One of their motivations for starting the project was a disconnect they noticed between rising inequality and static tax rates. “With inequality rising over the last three or four decades, why have there not been public policies that seem to address that in an important and substantive way?” says Scheve. But while it would seem intuitive that taxes would increase at the times when inequality is highest, Scheve and Stasavage found that this relationship hasn’t held true over the course of history.

What they noticed, as they plotted the past 200 years of the average top marginal tax rates in wealthy countries, was that even when countries had adopted a modern, progressive tax system in the 19th century, rates remained pretty low—rarely exceeding 10 percent for the richest citizens. Over the course of the 20th century, though, they saw the top tax rates trace an inverted-U shape, with countries adopting very high rates in the 1950s. Since then, though, average tax rates for the rich have fallen to about 40 percent.

Average Top Marginal Tax Rates in 20 Wealthy Countries, 1800-2013

Taxing the Rich

Which led Scheve and Stasavage to wonder: What in the middle of the 20th century caused tax rates to spike? They didn’t find much evidence that stretches of inequality overlapped with these high tax rates. And they considered that maybe tax rates went up when more-liberal politicians were in power, but tax rates went up only slightly during those times.

Instead, the explanation they found most plausible was that the mid-20th-century differed from all other periods in a crucial way. “The key events we see in driving that inverted U-shape are mass mobilization for war,” Scheve explains. When countries (especially democratic ones) mobilized for war, questions about fairness came to a head, because—even during nationwide drafts—it was most often the lower and middle classes that were on the front lines. “The actual rhetoric of the times was, if you're going to conscript labor, you need to conscript capital,” Scheve says.

Scheve explains that while fairness always comes up in tax debates, this argument carried a particular resonance with politicians and the public. “This was the real story about the rise of progressive taxation during the 20th century,” he says. “It wasn't so much the story of modernization, democratization, and rising inequality, but it was really a story about how … these massive conflicts [were] being fought with soldiers. It was under these circumstances that it changed the fairness debates.”

Scheve and Stasavage explain the story of taxation in the past two centuries with what they call the compensatory theory of taxation—the (fairly intuitive) idea that higher tax rates will be accepted as fair only if there’s a consensus, across all earners, that the rich are getting more benefits from the state than they’re contributing in tax revenues. This isn’t a radical idea, but what they’re suggesting is that the threshold for this compensation is actually extremely high: In this case, it took the lower and middle classes’ fighting (and sometimes dying) in big numbers to protect their country for really high marginal tax rates to seem acceptable.