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A Theory of Top Income Taxation and Social Insurance

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  • Francisco M. Gonzalez

    (Department of Economics, University of Waterloo)

  • Jean-Francois Wen

    (Department of Economics, University of Calgary)

Abstract

The development of the welfare state in the Western economies between 1930 and 1990 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 propose a new theory of the development of the welfare state to explain these facts. Our main insight is that social insurance and top income taxation are substitutes for averting social confl?ict. We emphasize the role of the Great Depression as a source of aggregate risk, and argue that the rise of the welfare state can be understood as a process of exploiting efficiency gains in response to gradual technological improvements in the provision of social insurance. Our detailed arguments build on the policy histories of the United States, Great Britain, and Sweden.

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Bibliographic Info

Paper provided by University of Waterloo, Department of Economics in its series Working Papers with number 1306.

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Length: 41 pages
Date of creation: Oct 2013
Date of revision: Oct 2013
Handle: RePEc:wat:wpaper:1306

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  1. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1388, C.E.P.R. Discussion Papers.
  2. Rodrik, Dani & Alesina, Alberto, 1994. "Distributive Politics and Economic Growth," Scholarly Articles 4551798, Harvard University Department of Economics.
  3. Aidt, T.S. & Dutta, Jayasri & Loukoianova, Elena, 2006. "Democracy comes to Europe: Franchise extension and fiscal outcomes 1830-1938," European Economic Review, Elsevier, Elsevier, vol. 50(2), pages 249-283, February.
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  7. Acemoglu, Daron & Robinson, James A, 1998. "Why did the West Extend the Franchise? Democracy, Inequality and Growth in Historical Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1797, C.E.P.R. Discussion Papers.
  8. Atkinson, Anthony B. & Leigh, Andrew, 2010. "The Distribution of Top Incomes in Five Anglo-Saxon Countries over the Twentieth Century," IZA Discussion Papers 4937, Institute for the Study of Labor (IZA).
  9. Ernesto Dal Bo & Pedro Dal Bo & Jason Snyder, . "Political Dynasties," Working Papers, Brown University, Department of Economics 2006-15, Brown University, Department of Economics.
  10. Weaver, Carolyn L., 1983. "On the lack of a political market for compulsory old-age insurance prior to the great depression: Insights from economic theories of government," Explorations in Economic History, Elsevier, Elsevier, vol. 20(3), pages 294-328, July.
  11. Christina D. Romer & David H. Romer, 2012. "The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era," NBER Working Papers 17860, National Bureau of Economic Research, Inc.
  12. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers, Stockholm - International Economic Studies 537, Stockholm - International Economic Studies.
  13. Simon Kuznets, 1950. "Shares of Upper Income Groups in Income and Savings," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number kuzn50-1.
  14. A. B. Atkinson, 2004. "Income Tax and Top Incomes over the Twentieth Century," Hacienda Pública Española, IEF, IEF, vol. 168(1), pages 123-141, march.
  15. Alston, Lee J & Ferrie, Joseph P, 1993. "Paternalism in Agricultural Labor Contracts in the U.S. South: Implications for the Growth of the Welfare State," American Economic Review, American Economic Association, American Economic Association, vol. 83(4), pages 852-76, September.
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