King's College London

That’s the conclusion of leading King’s College London academic, Dr Julian Limberg, in his article Banking Crises and the Modern Tax State, featured in the Socio-Economic Review. 

Data presented by Dr Limberg, lecturer in public policy in the Department of Political Economy, shows that financial crises in the form of banking crises over the course of the last 150 years have pushed for the introduction of ‘progressive’ taxation in the shape of a personal income tax.

Progressive taxation is the ‘most effective tool’ a government has to tackle inequality, Dr Limberg says.

The introduction of ‘regressive’ taxation, however, such as a general sales tax or value added tax, is less likely following financial crises, even though, Dr Limberg says, it can be an effective method of raising revenue for governments that are short of money.

A regressive tax is not adjusted according to the ability to pay and, therefore, puts a higher burden on lower income groups. As a result, in times of financial crises, there has been public pressure for fairer taxation that has pushed governments – both democratic and autocratic - towards the introduction of progressive taxes, as regressive taxation becomes a “hard political sell”.

Dr Limberg said: “Financial crises such as banking crises are not only expensive, but they also tend to violate people’s fiscal fairness principles. As a result, claims to compensate for these violations via progressive taxation gain strength.

“The empirics show robust support for this argument: governments around the world are much more likely to introduce progressive income taxes in the wake of a banking crises. In contrast, the introduction of sales taxes is largely unaffected by previous crises.”

Dr Limberg added that further analysis was needed to see whether such banking and financial crises still had the potential to increase progressive tax measures today, as developed countries seek to address rising inequality.