Why Is There a Ratchet Effect? Evidence from Civil War Income Taxes

David Mitchell

Chapter Chapter 4 in Public Choice Analyses of American Economic History, 2018, pp 69-86 from Springer

Abstract: Abstract The ratchet effect in public finance refers to the historical phenomena that the size of government increases during a crisis but does not return to its previous level when the crisis ends. The traditional explanation is that voters change their views on the appropriate size of government during the crisis. But change in taste is an explanation of last resort: it should not be accepted without examining alternatives. This paper looks Civil War taxes as an illuminating case of the ratchet effect. Both the observed political process and the resulting mix of taxes suggest that interest groups, not voters, led to the ratchet effect in this case. During the Civil War both tariffs and income taxes increased, but only the higher tariff stayed. This paper uses an analytical narrative to show that this was because the new interest groups only wanted the higher tariff and not the income tax.

Date: 2018
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DOI: 10.1007/978-3-319-77592-0_4

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