine what would have happened to taxes on the rich if there had been far less money in US political campaigns. Since we cannot repeat history, one way to get at this is to look at the experience of other countries, such as Canada, or Australia, or New Zealand, that resemble the US but have far less money in politics. Well, it turns out that over the last 40 years these countries have decreased taxes on the rich just as much as the US has. This tells us that the forces leading to lower taxes on the rich have been general, and the outcomes cannot be explained by simply referring to the fact that there is more money in US politics than in other countries.

Though many polls find that most Americans are upset about rising inequality and think the government should intervene by raising taxes for the wealthy, a survey you conducted asking what rate the rich should pay, respondents supplied a lower percentage than what the wealthy actually pay today. What gives?
Most of the time when polling firms ask people about increasing taxes on the rich they use a question that is a very blunt instrument. They will ask, for example, whether people think those earning more than $250,000 a year (or sometimes $1,000,000) ought to pay more tax, but the response is a simple “yes” or “no” that says nothing about how much people would like to see taxes on the rich increase or even if they really want higher statutory rates as opposed to the rich simply paying higher effective tax rates. (The effective tax rate is the rate people actually pay after all deductions and special privileges are taken into account.) The survey we conducted got at this question much more directly. We found that while there are a lot of people who would like to see higher taxes on the rich, on average support for higher rates, especially the sort of rates that we had in the mid 20th century, is not as broad as some have argued.

Why do (lower and middle income) voters sometimes seem to go against their own self interest, in terms of taxes, when they head to the polls?
There are a number of reasons why lower and middle income voters might support candidates proposing tax policies that fail to redistribute from the rich to the rest. Tax policy is technical, and perhaps they don’t fully understand it. Tax policy may also be one small influence on voting decisions if people care more about social issues or other stances taken by a candidate. In our book we don’t try to say that these factors are irrelevant. What we say is that there is also another more direct explanation—no one likes paying taxes but people also like to believe that they are voting for policies that meet some basic standards of fairness, and according to one definition of fairness the rich shouldn’t be taxed more heavily than the rest.

How do the arguments for taxing the rich that Bernie Sanders and other candidates are making compare to other arguments that were used over the past two centuries? Which, if any, are likely to succeed?
In the current debate there are two ways in which multiple candidates are saying that the rich should be taxed more heavily. Some people are saying that the rich should pay higher tax rates than everyone else. This is clearly the Sanders view. Other people are saying that we need to implement reforms to see that the rich do not actually pay lower tax rates than everyone else. Differential treatment of capital gains is a big reason why the very rich in the US today often end up paying lower tax rates than everyone else. We think support for this type of policy reform is likely to be much more broadly shared in the electorate. It is something that has been emphasized by Sanders and Clinton, but also by Republican candidates like Trump and Cruz.

With (we hope) no wars of mass mobilization on the horizon for the US, is a return to the high top tax rates of the mid-20th century politically possible?
To generate a return to mid-20th century taxes on the rich, proponents of this policy would need to find new compensatory arguments as compelling as the idea of a “conscription of wealth.” It would need to resonate not only with Sanders voters but also with Clinton voters and Republicans as well. This is no easy task, and frankly we think it is unlikely to happen anytime soon.