Stanford academic Kenneth Scheve talks to the Herald about equality and protectionism
“Taxing the rich” is both a controversial subject in Argentina and the region. It’s also the title of an upcoming book that Stanford academic Kenneth Scheve has co-authored with NYU professor David Stasavage. Following years of research into what drives support for or against income distribution and trade protectionism, Scheve has come to Argentina to present his work in local universities, and took some time to speak to the Herald in the lobby of his hotel.
He argued that Latin America has had a long history of conflict over inequality in the 20th century, but little end product has emerged in terms of progressive change, as the broad consensus seen in post-war developed countries for tax reform was absent here.
Latin America seems to be an exception when compared to Europe, the US, Asia in terms of how it seems to favour wealth redistribution and protectionist policies over the last 15 years. Why is that?
I would say first of all it’s in part a function of the relatively high levels of inequality in the continent. This created a preference for a larger presence of the state in the economy, to correct these distributional problems. There are plenty of examples of countries with large states that have done very well, with healthy welfare states that support education, the integration of women into the labour market, social insurance, unemployment, pensions and so on. So it’s perfectly possible for Latin America to chose this path and have solid economic growth. The one thing I would emphasize, however, is that these are not countries that are closed to trade, they are quite engaged with the world economy.
The debate on trade protectionism has been very present over the last decade in Argentina. Those policies gained a lot of support after a decade of pro-market reforms (in the 90s) that didn’t end very well.
Integration with the world economy creates winners and losers, so in every country around the world there are protectionist pressures. They get stronger depending on the overall success of the economy. Given the economic crisis that took place in Argentina, it makes sense that there were a lot of people wondering whether this is a good model for the economy.
There was a sense in Latin America in the early 1990s, looking at the success of a number of East Asian countries, that the closed model that had dominated the post-World War II era in Latin America didn’t work as well as the more open one of the “Tigers” of East Asia that developed so quickly. But neoconservative policies in Argentina ended so badly that sceptcism is understandable. But whether trade protection is the right response is something you can be sceptical about, because there are not a lot of examples of countries that developed strongly without being integrated with the world economy.
The worry among policymakers is what happens when, without protection, uncompetitive industries close down, as that can create unemployment and social unrest.
It is very difficult because job creation is the key to social stability. So one might argue that the priority should be making it easier for new firms to get started and ensuring the provision of public goods that make innovation and competitiveness possible such as education.
What’s your view on Latin America’s historical inequality?
Research suggests that levels of inequality were not that different in the middle of the 19th century when compared to, say, the US. What happened was that there were some increases in inequality in Latin America after that but also they didn’t experience that compression that took place in Europe and the US when they became more equal over the course of the 20th century.
With the rise of the welfare states?
Yes, but there were a number of contributing factors. The tax systems were important, as for various reasons Europe and the US started to apply high direct taxes such as income and inheritance taxes, which had an impact in the market as well. And the Latin American countries missed out on this inequality compression. Lately, however, inequality has increased so much in liberal economies, such as the US or the UK, that politics now have some similarities when compared with some Latin American countries. The debate on educational opportunities in Chile and how they impact on equality and income distribution is not that different to the discussion in the US right now.
You have argued that the mass social mobilization of people and resources for big wars was key in the developed world in convincing people about the importance of progressive taxation. Has the lack of such a factor shaped Latin America?
The reasearch that I did with David Stasavage does point to the role of those big events in the creation of both tax and education policies which led to the compression of incomes and wealth in North America and Europe, so I think it is a contributing factor, as this compression in Europe was a function of these wars, which helped build the consensus about the need for equal contributions. Without this consensus, what Latin America got was a lot of conflict over these policies, but little reform.
So which do you think are the avenues in times of peace and democracy for such reforms to happen?
One of the things that our reasearch suggests is that the norms that resonate with a larger consensus are ones that emphasize “equality” rather than “redistribution.” So education reform emphasizing equality of opportunity and giving all citizens educational possibilities tends to resonate in a larger consensus of citizens than those focused on taking from one group and redistributing for another one. But even on progressive tax policies, it’s important to have brackets which seem fair and equal, and not to have people who earn less paying more percentage-wise than those who earn more, or it will be seen as unfair and undermine them.
How does that happen?
Sweden ended up eliminating its inheritance tax because the middle class and the upper-middle class paid a lot of it, but the rich and the very rich managed to move their wealth abroad or even move themselves, so it became an “unfair” tax. And as inheritance does not bring in much revenue in any country around the world anyway, they just got rid of it. But with income tax, the amount of revenue is so substantial… it’s such an effective tax, that you want to find a way to make it feel fair and make people want to pay it.
Overall, your work seems to say that it’s very hard to establish progressive taxation in times of peace and democracy.
Yes, that’s the bottom line. When people ask the question “Why don’t the poor soak the rich more than they do in contemporary democracies?” they’re asking the wrong question. The question is why they ever did it. And our answer was that wars had a lot to do with it. The resistance we are seeing to these taxes globally is the usual business of contemporary democracies and tax policies. It’s a little depressing but that is the bottom line: it’s hard to do.
@ignacioportes
“Taxing the rich” is both a controversial subject in Argentina and the region. It’s also the title of an upcoming book that Stanford academic Kenneth Scheve has co-authored with NYU professor David Stasavage. Following years of research into what drives support for or against income distribution and trade protectionism, Scheve has come to Argentina to present his work in local universities, and took some time to speak to the Herald in the lobby of his hotel.
He argued that Latin America has had a long history of conflict over inequality in the 20th century, but little end product has emerged in terms of progressive change, as the broad consensus seen in post-war developed countries for tax reform was absent here.
Latin America seems to be an exception when compared to Europe, the US, Asia in terms of how it seems to favour wealth redistribution and protectionist policies over the last 15 years. Why is that?
I would say first of all it’s in part a function of the relatively high levels of inequality in the continent. This created a preference for a larger presence of the state in the economy, to correct these distributional problems. There are plenty of examples of countries with large states that have done very well, with healthy welfare states that support education, the integration of women into the labour market, social insurance, unemployment, pensions and so on. So it’s perfectly possible for Latin America to chose this path and have solid economic growth. The one thing I would emphasize, however, is that these are not countries that are closed to trade, they are quite engaged with the world economy.
The debate on trade protectionism has been very present over the last decade in Argentina. Those policies gained a lot of support after a decade of pro-market reforms (in the 90s) that didn’t end very well.
Integration with the world economy creates winners and losers, so in every country around the world there are protectionist pressures. They get stronger depending on the overall success of the economy. Given the economic crisis that took place in Argentina, it makes sense that there were a lot of people wondering whether this is a good model for the economy.
There was a sense in Latin America in the early 1990s, looking at the success of a number of East Asian countries, that the closed model that had dominated the post-World War II era in Latin America didn’t work as well as the more open one of the “Tigers” of East Asia that developed so quickly. But neoconservative policies in Argentina ended so badly that sceptcism is understandable. But whether trade protection is the right response is something you can be sceptical about, because there are not a lot of examples of countries that developed strongly without being integrated with the world economy.
The worry among policymakers is what happens when, without protection, uncompetitive industries close down, as that can create unemployment and social unrest.
It is very difficult because job creation is the key to social stability. So one might argue that the priority should be making it easier for new firms to get started and ensuring the provision of public goods that make innovation and competitiveness possible such as education.
What’s your view on Latin America’s historical inequality?
Research suggests that levels of inequality were not that different in the middle of the 19th century when compared to, say, the US. What happened was that there were some increases in inequality in Latin America after that but also they didn’t experience that compression that took place in Europe and the US when they became more equal over the course of the 20th century.
With the rise of the welfare states?
Yes, but there were a number of contributing factors. The tax systems were important, as for various reasons Europe and the US started to apply high direct taxes such as income and inheritance taxes, which had an impact in the market as well. And the Latin American countries missed out on this inequality compression. Lately, however, inequality has increased so much in liberal economies, such as the US or the UK, that politics now have some similarities when compared with some Latin American countries. The debate on educational opportunities in Chile and how they impact on equality and income distribution is not that different to the discussion in the US right now.
You have argued that the mass social mobilization of people and resources for big wars was key in the developed world in convincing people about the importance of progressive taxation. Has the lack of such a factor shaped Latin America?
The reasearch that I did with David Stasavage does point to the role of those big events in the creation of both tax and education policies which led to the compression of incomes and wealth in North America and Europe, so I think it is a contributing factor, as this compression in Europe was a function of these wars, which helped build the consensus about the need for equal contributions. Without this consensus, what Latin America got was a lot of conflict over these policies, but little reform.
So which do you think are the avenues in times of peace and democracy for such reforms to happen?
One of the things that our reasearch suggests is that the norms that resonate with a larger consensus are ones that emphasize “equality” rather than “redistribution.” So education reform emphasizing equality of opportunity and giving all citizens educational possibilities tends to resonate in a larger consensus of citizens than those focused on taking from one group and redistributing for another one. But even on progressive tax policies, it’s important to have brackets which seem fair and equal, and not to have people who earn less paying more percentage-wise than those who earn more, or it will be seen as unfair and undermine them.
How does that happen?
Sweden ended up eliminating its inheritance tax because the middle class and the upper-middle class paid a lot of it, but the rich and the very rich managed to move their wealth abroad or even move themselves, so it became an “unfair” tax. And as inheritance does not bring in much revenue in any country around the world anyway, they just got rid of it. But with income tax, the amount of revenue is so substantial… it’s such an effective tax, that you want to find a way to make it feel fair and make people want to pay it.
Overall, your work seems to say that it’s very hard to establish progressive taxation in times of peace and democracy.
Yes, that’s the bottom line. When people ask the question “Why don’t the poor soak the rich more than they do in contemporary democracies?” they’re asking the wrong question. The question is why they ever did it. And our answer was that wars had a lot to do with it. The resistance we are seeing to these taxes globally is the usual business of contemporary democracies and tax policies. It’s a little depressing but that is the bottom line: it’s hard to do.
@ignacioportes
