Whether policymaking can develop solutions for the inevitable problems that capitalism creates has long been a concern of political economists. One of these issues is rising inequality across the USA and other countries. Inequality is a significant risk for political stability, so it is vital to understand how democratic societies respond to it. Progressive taxation policies, which tax the rich at higher rates, can help to equalize incomes and wealth. Despite this, over the last four decades while inequality has increased, successive US governments have introduced falling tax rates for top earners. Why is this? Read More
Professor Kenneth Scheve at Yale and Professor David Stasavage at New York University argue that tax policy does not respond to inequality because of the beliefs that some voters hold about what’s fair.
For many, fairness in taxation means treating citizens equally. Equal treatment is a key principle in democracy. Just as we all have one vote and have equal protection before the law, many believe that equal treatment demands that we should all pay the same rate of tax.
Scheve and Stasavage investigated this using a new survey tool they developed to measure the beliefs of voters regarding equal treatment and how this relates to opinions on taxation. One question in their survey asks respondents whether they believe inequality to be a problem in their country. Another asks them to consider the principle of equal treatment versus accounting for people’s different circumstances. They then decide which idea should guide policy.
Finally, to test whether equal treatment beliefs are associated with tax preferences, respondents are asked about their preferred income tax rate for top earners.
Scheve and Stasavage implemented this survey in Germany, the UK and the USA. In all three countries, they found a robust negative correlation between the strength of equal treatment beliefs and preferences for higher tax rates for the rich. This means that, if a person was less concerned about the principle of equal treatment, they were more likely to prefer higher taxes on the rich.
Scheve and Stasavage recognized, however, that individuals may adopt equal treatment beliefs to justify the tax policy opinions that they hold for other reasons. To provide evidence that a belief in equal treatment has a causal impact on tax policy preferences, they conducted an additional survey experiment.
In this, they exposed respondents to a violation of equal treatment beliefs before asking them about their taxation preferences. Here, their hypothesis held: the strength of equal treatment beliefs increased and the support for progressive taxation decreased.
These results support the researchers’ argument that non-progressive taxation policy is related to voter beliefs about fairness and specifically whether they held strong equal treatment beliefs. This can help us to understand why, despite rising inequality and its negative impacts, taxation policy in the US has failed to respond.
