Income tax progressivity and war inflation during the two World Wars

Top marginal rates in income taxes increased significantly during the two World Wars in most Western countries, which points towards increases in their progressivity. We argue, however, that this war-related effect is less clear-cut than previously thought: wartime inflation could have exerted a counteracting impact by pushing citizens into higher tax brackets, including new individuals from the bottom of the income distribution into being taxpayers, and reducing the real value of allowances. We study the impact of wartime inflation by calculating tax revenue, the number of taxpayers, effective tax rates and indices of tax progressivity and redistribution under different inflation scenarios in Sweden, the United Kingdom, and the United States, during World War I and World War II. Our results show that inflation partially counteracted the progressive effect of increases in top marginal tax rates, particularly in Sweden during World War I and in the United Kingdom during World War II. However, the growth in income tax revenue as a result of bracket creep increased its redistributive impact.