‘Tax the rich’? The financial crisis, fiscal fairness, and progressive income taxation

Julian Limberg

doi:10.1017/s1755773919000183

Abstract

AbstractHas the financial crisis influenced taxes on the rich? In this article, I argue that crisis countries have raised income tax progressivity because of fiscal fairness considerations. I test this claim by analysing a new data set on top marginal personal income tax (PIT) rates for 122 countries from 2006 to 2014, applying matching methods and a difference-in-differences design. The results show that countries with a financial crisis have increased top PIT rates by 4 percentage points. Furthermore, rising public debt only leads to higher top PIT rates when it is crisis-induced. These findings demonstrate that notions of fiscal fairness can still shape progressive taxation in the 21st century.

Highlights

IntroductionPublic debt only leads to increasing top personal income tax (PIT) rates if is induced by the financial crisis
A simple t test reveals that countries with a financial crisis have increased top personal income tax (PIT) rates by 2.4 percentage points in the short (2007–10) and by 3.7 percentage points in the medium run (2007–14) compared to non-crisis countries
Has the financial crisis led to higher taxes on the rich? Using new data on top PIT rates for a global country sample, I have shown that the financial crisis has caused rising tax rates on high incomes

Summary

Introduction

Public debt only leads to increasing top PIT rates if is induced by the financial crisis These results support my argument that rising tax rates on the rich are not solely the result of higher revenue needs in crisis countries. With regard to my study, this means that higher debt will only lead to increasing top PIT rates in countries that have experienced a prior financial crisis. I have argued that fiscal fairness considerations in the wake of the crisis have increased taxes on the rich and top PIT rates. In order to test for the impact of changes in public debt on top PIT rates in the wake of a financial crisis (Hypothesis 3), I look at yearly data for all 122 countries in my sample from 2006 to 2014.

FC No FC

Results

Conclusion