Today, Americans tend to take progressive income taxes for granted. Sure, there's the occasional call for a flat income tax, or a flat sales tax, from Republican presidential candidates, but none have come close to being implemented. Progressive rates are here to stay.
But for the first century of American history, the federal government was funded mainly through tariffs, not income taxes. It was only in the early 20th century that the 16th Amendment authorizing income taxes passed, around the same time that progressive income taxation was becoming popular in Europe:
A recent paper by UC - Berkeley grad student Juliana Londoño Vélez provides an intriguing explanation for this evolution. Progressive taxation wasn't an inevitable effect of democracy, of the lower classes gaining a modicum of political power. It was an accidental effect of the 20th century's massive wars.
Why to believe the argument
There's plenty of anecdotal historical evidence for this proposition. The first federal income tax proposal came during the War of 1812, and one was implemented briefly during the Civil War. While the Progressive Era brought a renewed push, and the 16th Amendment and an accompanying income tax law were passed four years before US entry into World War I, it wasn't until the US joined the conflict that the tax's scale expanded to modern levels. "The War Revenue Act of 1917 dramatically raised the stakes for the rich," Londoño Vélez writes, "increasing the top marginal income tax rate from 15 percent to 67 percent, and 77 percent shortly thereafter." World War I also greatly expanded the French income tax; in 1920, to help pay for reconstruction, the top rate grew from 2 percent to 50 percent.
But the crux of Londoño Vélez's argument is quantitative. She compiled data on top income tax rates for sixteen rich, developed countries, and pairs it with data on mass mobilizations for war. A mass mobilization, for these purposes, is defined as a point in time in which 2 percent or more of the country's population is in military service. For many countries in the sample, World Wars I and II were the only mass mobilizations. The US had Korea as well, fascist Italy did a mass mobilization amidst the Great Depression in 1935, and South Korea had three mobilizations from 1965 to 1970 (as well as the Korean war).
Londoño Vélez found that "no country had high taxes on the rich before the advent of war, with [the] top rate rarely exceeding 10 percent … the Wars created substantial income tax progressivity, with periods of mass war mobilization coinciding with significant rises in the top income tax rate." There is, she concludes, "a strong and statistically significant effect of mass mobilization for war on the top rate." A number of competing explanations, by contrast, seem to not have a significant effect on the top rate, including universal male suffrage, overall affluence, and whether or not the country had a left-leaning government. And because bottom rates did not rise an equivalent amount in turn, the overall effect was an increase in progressivity.
Here, for example, is how top rates in the US and UK match up with their mass mobilizations:
Londoño Vélez also finds that war mobilization has a significant effect on income tax rates five years on, suggesting that the effect on taxes persisted. "It is difficult to say what would have happened to progressive taxation without the shocks of the First and Second World Wars," she concludes. "It is very likely the case that the emergence of progressive taxation would have taken a much slower course in the absence of the imperatives of national defense."
Why to be skeptical
The biggest reason for skepticism is that a number of countries that didn't experience mass mobilizations nonetheless developed progressive tax systems. Sweden, for example, developed a progressive income tax despite being neutral in both World Wars. Denmark and the Netherlands were neutral in World War I and invaded quickly in World War II, and adopted progressive tax systems too. Of course, the wars weren't irrelevant to neutral countries' politics. Londoño Vélez notes that Sweden adopted progressive "defense taxes" in 1914 and 1939, suggesting that its tax system might have developed in anticipation of involvement in the World Wars, even if the country wound up staying out.
Denmark is a harder case. "During the First World War, the Danish government largely expected that the war would be short and was slow to adopt measures such as permanent tax increases," Londoño Vélez writes. "Later, during its occupation by Nazi Germany in the Second World War, the tax rate barely increased." In general, Denmark raised its top tax rate slowly and steadily until a big boost in the 1960s. Londoño Vélez concedes her theory can't account for this: "Denmark’s adoption of relatively high marginal income tax rates well after the conclusion of World War II suggests that war mobilization was not the only path to progressive taxation for modern states in the twentieth century."
Further, Londoño Vélez's data is, by necessity, correlational. You can't run a controlled experiment in which a random half of the world experiences a world war and the other half doesn't and then compare their tax rates (I mean, theoretically you could, but you shouldn't). So even with the best statistical methods, it's possible this analysis is missing some third factor present in countries that experienced a mass mobilization and which developed progressive income taxes that is the actual explanation for the latter.
Many thanks to Tyler Cowen for pointing me to Londoño Vélez's paper.