Monday, 11 April 2022

"Wealth invested in beauty": reinterpreting Renaissance Florence and the Little Divergence from GDP estimates of 1427 Tuscany

 Jan Luiten van Zanden and Emanuele Felice

The full paper can be read here

How wealthy, and how unequal, was pre-industrial Europe? And how rich was the South of Europe compared to the North Sea area: did the Little Divergence already start in the late Medieval Period? And if this was the case, what are the reasons for the decline, perhaps starting already in the XV century, of Italy?

These are the main questions we address in this reconstruction of the historical national accounts of Tuscany in 1427. It is based on one of the most detailed, extensive and probably reliable quantitative source available for Medieval Europe, the Florentine Catasto of 1427, which has accurate information on the composition, the occupations and assets of 61,123 households in Tuscany in that year.

According to our estimates, by the early XV century Tuscany was in per capita GDP, in real terms, only slightly above England (maybe less than 20%), and slightly less above Holland (maybe around 13%); this gap is much smaller than the one resulting from the Maddison project (in 1427 Centre-North Italy has a GDP per capita between 70 and 100% higher than Holland and England, in the same period).

In addition, in the process of creating a benchmark estimate of Tuscany’s GDP in 1427, we also learn a lot about the structure of its economy. In fact, our results point at a fundamental institutional difference, between Tuscany on the one side, and England and Holland on the other: the productivity gap between industry and services on the one hand and agriculture on the other hand in Tuscany was much larger than in England and Holland. Furthermore, in Tuscany contrasts between city and countryside are exacerbated by the large income streams from agriculture to the cities (and in particular Florence). This increases the income of the urban elite – which spends it on the conspicuous consumption that gives rise to the Renaissance – and depresses rural incomes.

These findings confirm an institutional explanation of Tuscan economic decline first put forward, in pioneering works, by Stephan Epstein, in the early 1990s, and later corroborated by several studies on the basis of different sources (such as those by Van Bavel, Cohn, Alfani and Ryckbosch, Alfani and Ammannati): Tuscany was characterized by high extractive rates in favor of the elite of capital city, to the detriment of the subdued cities and, most of all, of the countryside. This led to underdeveloped markets for labor and capital in the countryside, which sharply contrasts with what we know about Holland and England, where mobility of labor and capital was much higher. In Tuscany, these blockades to market functioning in turn resulted into very low productivity in agriculture, a high share of labor in agriculture and, arguably, lower economic growth. The high extractive rate by the capital elite also brought about a very high income per head in industry and above all in services, as compared to agriculture: this may also explain why, in spite of a small difference in per capita GDP, Tuscany boasted a much richer material culture with respect to England and Holland, as testified by the florescence of the arts in the capital city at that time: the surplus income was invested in beauty.

The peculiarity of Tuscany’s institutional pattern (with respect also to other Italian territories, such as Lombardy and Sicily) helps to understand the limitation of GDP estimates based on the indirect approach, as are the series available for pre-industrial Centre-North of Italy: these tend to be heavily based on a few sources and for specific sectors and territories. In this case, the real wages of the construction workers from Florence may not be a good proxy of the entire urban sector, for a fragmented economy where labor and capital were immobile as Tuscany was; let alone for the entire Centre-North of Italy. Moreover, when it comes to international comparisons and long-run historical series differences in purchasing power parities must be properly considered, as well as their changes through time.

Our conclusions may be a useful result for other ‘fragmented’ economies as well, and for historical estimates based on a few hypotheses over-extended through time and space: cautiousness is warranted, and should always be complemented by direct evidence when available. But we also point – very indirectly – to the paradox that the beauty of the Renaissance, the unmatched brilliance of its arts, was made possible by the highly uneven distribution of wealth and income that in the long run undermined the vitality of Tuscan economy and society.  

Thursday, 24 February 2022

The Panopticon of Germany’s Foreign Trade. New Facts on the First Globalization, 1880-1913.

Wolf-Fabian HUNGERLAND and Nikolaus WOLF. 

The full paper in the EREH can be read here

We are used to distinguishing between the “first” and the “second” globalization, separated not only by two world wars, but also by changes in technology and institutions, and hence their basic economic logic. The first globalization is typically described in terms of “classical” trade models of comparative advantage, where countries trade to take advantage of their differences. In contrast, the second globalization is largely described in terms of “new” trade models based on monopolistic competition and firm heterogeneity. Here, similar countries trade because they are all populated by firms exploiting economies of scale and differences in productivity.

The similarities and differences between these two globalizations are subject to a large and growing literature (Baldwin 2016, Jacks and Stürmer 2020). Given the rise in trade between very different countries like the USA and China, Paul Krugman asked during his Nobel prize lecture of 2008: “is the world becoming more classical?” (Krugman 2008). In a new paper (Hungerland and Wolf, EREH forthcoming), we describe Germany’s foreign trade 1880-1913 with new and very detailed evidence. To us, this evidence begs the question of how “classical” has the world ever been in the first place? Put differently, to what extent can “new” trade theory help us to understand the first globalization?

We have three main findings. First, and least surprising, Germany got increasingly specialized in manufacturing, notably chemicals, machinery and transport equipment. This is fully in line with predictions of “classical” trade models, and Germany having a comparative advantage in industries that use physical and human capital intensively. Second, however, we find that nearly all growth in exports and most growth in imports took place along the extensive margin, mostly driven by new products traded with old trade partners. Third, we find that between 25-30% of trade at our finest level of disaggregation is intra-industry trade, i.e. trade in the same product category. The latter two findings imply that we cannot understand the first globalization unless allowing for very substantial heterogeneity within countries and industries.

To create our data, we first digitalized all historical statistics on the foreign trade of the German customs union and the two major port cities Bremen and Hamburg that stayed outside of that customs union before 1889. Our data covers all imports and exports from 1880 to 1913 of all products, with all trade partners, captured in values and quantities. Next, we reclassified all data to the SITC system, and used a quota method to merge the Bremen and Hamburg data with that of the German customs union to create one consistent dataset. Using the SITC, we can compare this to historical trade data for other countries (e.g. Italy, see Federico and Wolf, 2012) and modern trade data. In a related paper, Hungerland and Altmeppen (2021) provide details on this and discuss, which revision of SITC is best suited to create comparable, historical and long-run trade data.

Figure 1 shows the growth of imports and exports of the German Empire, 1880-1913. This trade growth was much faster than GDP, resulting in a rising openness ratio. Moreover, Germany was catching up to the UK, to become the second largest trading nation in the world by 1913.


FIGURE 1
AGGREGATE IMPORTS, EXPORTS, TRADE BALANCE

In 1913-marks. Statistical items excluded. Source: Own calculations.


  

Table 1 is a first cut through the aggregate data: we see how imports and exports grew between 1880 and 1913 at the level of 1-digit SITC sectors. The pattern is roughly in line with “classical” trade models, where exports of manufacturing products grow more rapidly than imports, while the opposite holds for agricultural products and raw materials. However, the growth of manufacturing exports is accompanied by very strong growth in manufacturing imports, and Germany continues to export agricultural products and especially raw materials (such as coal).

 

TABLE 1
SECTORAL TRADE GROWTH



Our data allows us to dissect aggregate trade growth much further, down to the level of 5-digit SITC (the product-level) for each trade partner of Germany. The number of products traded increased from 334 in 1880 to 834 in 1913, while the number of trade partners grew from 34 (1880) to 86 (1913). Let us define each product-country combination as a variety. In 1880 we observe 971 import varieties and 1,482 export varieties. A generation later in 1913 we observe 10,145 import and 29,263 export varieties. Following Amiti and Freund (2010), we can decompose aggregate trade growth over all varieties into three margins. First, growth can occur along the intensive margin, where trade in existing varieties is expanding (“more of the same”). Second, there can be growth along the extensive margin, where new varieties enter (either old products are traded with new trade partners, new products traded with old trade partners, or new products with new trade partners). Finally, growth can occur along the extensive margin, where old varieties disappear. Figure 2 shows the relative contribution of each of these margins to Germany’s trade expansion before World War I.

 

FIGURE 2: MARGIN DECOMPOSITION, 1880-1913

Margins in percent of total trade according to eq. 1. Source: own calculations.

 

Clearly, the extensive margin dominates the picture. Interestingly, this is true for imports and exports alike. In our paper, we show that the extensive margin dominates growth in all types of trade, manufacturing and non-manufacturing, and trade within and outside of Europe. Even trade growth between Germany and the USA was dominated by the extensive margin. Within the extensive margin, the most important element is the entry of new products in trade with existing trade partners. Moreover, we show that this is unlikely to be a statistical artefact stemming from an increasing level of detail in the historical classification system. If we restrict our attention to only those products and countries that were already recorded in the first year of our sample (1880), the picture remains largely unchanged (although this certainly underestimates the extensive margin).

A related question is whether and to what extent there was intra-industry trade, hence exports and imports of the same products in a given year. In figure 3 we show, separately for non-manufacturing and manufacturing trade, what share of trade is intra-industry, varying the level of aggregation from sectors (1-digit SITC) to products (5-digit SITC).  

 

FIGURE 3
INTRA-INDUSTRY TRADE

Intra-industry trade in percent of total trade, Figure 3A: SITC sectors 0 to 4. Figure 3B: SITC sectors 5 to 8. Source: Own calculations.

We find that even at the product-level, intra-industry trade accounts for between a quarter and a third of all trade, in manufacturing and non-manufacturing. Zooming into this more closely, we find that intra-industry trade was more prominent with rich economies—i.e. mostly with European trade partners.

Overall, our evidence suggests that simple “classical” trade models that focus on differences between countries miss crucial aspects of the first globalization. Once disaggregated trade data becomes available, we see that most of the growth in imports and exports was due not to increase in the value of trade in specific products between trade partners but growth in the number of products and trade partners. Our new evidence for Germany is in line with similar findings for Belgium before 1914 (Huberman et al., 2017) and Japan before 1914 (Meissner and Tang, 2017, 2018). Such growth along the extensive margin may have been driven by changes in trade costs due to improved transportation technology, by rising incomes, or also reflect strategies to differentiate products by branding and quality. But together with the evidence on large-scale intra-industry trade this suggests that heterogeneity within countries and industries should be systematically taken into account.

Yet, “classical” trade models are obviously not dead. At a very broad level they seem to capture, how countries specialized before 1914 – after all, they were invented to capture exactly this. Germany did specialize in manufacturing products, while agriculture in Germany and elsewhere in Europe was increasingly exposed to import competition: the “European grain invasion” (O’Rourke 1997) was very real. Farmers responded either by giving up and leaving agriculture, lobbying for protection, or shifting to different products (Suesse and Wolf 2020).

To us this suggests thinking about globalization along the lines of a hybrid model such as Bernard et al. (2007) that combines comparative advantages at the country-level with heterogeneity at the firm-level. Doing so might have far-reaching implications for our interpretation of the costs and benefits, the winners and losers, and hence for the political economy of globalization. With more disaggregated trade data available for more countries – hopefully in standardised and comparable form -, this is opening the door for a new understanding of the history of globalization.

 

 

 

References

Amiti, M. and C. Freund (2010), "The Anatomy of China's Export Growth," NBER Chapters, in: China's Growing Role in World Trade, pages 35-56, National Bureau of Economic Research, Inc.

Baldwin, Richard (2016), The Great Convergence. Information, Technology and the New Globalization. The Belknap Press of Harvard University Press, Cambridge.

Bernard, Andrew B., Stephen J. Redding and Peter K. Schott (2007), “Comparative Advantage and Heterogeneous Firms”, Review of Economic Studies, 74, 31–66.

Federico, G. and Wolf, N. (2012). “A Long-run Perspective on Comparative Advantage”, In: G. Toniolo (Ed.), The Oxford Handbook of the Italian Economy since Unification, Oxford: Oxford University Press, chap. 12. 327–350.

Huberman, M., C. Meissner and K. Oosterlinck (2017), “Technology and Geogrpahy in the Second Industrial Revolution: New Evidence from the Margins of Trade“, The Journal of Economic History 77 (1), 39-88.

Hungerland, Wolf-Fabian and C. Altmeppen (2021), “What is a product anyway? Applying the Standard International Trade Classification (SITC) to historical data”, Historical Methods: A Journal of Quantitative and Interdisciplinary History.

Hungerland, Wolf-Fabian and Nikolaus Wolf (2021), “The Panopticon of Germany’s Foreign Trade, 1880-1913. New facts on the First Globalization”, European Review of Economic History (forthcoming).

Jacks, D. and  M. Stuermer (2020), “What drives commodity price booms and busts?”, Energy Economics, 85, 104035.

Krugman, P. (2008), “The Increasing Returns Revolution in Trade and Geography”, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2008, Prize Lecture.

Meissner, C., & Tang, J. (2017). “New goods and markets versus more of the same: Japan's entry to world markets during the first age of globalisation”, VOXEU.org, 16 June 2017.

Meissner, C., & Tang, J. (2018), “Upstart Industrialization and Exports: Evidence from Japan, 1880–1910”, The Journal of Economic History, 78(4), 1068-1102.

O’Rourke, K. H. (1997), “The European Grain Invasion, 1870-1913”, The Journal of Economic History, 57 (4), 775-801.

Suesse, M. and N. Wolf (2020), “Rural transformation, inequality, and the origins of microfinance”,

Journal of Development Economics, 143, 102429.

 

 

 

Wednesday, 9 February 2022

The paradox of ‘Malthusian urbanization’: Urbanization without growth in the Republic of Genoa, 1300 to 1800

By Luigi Oddo (University of Genoa, Department of Political Science) and Andrea Zanini (University of Genoa, Department of Economics).

From the second half of the 20th century, the role of urbanization in the development process has become an extensively investigated topic. In standard urbanization models, from the pioneering studies by Lewis (1954) on urban pull factors, then passing on the great classics of the subject by de Vries (1984) and Bairoch (1988), who stressed rural push factors, cities have almost always been represented as a factor of economic development in the pre-industrial world. Urbanization levels and city sizes have often been used as empirical proxies for the level of income per capita (De Long and Shleifer 1993; Acemoglu et al. 2002, 2005; Malanima 2005; Maddison 2008; Dittmar 2011).

The role of urbanization as a factor of economic growth has also been included in the literature concerning Malthusian population theory. Clark (2007) and Voigtländer and Voth (2009, 2013) suggested that high urbanization rates helped keep down fertility and to drive up death rates, allowing living standards to rise, but through purely Malthusian mechanisms. Overall, both urbanization models and Malthusian population theory basically support the principle, even if through different mechanisms, city growth was a factor of economic advancement in the pre-industrial world.

However, in the last 20 years, the idea that urbanization level is closely correlated with levels of income and growth has started to be questioned, especially in the literature concerning developing countries (Fay and Opal 2000, Henderson et al. 2013, Gollin et al. 2016). The experience of the Third World in the second half of the 20th century clearly shows that changes in income do not explain shifts in urbanization. Urbanization continues even during periods of negative growth.

On this basis, we aimed to shed light on the relationships between urbanization and economic growth in the pre-industrial era, analyzing the case of an Italian pre-unification state, the Republic of Genoa, from 1300 to 1800 with a novel dataset of cities and rural populations. Genoa was one of the most powerful Italian maritime republics, probably exhibiting one of the highest degrees of urbanization in Europe in the Late Middle Ages. However, the history of the Republic of Genoa was described by cyclical Malthusian stagnations, which were characterized by almost flat-lined growth at the population level (Figure 1). 

Figure 1: urbanization (upper) and population (lower) of Genoa 1300-1800


The coexistence of these contradictory elements raises the following question: is a high degree of urbanization always a sign of economic advancement in the pre-industrial world?

To answer this question, our paper introduces elements of rural-urban migration models within the Malthusian population theory to provide a different perspective on the interactions between urbanization levels and demographic dynamics. Focusing on the Republic of Genoa, this approach brings out that if high levels of urbanization do not reflect substantial increasing productivity in agriculture and growing urban labor demand, urbanization per se is not sufficient to take-off from Malthusian stagnation. Therefore, the rise in urbanization cannot match sustained economic growth. The natural consequence is urbanization growth that follows a stop-and-go trend, where city populations inflate and deflate cyclically. To describe this phenomenon, we coined the term ‘Malthusian urbanization’.

Read the full paper here

Thursday, 9 December 2021

EHES conference: Call for papers


Call for panels and papers are now open for the next EHES conference, to be held 17-18 June 2022 in Groningen. 

All submissions are due by 10 January. See the official call for papers for more details about PhD bursaries and the dissertation prize here


The website and submission portal are coming soon - we'll keep you posted here.

Thursday, 11 November 2021

Death, sex and fertility: Female infanticide in rural Spain, 1750-1950

By Francisco J. Beltrán Tapia and (Norwegian University of Science and Technology; CEPR) and Francisco J. Marco-Gracia (University of Zaragoza; Instituto Agroalimentario de Aragón). Blog post based on the article with the same name published in the European Review of Economic History (here).

 

Many pre-industrial societies regulated population size by resorting to infanticide and the mortal neglect of unwanted infants and children (Langer 1972; Harris and Ross 1987; Hrdy 1999). These practices have traditionally targeted girls in India, China and Japan, among other countries characterised by strong patriarchal traditions that favour males (Das Gupta el al. 2003; Bhaskar and Gupta 2007; Drixler 2013). Women’s status in historical Europe was definitely more advantageous than in other parts of the world but Europe was not a gender-equal paradise and women were discriminated against in many dimensions (Szoltysek et al. 2017; Carmichael and Rijpma 2017; Dilli et al. 2019). In this regard, although the traditional narrative nonetheless defends that European families did not neglect their female babies (Derosas and Tsuya 2010; Lynch 2011), several studies suggest that female infanticide, as a means of controlling the size and sex composition of their offspring, was more widespread that commonly thought, especially in Southern Europe (Hanlon 2016; Beltrán Tapia and Raftakis 2021; Echavarri 2021).

By relying on the parish records of all the population living in a rural Spanish region between 1750 and 1950 (almost 60,000 individuals), this article evidences that discriminatory practices increased female mortality shortly after birth. Firstly, aggregate sex ratios obtained from baptismal records were exceptionally high, at least until the late 19th century (figure 1). Secondly, the individual-level information shows that the probability of being male at baptism was significantly higher when there were no previous male siblings alive, a feature that could trigger discrimination in the presence of son preference. Likewise, as evidenced by death registers, female survival chances during the first one or two days of life were also negatively affected by this same feature, as well as by the number of siblings alive. These findings seem to be concentrated at higher parities and among landless and semi-landless families which were subject to harsher economic conditions and therefore more likely to resort to extreme decisions under difficult circumstances.

Figure 1. Sex ratios at baptism, 1575-1975



Note: 25-year moving average. Dotted lines represent the 95 per cent confidence interval. Source: AMHDB.

 

Crucially, the fact that the results are robust to employing data from birth and death registers rules out the possibility that under-registration explains this pattern: although female misreporting would bias sex ratios at birth upwards, it would have the opposite effect on mortality rates. Taken together, these findings strongly support the idea that a significant fraction of female babies were neglected or disposed away. These discriminatory patterns affecting female mortality shortly after birth disappeared during the first decades of the 20th century, as soon as the demographic transition and other economic, social and cultural changes reduced general mortality rates and undermined the strong son preference detected here.

The mortal neglect of girls shortly after birth was probably a conscious family decision that affected a number of families under certain circumstances. Apart from the need to provide dowries for their daughters, the fact that there existed less female waged labour opportunities also militated against girls. The sources are though silent regarding how these girls went missing. There were of course many ways of disposing of unwanted children and these crimes were easy to commit and difficult to prove (starvation, dehydration, strangulation, drugged to death, smothering, exposure to elements, etc. It is also plausible that families could have not striven enough to keep them alive especially during the crucial first hours of life. Given that there is hardly any anecdotal evidence on female infanticide, our findings suggest that some families disguised female infanticide or neglect as natural deaths.

The evidence provided here shows that families especially targeted girls, but boys could have undoubtedly fell victims to these practices as well. This article therefore not only challenges the notion that there were no missing girls in historical Europe, but also suggests that these families regulated the size and sex composition of their offspring. These findings have important implications for our understanding of the traditional demographic regime and the subsequent transition to lower fertility and mortality rates because the relatively low number of children raised by these families cannot be longer explained solely by the use of different methods to reduce fertility either indirectly (delaying age at marriage or celibacy) or directly (spacing or stopping). By increasing the mortality of their unwanted children, these families also adopted a “death control”. The gradual disappearance of these practices would therefore partly contribute to explaining the decline in fertility and mortality that took place during the demographic transition. Likewise, the fact that many of these deaths escaped from birth and death registers also indicates that fertility and mortality rates in these areas were higher than what it has been traditionally assumed.

Thursday, 26 August 2021

War inflation as an agent of income tax modernization

Sara Torregrosa-Hetland

Oriol Sabaté

 

The World Wars were associated with progressive tax policies in most Western countries. Top marginal income tax rates increased to unprecedented levels, while other fiscal instruments, such as excess profits taxes, were implemented during the wars to meet the extraordinary revenue needs (Scheve and Stasavage, 2016).

In the income tax, this leap in progressive reforms came along with the broadening of the tax base, which brought for the first time low and middle incomes into the tax (Brownlee, 1996; Broadberry and Howlett, 1998, 2005; Rockoff, 2012). This fundamental transformation was the result of both regulatory changes, which reduced exemption limits and personal deductions, and high levels of inflation, which eroded the real value of these same exemption limits and deductions, pushing incomes previously excluded from paying the tax into the fiscal net (even though their real incomes did not increase).

Our latest paper published in EREH (Torregrosa-Hetland and Sabaté, 2021a) quantifies the role that inflation played in the downward expansion of the tax during the World Wars. We first clarify and estimate the ways in which inflation affects the distribution of income tax due across different levels of income, and, second, calculate its effects on tax progressivity and redistribution. Specifically, we analyze the income taxes of Sweden, the United Kingdom and the United States, by comparing the actual operation of the tax with alternative counterfactual scenarios of lower or no inflation (here, as in the paper, we concentrate on our first counterfactual, defined by the level of inflation over the five pre-war years). The exercise is based on disaggregating the original tabulated tax data (following Blanchet et al., 2017), and imputing income tax payments to the synthetic observations according to the regulations in place (see also Torregrosa-Hetland and Sabaté, 2021b).

Inflation expanded the tax: more taxpayers, more revenue

Our results show that inflation was indeed a powerful mechanism for the downward expansion of the tax. By the end of World War I, 75% of British taxpayers had been incorporated into the fiscal net by excess inflation. This figure reached 68% and 38% in Sweden and the United States respectively. The impact of inflation by 1920 in Sweden was so extreme that these new taxpayers amounted to 28% of the total tax units in the country (i.e., of the total number of potential tax returns if everyone would have been required to file). During World War II, nearly 4 million British taxpayers started paying the tax for no other reason than nominal increases in their incomes (see Table 1).

Table 1. Additional taxpayers brought in by inflation

Country

Year

Scenario

New taxpayers brought in by inflation

Absolute number

Percent of total taxpayers

Percent of total tax units

Sweden

1920

1

933,924

71%

30%

1920

2

876,513

68%

28%

1946

1

292,665

11%

8%

1946

2

166,053

6%

4%

United Kingdom

1919

1

2,913,250

77%

12%

1919

2

2,840,603

75%

12%

1949

1

6,282,209

45%

24%

1949

2

4,013,889

29%

15%

United States

1919

1

1,488,373

44%

4%

1919

2

1,300,997

38%

3%

1946

1

2,670,648

6%

5%

1946

2

1,484,428

4%

3%

 

Inflation did not only bring new taxpayers into the tax, but also pushed existing taxpayers into higher tax brackets (due to the erosion of the real value of bracket limits and deductions). As a result, inflation was responsible for as much as 80% of the income tax revenue in Sweden in 1920, and near 65% and 57% in the United Kingdom and the United States in 1919 (see Table 2). Of this additional “inflation revenue”, the majority was paid by existing taxpayers that had been pushed into higher tax brackets (84% in Sweden by the end of World War I, and above 90% in the United Kingdom and the United States; see Table 3). New taxpayers entered massively into the tax during the two wars, but their relatively low effective tax rates (particularly during World War I) made the revenue impact more modest in absolute terms.

Table 2. Additional income tax revenue brought in by inflation

Country

Year

Scenario

New tax revenue brought in by inflation

Million current krs / £ / $

Percent of total income tax revenue

Sweden

1920

1

145

82%

1920

2

142

80%

1946

1

588

44%

1946

2

391

29%

United Kingdom

1919

1

210

67%

1919

2

200

64%

1949

1

822

67%

1949

2

602

49%

United States

1919

1

880

63%

1919

2

801

57%

1946

1

7,629

41%

1946

2

4,966

27%

Table 3. Distribution of the additional revenue caused by inflation between taxpayer groups

Country

Year

Scenario

New taxpayers brought in by inflation

Rest of taxpayers

Top 10% of tax units

Top 1% of tax units

Sweden

1920

1

17.3%

82.7%

80.6%

52.3%

1920

2

15.2%

84.8%

80.3%

52.0%

1946

1

3.9%

96.1%

57.0%

27.3%

1946

2

2.9%

97.1%

56.9%

27.1%

United Kingdom

1919

1

8.0%

92.0%

97.8%

76.6%

1919

2

7.6%

92.4%

97.6%

76.1%

1949

1

17.3%

82.7%

66.7%

33.5%

1949

2

13.4%

86.6%

65.0%

32.3%

United States

1919

1

8.0%

92.0%

99.9%

80.6%

1919

2

7.1%

92.9%

99.9%

80.4%

1946

1

0.7%

99.3%

55.0%

31.0%

1946

2

0.4%

99.6%

54.7%

30.6%

 

Inflation made the income tax less progressive, but more redistributive

What was the impact of these changes in the progressivity of the income tax? Since the increases in tax burden were, in relative terms, more intense at the bottom of the income distribution, inflation had a regressive effect. This was particularly true in the United Kingdom during World War I. Figure 1 and 2 show the extent to which low and middle incomes became subject to higher average effective tax rates by the end of the wars due to inflation.

Figure 1. Average effective tax rates under different inflation scenarios at the end of WWI


Figure 2. Average effective tax rates under different inflation scenarios at the end of WWII


Interestingly, though, the impact of inflation on redistribution was positive. While inflation reduced the level of progressivity, it increased the size of a still progressive tax, which in turn increased the amount of income that was placed into the redistributive channel. For instance, the British income tax reduced inequality by 5.11 Gini points in 1919, and no less than 28% of this effect was caused by accumulated excess inflation since 1913. In this way, inflation was one of the drivers of the transition from a ‘class tax’ into a ‘mass tax’: one that obtained revenue from most of the population, forming a strong basis for fiscal citizenship, and which became one of the major redistributive instruments of the post-war era/for decades to come.

 

References

BLANCHET, T., FOURNIER, J., and PIKETTY, T. (2017): Generalized Pareto Curves: Theory and Applications. WID.world Working Paper Series 2017/3.

BROADBERRY, S. and HOWLETT, P. (1998): 'The United Kingdom: ‘Victory at all costs’', in M. Harrison (Ed.), The Economics of World War II: Six Great Powers in International Comparison. Cambridge: Cambridge University Press, 43-80.

BROADBERRY, S. and HOWLETT, P. (2005): 'The United Kingdom during World War I: business as usual?', in S. Broadberry and M. Harrison (eds.) The Economics of World War I, New York: Cambridge University Press, 206-234.

BROWNLEE, E. (1996): Federal Taxation in America: A History, New York: Cambridge University Press.

ROCKOFF, H. (2012). America’s Economic Way of War. War and the US Economy from the Spanish-American War to the Persian Gulf War. Cambridge: Cambridge University Press.

SCHEVE, K., and D. STASAVAGE (2016): Taxing the Rich. A History of Fiscal Fairness in the United States and Europe. Princeton University Press.

TORREGROSA-HETLAND, S., and SABATÉ, O. (2021a): 'Income tax progressivity and inflation during the World Wars', forthcoming in European Review of Economic History.

TORREGROSA-HETLAND, S., and SABATÉ, O. (2021b): 'Income taxes and redistribution in the early twentieth century', Lund Papers in Economic History: General Issues; no. 224.