Income tax progressivity and inflation during the world wars

Abstract

This paper studies the impact of inflation on income taxes in Sweden, the UK, and the United States during the world wars. As tax reforms were rising top marginal rates and reducing exemption thresholds, extraordinary levels of inflation eroded the real value of exemptions, brackets, and deductions. The micro-simulation of actual and alternative scenarios shows that inflation made the tax less progressive, particularly in Sweden during World War I and the UK during World War II. Nevertheless, its redistributive effect increased due to the related growth in tax revenue. Inflation contributed to transform a “class tax’’ into a “mass tax”.

Does war destroy business? A review of empirical publications

“…Another study finds that although tax reforms in Sweden, the UK, and the US during the world wars resulted in high inflation, which further caused the erosion of the real value of exemptions, brackets, and deductions, the micro‐simulation of the actual and alternative scenarios reveals that tax reforms increased the redistributive effects, although inflation hindered the tax progress, particularly in Sweden and the UK during WWI and WWII, respectively (Torregrosa‐Hetland & Sabaté, 2022). World War II adversely affected the civilian advertising market in neutral Sweden.…”

“…A study in Sweden, the UK, and the US reports that wartime tax reforms resulted in extraordinary inflation, hindering tax progress and eroding real value for exemptions, brackets, and deductions during WWII (Torregrosa‐Hetland & Sabaté, 2022). Another study strongly supports the monetary hypothesis that participation in WWI necessitated the money supply expansion, whereby an upsurge in its disparity was the primary cause of the instability of the Portuguese economy (Costa‐Gomes, 1999).…”