Funding the welfare state: Globalization and the taxation of business in advanced market economies

Political Studies

Volumn 46, Issue 4, 1998, Pages 671-692

  Swank, Duane ^a  

^a NONE

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[No Author keywords available]

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EID: 0039065200     PISSN: 00323217     EISSN: None     Source Type: Journal    
DOI: 10.1111/1467-9248.00161     Document Type: Article

References (68)

1. R. McKenzie and D. Lee, Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World (New York, Free, 1991), p. 1. For surveys of tax policy changes see, among others, M. Boskin and C. McClure, World Tax Reform (San Francisco, International Center for Economic Growth, 1990), Organization for Economic Cooperation and Development (hereafter OECD), Taxation in Developed Countries (Paris, OECD, 1987); OECD, Economies in Transition (Paris, OECD, 1989), esp. ch. 5; OECD, Taxation in OECD Countries (Paris OECD 1993); On the causes and consequences of globalization, see the synoptic literature review in B. J. Cohen, 'Phoenix risen: the resurrection of global finance', World Politics 48 (1996) 268-96.
2. R. McKenzie and D. Lee, Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World (New York, Free, 1991), p. 1. For surveys of tax policy changes see, among others, M. Boskin and C. McClure, World Tax Reform (San Francisco, International Center for Economic Growth, 1990), Organization for Economic Cooperation and Development (hereafter OECD), Taxation in Developed Countries (Paris, OECD, 1987); OECD, Economies in Transition (Paris, OECD, 1989), esp. ch. 5; OECD, Taxation in OECD Countries (Paris OECD 1993); On the causes and consequences of globalization, see the synoptic literature review in B. J. Cohen, 'Phoenix risen: the resurrection of global finance', World Politics 48 (1996) 268-96.
3. R. McKenzie and D. Lee, Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World (New York, Free, 1991), p. 1. For surveys of tax policy changes see, among others, M. Boskin and C. McClure, World Tax Reform (San Francisco, International Center for Economic Growth, 1990), Organization for Economic Cooperation and Development (hereafter OECD), Taxation in Developed Countries (Paris, OECD, 1987); OECD, Economies in Transition (Paris, OECD, 1989), esp. ch. 5; OECD, Taxation in OECD Countries (Paris OECD 1993); On the causes and consequences of globalization, see the synoptic literature review in B. J. Cohen, 'Phoenix risen: the resurrection of global finance', World Politics 48 (1996) 268-96.
4. R. McKenzie and D. Lee, Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World (New York, Free, 1991), p. 1. For surveys of tax policy changes see, among others, M. Boskin and C. McClure, World Tax Reform (San Francisco, International Center for Economic Growth, 1990), Organization for Economic Cooperation and Development (hereafter OECD), Taxation in Developed Countries (Paris, OECD, 1987); OECD, Economies in Transition (Paris, OECD, 1989), esp. ch. 5; OECD, Taxation in OECD Countries (Paris OECD 1993); On the causes and consequences of globalization, see the synoptic literature review in B. J. Cohen, 'Phoenix risen: the resurrection of global finance', World Politics 48 (1996) 268-96.
5. R. McKenzie and D. Lee, Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World (New York, Free, 1991), p. 1. For surveys of tax policy changes see, among others, M. Boskin and C. McClure, World Tax Reform (San Francisco, International Center for Economic Growth, 1990), Organization for Economic Cooperation and Development (hereafter OECD), Taxation in Developed Countries (Paris, OECD, 1987); OECD, Economies in Transition (Paris, OECD, 1989), esp. ch. 5; OECD, Taxation in OECD Countries (Paris OECD 1993); On the causes and consequences of globalization, see the synoptic literature review in B. J. Cohen, 'Phoenix risen: the resurrection of global finance', World Politics 48 (1996) 268-96.
6. R. McKenzie and D. Lee, Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World (New York, Free, 1991), p. 1. For surveys of tax policy changes see, among others, M. Boskin and C. McClure, World Tax Reform (San Francisco, International Center for Economic Growth, 1990), Organization for Economic Cooperation and Development (hereafter OECD), Taxation in Developed Countries (Paris, OECD, 1987); OECD, Economies in Transition (Paris, OECD, 1989), esp. ch. 5; OECD, Taxation in OECD Countries (Paris OECD 1993); On the causes and consequences of globalization, see the synoptic literature review in B. J. Cohen, 'Phoenix risen: the resurrection of global finance', World Politics 48 (1996) 268-96.
7. I assume that in generally competitive domestic and international markets business can shed less than 100% of the tax burden in the short term. Even if business can shift 100% of the burden of, let us say, employer social security taxes to labour in the long-term (and this is the conventional view), business will prefer a reduction in these taxes as a way of reducing real labour costs. I also assume that, while the tax treatment of foreign earnings is important in a world of global capital markets, profits and social security/payroll taxes play central roles in shaping patterns of international capital movements. On the causal role of taxation, see among others, OECD, Taxation in a Global Economy: Domestic and International Issues (Paris OECD 1991); International Monetary Fund, Determinants and Consequences of International Capital Flows (Washington DC, IMF, 1991).
8. I assume that in generally competitive domestic and international markets business can shed less than 100% of the tax burden in the short term. Even if business can shift 100% of the burden of, let us say, employer social security taxes to labour in the long-term (and this is the conventional view), business will prefer a reduction in these taxes as a way of reducing real labour costs. I also assume that, while the tax treatment of foreign earnings is important in a world of global capital markets, profits and social security/payroll taxes play central roles in shaping patterns of international capital movements. On the causal role of taxation, see among others, OECD, Taxation in a Global Economy: Domestic and International Issues (Paris OECD 1991); International Monetary Fund, Determinants and Consequences of International Capital Flows (Washington DC, IMF, 1991).
9. The internationalization of finance has been analysed extensively. Several studies have highlighted the causal roles of political actors and institutions in addition to, and in interaction with, technological and economic factors. E. Helleiner, States and the Reemergence of Global Finance (Ithaca NY, Cornell University Press, 1994); D. Quinn and C. Inclan. 'The origins of financial openness: a 21 country study of its determinants, 1950-1988', American Journal of Political Science, 41 (1997), forthcoming; A. Sobel, Domestic Choices. International Markets: Dismantling National Barriers and Liberalizing Securities Markets (Ann Arbor, University of Michigan Press, 1994).
10. The internationalization of finance has been analysed extensively. Several studies have highlighted the causal roles of political actors and institutions in addition to, and in interaction with, technological and economic factors. E. Helleiner, States and the Reemergence of Global Finance (Ithaca NY, Cornell University Press, 1994); D. Quinn and C. Inclan. 'The origins of financial openness: a 21 country study of its determinants, 1950-1988', American Journal of Political Science, 41 (1997), forthcoming; A. Sobel, Domestic Choices. International Markets: Dismantling National Barriers and Liberalizing Securities Markets (Ann Arbor, University of Michigan Press, 1994).
11. The internationalization of finance has been analysed extensively. Several studies have highlighted the causal roles of political actors and institutions in addition to, and in interaction with, technological and economic factors. E. Helleiner, States and the Reemergence of Global Finance (Ithaca NY, Cornell University Press, 1994); D. Quinn and C. Inclan. 'The origins of financial openness: a 21 country study of its determinants, 1950-1988', American Journal of Political Science, 41 (1997), forthcoming; A. Sobel, Domestic Choices. International Markets: Dismantling National Barriers and Liberalizing Securities Markets (Ann Arbor, University of Michigan Press, 1994).
12. The nations included in Figure 1 and subsequent analyses are Australia, Austria, Belgium, Canada, Denmark, Finland, France, West Germany, Ireland, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States. Iceland, Israel, Luxembourg, and New Zealand were omitted because of nation-specific peculiarities (e.g., small size) and a paucity of data.
13. See C. Lindblom, Politics and Markets (New York, Basic, 1977); A Przeworski and M. Wallerstein, 'Structural dependence of the state on capital', American Political Science Review, 82 (1988), 11-30; D. Swank, Politics and the structural dependence of the state in democratic capitalist nations', American Political Science Review, 86 (1992) 38-54.
14. See C. Lindblom, Politics and Markets (New York, Basic, 1977); A Przeworski and M. Wallerstein, 'Structural dependence of the state on capital', American Political Science Review, 82 (1988), 11-30; D. Swank, Politics and the structural dependence of the state in democratic capitalist nations', American Political Science Review, 86 (1992) 38-54.
15. See C. Lindblom, Politics and Markets (New York, Basic, 1977); A Przeworski and M. Wallerstein, 'Structural dependence of the state on capital', American Political Science Review, 82 (1988), 11-30; D. Swank, Politics and the structural dependence of the state in democratic capitalist nations', American Political Science Review, 86 (1992) 38-54.
16. For a review of the literature on the political impacts of economic performance, see P. Nannestad and M. Paldam, 'The V-P function: a survey of the literature on vote and popularity functions after 25 years', Public Choice 79 (1994), 213-45. On economic performance and state revenues, see F. Block, 'The ruling class does not rule: notes on the Marxist theory of the state', Socialist Revolution 33 (1977), 6-27.
17. For a review of the literature on the political impacts of economic performance, see P. Nannestad and M. Paldam, 'The V-P function: a survey of the literature on vote and popularity functions after 25 years', Public Choice 79 (1994), 213-45. On economic performance and state revenues, see F. Block, 'The ruling class does not rule: notes on the Marxist theory of the state', Socialist Revolution 33 (1977), 6-27.
18. For empirical evaluations of the thesis, see D. Quinn and R. Shapiro, 'Business political power: the case of taxation', American Political Science Review, 85 (1991), 856-71; Swank, 'Politics and the structural dependence of the state'; J. Williams and B. Collins, 'The political economy of the corporate taxation', American Journal of Political Science, 41 (1997), 208-44.
19. For empirical evaluations of the thesis, see D. Quinn and R. Shapiro, 'Business political power: the case of taxation', American Political Science Review, 85 (1991), 856-71; Swank, 'Politics and the structural dependence of the state'; J. Williams and B. Collins, 'The political economy of the corporate taxation', American Journal of Political Science, 41 (1997), 208-44.
20. For empirical evaluations of the thesis, see D. Quinn and R. Shapiro, 'Business political power: the case of taxation', American Political Science Review, 85 (1991), 856-71; Swank, 'Politics and the structural dependence of the state'; J. Williams and B. Collins, 'The political economy of the corporate taxation', American Journal of Political Science, 41 (1997), 208-44.
21. For examples see, Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (Chicago, University of Chicago Press, 1976[1776]); R. Bates and D. Lien, 'A note on taxation, development and representative government', Politics and Society, 14 (1985), 53-70.
22. For examples see, Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (Chicago, University of Chicago Press, 1976[1776]); R. Bates and D. Lien, 'A note on taxation, development and representative government', Politics and Society, 14 (1985), 53-70.
23. Compare for instance, McKenzie and Lee, Quicksilver Capital, and S. Gill and D. Law, The Global Political Economy (Baltimore, Johns Hopkins University Press, 1988).
24. Compare for instance, McKenzie and Lee, Quicksilver Capital, and S. Gill and D. Law, The Global Political Economy (Baltimore, Johns Hopkins University Press, 1988).
25. Sven Steinmo, Democracy and Taxation (New Haven, Yale University Press, 1993).
26. J. R. Freeman, 'Globalization, Welfare, and Democracy', Typescript, Department of Political Science, University of Minnesota.
27. P. Kurzer, Business and Banking: Political Change and Economic Integration in Western Europe (Ithaca NY, Cornell University Press, 1993); J. Moses 'Abdication from national policy autonomy: what's left to leave?', Politics and Society, 22 (1994) 125-48. On the determination of welfare policies, see A. Hicks and D. Swank, 'Politics, institutions, and social welfare spending in the industrialized democracies, 1960-1982', American Political Science Review, 86 (1992). 658-74; E. Huber, C. Ragin and J. Stephens, 'Social democracy, christian democracy, constitutional structure and the welfare state', American Journal of Sociology, 99 (1993), 711-49.
28. P. Kurzer, Business and Banking: Political Change and Economic Integration in Western Europe (Ithaca NY, Cornell University Press, 1993); J. Moses 'Abdication from national policy autonomy: what's left to leave?', Politics and Society, 22 (1994) 125-48. On the determination of welfare policies, see A. Hicks and D. Swank, 'Politics, institutions, and social welfare spending in the industrialized democracies, 1960-1982', American Political Science Review, 86 (1992). 658-74; E. Huber, C. Ragin and J. Stephens, 'Social democracy, christian democracy, constitutional structure and the welfare state', American Journal of Sociology, 99 (1993), 711-49.
29. P. Kurzer, Business and Banking: Political Change and Economic Integration in Western Europe (Ithaca NY, Cornell University Press, 1993); J. Moses 'Abdication from national policy autonomy: what's left to leave?', Politics and Society, 22 (1994) 125-48. On the determination of welfare policies, see A. Hicks and D. Swank, 'Politics, institutions, and social welfare spending in the industrialized democracies, 1960-1982', American Political Science Review, 86 (1992). 658-74; E. Huber, C. Ragin and J. Stephens, 'Social democracy, christian democracy, constitutional structure and the welfare state', American Journal of Sociology, 99 (1993), 711-49.
30. P. Kurzer, Business and Banking: Political Change and Economic Integration in Western Europe (Ithaca NY, Cornell University Press, 1993); J. Moses 'Abdication from national policy autonomy: what's left to leave?', Politics and Society, 22 (1994) 125-48. On the determination of welfare policies, see A. Hicks and D. Swank, 'Politics, institutions, and social welfare spending in the industrialized democracies, 1960-1982', American Political Science Review, 86 (1992). 658-74; E. Huber, C. Ragin and J. Stephens, 'Social democracy, christian democracy, constitutional structure and the welfare state', American Journal of Sociology, 99 (1993), 711-49.
31. See, for instance, OECD, Taxation and International Capital Flows (Paris, OECD, 1990); IMF, Determinants and Consequences of International Capital Flows; A. Razin and J. Slemrod (eds), Taxation in the Global Economy (Chicago, The University of Chicago Press, 1990).
32. See, for instance, OECD, Taxation and International Capital Flows (Paris, OECD, 1990); IMF, Determinants and Consequences of International Capital Flows; A. Razin and J. Slemrod (eds), Taxation in the Global Economy (Chicago, The University of Chicago Press, 1990).
33. See, for instance, OECD, Taxation and International Capital Flows (Paris, OECD, 1990); IMF, Determinants and Consequences of International Capital Flows; A. Razin and J. Slemrod (eds), Taxation in the Global Economy (Chicago, The University of Chicago Press, 1990).
34. See, among others, D. Cameron, 'The expansion of the public economy: a comparative analysis', American Political Science Review, 72 (1978), 1243-61; P. Katzenstein, Small States in World Markets (Ithaca NY, Cornell University Press, 1985)
35. See, among others, D. Cameron, 'The expansion of the public economy: a comparative analysis', American Political Science Review, 72 (1978), 1243-61; P. Katzenstein, Small States in World Markets (Ithaca NY, Cornell University Press, 1985)
36. For case studies see, Kurzer, Business and Banking;
37. T. Notermans, 'The abdication of national policy autonomy: why the macroeconomic policy regime has become so unfavorable to labor', Politics and Society, 21 (1993), 133-67;
38. Steinmo, Democracy and Taxation.
39. G. Garrett, 'Capital Mobility, Trade, and the Domestic Politics of Economic Policy', in R. Keohane and H. Milner (eds), Internationalization and Domestic Politics (New York, Cambridge University Press, 1996, pp. 79-107; M. Webb, 'International Capital Mobility and Revenue Raising in Advanced Industrial Countries', paper presented at the Annual Meetings of the American Political Science Association, Chicago, 1992.
40. G. Garrett, 'Capital Mobility, Trade, and the Domestic Politics of Economic Policy', in R. Keohane and H. Milner (eds), Internationalization and Domestic Politics (New York, Cambridge University Press, 1996, pp. 79-107; M. Webb, 'International Capital Mobility and Revenue Raising in Advanced Industrial Countries', paper presented at the Annual Meetings of the American Political Science Association, Chicago, 1992.
41. See IMF, Determinants and Consequences of International Capital Flows, for a synoptic review of the literature.
42. C. Boix, Political Parties, Growth, and Inequality: Conservative and Social Democratic Party Strategies in the World Economy (New York, Cambridge University Press, forthcoming); G. Garrett and P. Lange, 'Political responses to interdependence: what's "left" for the left?', International Organization, 45 (1991), 539-64.
43. C. Boix, Political Parties, Growth, and Inequality: Conservative and Social Democratic Party Strategies in the World Economy (New York, Cambridge University Press, forthcoming); G. Garrett and P. Lange, 'Political responses to interdependence: what's "left" for the left?', International Organization, 45 (1991), 539-64.
44. P. Pierson, Dismantling the Welfare State: Reagan, Thatcher and the Politics of Retrenchment in Britain and the United States (New York, Cambridge University Press, 1994).
45. G. Esping-Andersen, 'After the golden age: welfare state dilemmas in a global economy', in G. Esping-Andersen (ed.), Welfare States in Transition (Thousand Oaks CA, Sage, 1996), pp. 1-31; G. Garrett and P. Lange. 'The impact of international economy on national policies: an analytic overview', in Keohane and Milner, Internationalization and Domestic Politics, pp. 46-75.
46. G. Esping-Andersen, 'After the golden age: welfare state dilemmas in a global economy', in G. Esping-Andersen (ed.), Welfare States in Transition (Thousand Oaks CA, Sage, 1996), pp. 1-31; G. Garrett and P. Lange. 'The impact of international economy on national policies: an analytic overview', in Keohane and Milner, Internationalization and Domestic Politics, pp. 46-75.
47. M. Wallerstein and A. Przeworski, 'Capital taxation with open borders', Review of International Political Economy, 2 (1995), 425-45. However, it is important to note that, as with their work in the context of closed economy, anticipations of new taxes by business will result in disinvestment (e.g., capital flight).
48. Kurzer, Business and Banking; J. Frieden, 'Invested interests: the politics of national economic policies in a world of global finance', International Organization, 45 (1991), 425-51.
49. Kurzer, Business and Banking; J. Frieden, 'Invested interests: the politics of national economic policies in a world of global finance', International Organization, 45 (1991), 425-51.
50. Quinn and Inclan, 'The origins of financial openness'.
51. Analysing the sources of this shift in tax policy rules is largely beyond the scope of the present inquiry, although I might note that the origins in all likelihood lie in the interaction between ideas, ideology, and interests - societal and state-centred - in the context of 1970s and 1980s economic crises and structural change. See C. J. Martin, Shifting the Burden: The Struggle over Growth and Corporate Taxation (Chicago, University of Chicago Press, 1991), for an insightful analysis of US tax policy changes.
52. Boskin and McClure, World Tax Reform OECD Taxation in Developed Countries; OECD, Economies in Transition, esp. ch. 5; OECD, Taxation in OECD Countries; J. Pechman, World Tax Reform: A Progress Report (Washington DC, Brookings, 1988).
53. Boskin and McClure, World Tax Reform OECD Taxation in Developed Countries; OECD, Economies in Transition, esp. ch. 5; OECD, Taxation in OECD Countries; J. Pechman, World Tax Reform: A Progress Report (Washington DC, Brookings, 1988).
54. Boskin and McClure, World Tax Reform OECD Taxation in Developed Countries; OECD, Economies in Transition, esp. ch. 5; OECD, Taxation in OECD Countries; J. Pechman, World Tax Reform: A Progress Report (Washington DC, Brookings, 1988).
55. Boskin and McClure, World Tax Reform OECD Taxation in Developed Countries; OECD, Economies in Transition, esp. ch. 5; OECD, Taxation in OECD Countries; J. Pechman, World Tax Reform: A Progress Report (Washington DC, Brookings, 1988).
56. Tables displaying data on rate cuts and the elimination of investment incentives, collected from OECD sources cited herein, are available from the author. With regard to investment incentives, standard depreciation for investment has been maintained in all nations.
57. See, OECD, Taxation in Developed Countries, p. 27; OECD, Taxation in OECD Countries, pp. 56-7, for a particularly telling narrative.
58. See, OECD, Taxation in Developed Countries, p. 27; OECD, Taxation in OECD Countries, pp. 56-7, for a particularly telling narrative.
59. Other forms of business taxation include the property and net wealth tax, but these are trivial or non-existent in the large majority of nations.
60. For analysis of Australia's means-tested welfare state, funded from general revenues, see F. G. Castles, The Working Class and Welfare (Sidney, Allen and Unwin, 1985).
61. J. Slemrod, 'Tax Principals in an International Economy', in Boskin and McClure, World Tax Reform, pp. 2-31.
62. I also have explored the policy effects of a number of disaggregated indicators of international capital openness (e.g., direct investment flows). Results are virtually identical to those discussed for focal measures.
63. For an accessible treatment of these problems, see A. Hicks, 'Introduction to Pooling', in T. Janowski and A. Hicks (eds), The Comparative Political Economy of the Welfare State (New York, Cambridge University Press, 1995), pp. 169-88; for a more advanced treatment, see B. H. Baltagi, Econometric Analysis of Panel Data (New York, John Wiley, 1995).
64. For an accessible treatment of these problems, see A. Hicks, 'Introduction to Pooling', in T. Janowski and A. Hicks (eds), The Comparative Political Economy of the Welfare State (New York, Cambridge University Press, 1995), pp. 169-88; for a more advanced treatment, see B. H. Baltagi, Econometric Analysis of Panel Data (New York, John Wiley, 1995).
65. In 'How Not To Be Misled by Time-Series-Cross-Section Data: OLS vs. GLS-ARMA', Typescript, University of California, San Diego (no date). Beck and Katz have argued that lagged endogenous variable models have two advantages over autoregression levels models. First, they explicitly model the autoregressive dynamics rather than treating autoregression as a nuisance. Second, the lagged endogenous variable model may be interpreted as a partial adjustment model where the long-term rate of adjustment of Y after a change X is derived from the coefficient of the lagged dependent variable. In 'What to do (and not to do) with time-series cross-section data', American Political Science Review, 89 (1995) 634-47, Beck and Katz have criticized the 'full' feasible GLS estimation for pooled time-series models. They argue that the inflation of t-statistics is two to four where the number of time points does not appreciably exceed the number of units. Experimental evidence is used to justify the use of panel correct standard errors. Finally, analyses of stationarity and cointegration revealed no significant problems with focal variables; details are available from the author.
66. In 'How Not To Be Misled by Time-Series-Cross-Section Data: OLS vs. GLS-ARMA', Typescript, University of California, San Diego (no date). Beck and Katz have argued that lagged endogenous variable models have two advantages over autoregression levels models. First, they explicitly model the autoregressive dynamics rather than treating autoregression as a nuisance. Second, the lagged endogenous variable model may be interpreted as a partial adjustment model where the long-term rate of adjustment of Y after a change X is derived from the coefficient of the lagged dependent variable. In 'What to do (and not to do) with time-series cross-section data', American Political Science Review, 89 (1995) 634-47, Beck and Katz have criticized the 'full' feasible GLS estimation for pooled time-series models. They argue that the inflation of t-statistics is two to four where the number of time points does not appreciably exceed the number of units. Experimental evidence is used to justify the use of panel correct standard errors. Finally, analyses of stationarity and cointegration revealed no significant problems with focal variables; details are available from the author.
67. kX . . . ε. That is, effects of variations in the Xs are effects on changes in Y.
68. 1. See R. Friedrich, 'In defense of interaction terms in multiple regression equations', American Journal of Political Science, 26 (1982), 797-833.