The fiscal reckoning of war: Contemporary armed conflict and progressive income taxation

Abstract

Armed conflicts expose states to extraordinary fiscal stress and leave poverty and inequality in their wake. Yet, the fiscal policy responses in contemporary conflict-affected states appear feeble, in striking contrast to historical antecedents, having led to radical and distinctly progressive tax reforms. Whereas extant literature cautions against generalising Western wartime experiences, emphasising qualitative differences in warfare and institutional context, this article argues for the ex ante generality of the link between war and progressive taxation. Accordingly, it elaborates a revised theory of wartime tax bargaining, centred on fiscal need and demand for fiscal fairness, whereby contemporary conflicts, including civil wars, should induce governments to increase taxes, and particularly on the rich. The apparent absence of war-induced progressive taxation in the last decades, in contrast, is overdetermined by international shifts at the end of the Cold War and its influence on local wartime elites. Statistically analysing newly collected data on top personal income tax rates for all conflict-affected countries 1960–2020, it is shown that the link was strong, general and, contrary to common assumption, applied as much to civil as to interstate wars. The results support the theory, whereby acute revenue needs and war-induced demand for fiscal fairness translate into increased taxes on the rich. The sudden uniform disappearance of the association in the last decades, irrespective of country-level factors, is consistent with an interpretation emphasising global shifts precipitated by the end of the Cold War.