University of Calgary
A Theory of Top Income Taxation and Social Insurance
by Francisco M. Gonzalez and Jean-Francois Wen
The development of the welfare state in the decades following the Great Depression coincided with a puzzling pattern in the taxation of top incomes. Effective tax rates at the top increased sharply but then gradually decreased, even as social transfers continued rising. We argue that this was because social insurance programs and taxation of top incomes are substitutes for meeting social demands. Our theory presumes that the wealthy are politically influential and that they use their influence to bring about a combination of social insurance and tax progressivity that minimizes their cost without triggering social conflict. We view the Great Depression as a watershed event that led to the perception of a permanent increase in aggregate risk. The initial policy response for averting conflict was to supply social insurance programs coupled with increased taxation of top incomes. Subsequently, top marginal taxes were reduced, as insurance programs targeted heterogeneous risks more fi nely over time. Under this view the rise of the welfare state can be understood as a process of exploiting efficiency gains as public administration constraints are gradually lifted. Our detailed arguments build on the policy histories of the United States, Great Britain, and Sweden.
Download Paper
View this paper on RePEc
The development of the welfare state in the decades following the Great Depression coincided with a puzzling pattern in the taxation of top incomes. Effective tax rates at the top increased sharply but then gradually decreased, even as social transfers continued rising. We argue that this was because social insurance programs and taxation of top incomes are substitutes for meeting social demands. Our theory presumes that the wealthy are politically influential and that they use their influence to bring about a combination of social insurance and tax progressivity that minimizes their cost without triggering social conflict. We view the Great Depression as a watershed event that led to the perception of a permanent increase in aggregate risk. The initial policy response for averting conflict was to supply social insurance programs coupled with increased taxation of top incomes. Subsequently, top marginal taxes were reduced, as insurance programs targeted heterogeneous risks more fi nely over time. Under this view the rise of the welfare state can be understood as a process of exploiting efficiency gains as public administration constraints are gradually lifted. Our detailed arguments build on the policy histories of the United States, Great Britain, and Sweden.
Download Paper
View this paper on RePEc
Powered by UNITIS. More features.