Social democracy constrained: Indirect taxation in industrialized democracies

British Journal of Political Science

Volumn 37, Issue 4, 2007, Pages 619-641

  Beramendi, Pablo ^a   Rueda, David ^b  

^a DUKE UNIVERSITY   (United States)

^b MERTON COLLEGE   (United Kingdom)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 34548749765     PISSN: 00071234     EISSN: 14692112     Source Type: Journal    
DOI: 10.1017/S0007123407000348     Document Type: Review

References (103)

1. There are a number of reasons why this is the case. The analysis in Geoffrey Garrett, Partisan Politics in the Global Economy (New York: Cambridge University Press, 1998) explains the resilience of the welfare state in spite of momentous international challenges. More recently, Paul Pierson and John Myles, 'The Comparative Political Economy of Pension Reform', in Paul Pierson, ed., The New Politics of the Welfare State (New York: Oxford University Press, 2001), pp. 305-34, have emphasized the path-dependent nature of pension levels (the existence of previous policies acts as an important constraint on change).
2. Douglas Hibbs, 'Partisan Theory after Fifteen Years', European Journal of Political Economy, 8 (1992), 361-73.
3. A growing body of literature has highlighted different aspects of the strategies pursued by OECD governments in order to balance the efficiency required by the working of the economy and the array of compensation policies demanded by domestic constituencies. On the determinants of income transfers, see Torben Iversen and Thomas R. Cusack, 'The Causes of Welfare State Expansion: Deindustrialization or Globalization?' World Politics, 52 (2000), 313-49;
4. and Evelyne Huber and John Stephens, Development and Crisis of the Welfare State (Chicago: The University of Chicago Press, 2001).
5. On the redistributive impact of the welfare state, see Pablo Beramendi, 'The Politics of Income Inequality in the OECD: The Role of Second Order Effects' (Luxembourg Income Study Working Papers, No. 284, 2001);
6. Jonas Pontusson and Lane Kenworthy, 'Rising Inequality and the Politics of Redistribution in Affluent Countries', Perspectives on Politics, 3 (2005), 449-71;
7. and Torben Iversen and David Soskice, 'Electoral Systems and the Politics of Coalitions: Why Some Democracies Redistribute More than Others', American Political Science Review, 100 (2006), 65-181.
8. On the link between globalization and capital taxation, see Michael Wallerstein and Adam Przeworski, 'Capital Taxation with Open Borders', Review of International Political Economy, 2 (1995), 425-45;
9. Philipp Genschel, 'Globalization, Tax Competition and the Welfare State', Politics and Society, 30 (1999), 245-75;
10. Scott Basinger and Mark Hallerberg, 'Competing for Capital', American Political Science Review, 98 (2004), 261-76;
11. Sven Steinmo, 'Globalization and Taxation: Challenges to the Swedish Welfare State', Comparative Political Studies, 35 (2002), 839-62;
12. and Duane Swank and Sven Steinmo, 'The New Political Economy of Taxation in Advanced Capitalist Democracies', American Journal of Political Science, 46 (2002), 642-55.
13. On the role of partisan politics, Carles Boix, Political Parties, Growth and Equality (New York: Cambridge University Press, 1998);
14. Thomas R. Cusack, 'Partisan Politics and Public Finance: Changes in Public Spending in the Industrialized Democracies, 1955-1989', Public Choice, 91 (1997), 375-95;
15. Thomas R. Cusack, 'Partisan Politics and Fiscal Policy', Comparative Political Studies, 32 (1999), 464-86;
16. Desmond King, Actively Seeking Work? (Chicago: The University of Chicago Press, 1995);
17. David Rueda, Social Democracy Inside Out (Oxford: Oxford University Press, 2007);
18. David Rueda, 'Insider-Outsider Politics in Industrialized Democracies', American Political Science Review, 99 (2005), 61-74;
19. and David Rueda, 'Social Democracy and Active Labour Market Policies: Insiders, Outsiders, and the Politics of Employment Promotion', British Journal of Political Science, 36 (2006), 385-406.
20. Finally, on the effects of political institutions and veto players, see Mark Hallerberg and Scott Basinger, 'Internationalization and Changes in Tax Policy in OECD Countries', Comparative Political Studies, 31 (1998), 321-53;
21. Sven Steinmo and Caroline Tolbert, 'Do Institutions Really Matter? Taxation in Industrialized Democracies', Comparative Political Studies, 31 (1998), 165-87;
22. and Andrew Gould, 'Party Size and Policy Outcomes: An Empirical Analysis of Taxation in Democracies', Studies in Comparative International Development, 36 (2001), 3-26.
23. Stephen Ganghof, 'Global Markets, National Tax Systems, and Domestic Politics: Rebalancing Efficiency and Equity in Open States' Income Taxation' (Cologne: Max Planck Institut für Gesellschaftsforschung, Discussion Paper, August 2001);
24. Lucas Bretschger and Frank Hettich, 'Globalisation, Capital Mobility and Tax Competition: Theory and Evidence for OECD Countries', European Journal of Political Economy, 18 (2002), 695-716;
25. and Basinger and Hallerberg, 'Competing for Capital'.
26. Junko Kato, Regressive Taxation and the Welfare State (New York: Cambridge University Press, 2003).
27. The data reported in Table 1 were generously provided by Lane Kenworthy, and are based on his own calculations using the Luxembourg Income Study dataset. These data are limited to twelve countries. The data we use in our econometric models come from an array of different sources (see details in Table 3). In these analyses, the sample will be extended to sixteen countries.
28. Average effective tax rates (AETRs) reflect government taxation on average household consumption (for details, see Table 3). There is an advantage to these tax rates relative to more traditional indicators. AETRs are better indicators of tax policy because they are measured with respect to the income source, unlike other variables that compute the ratio of indirect taxes to gross domestic product.
29. OECD, Economic Outlook (Paris: OECD, various years);
30. and OECD, Labor Force Statistics (Paris: OECD, various years).
31. The Anglo-Saxon countries include the United States, Canada, the United Kingdom, Ireland and Australia; the Continental countries include The Netherlands, Belgium, Germany and Austria; the Scandinavian group is Finland, Sweden, Norway and Denmark; and the others are France, Italy and Japan.
32. Iversen and Soskice, 'Electoral Systems and the Politics of Coalitions'.
33. Peter Katzenstein, Small States in World Markets Industrial Policy in Europe (Ithaca, N.Y.: Cornell University Press, 1985);
34. John Stephens, The Transition to Socialism (London: Macmillan, 1979);
35. Walter Korpi, The Democratic Class Struggle (London: Routledge, 1983);
36. Garrett, Partisan Politics in the Global Economy;
37. Karl O. Moene and Michael Wallerstein, 'Social Democratic Labor Market Institutions', in Herbert Kitschelt, Peter Lange, Gary Marks and John Stephens, eds, Continuity and Change in Contemporary Capitalism (New York: Cambridge University Press, 1999), pp. 231-61; and Harold
38. Wilensky, Rich Democracies Political Economy, Public Policy, and Performance (Berkeley: University of California Press, 2002).
39. Douglas Hibbs, 'Political Parties and Macroeconomic Theory', American Political Science Review, 71 (1977), 1467-87;
40. Alexander Hicks and Lane Kenworthy, 'Cooperation and Political Economic Performance in Affluent Democratic Capitalism', American Journal of Sociology, 103 (1998), 1631-72;
41. Peter Lange and Geoffrey Garrett, 'The Politics of Growth: Strategic Interaction and Economic Performance in Advanced Industrial Democracies, 1974-1980', Journal of Politics, 47 (1985), 792-827;
42. Michael Alvarez, Geoffrey Garrett and Peter Lange, 'Government Partisanship, Labor Organization and Macro-Economic Performance', American Political Science Review, 85 (1991), 539-56;
43. Torben Iversen, 'Wage Bargaining, Central Bank Independence, and the Real Effects of Money', International Organization, 52 (1998), 469-504;
44. James Alt, 'Political Parties, World Demand, and Unemployment', American Political Science Review, 79 (1985), 1016-40;
45. David Rueda and Jonas Pontusson, 'Wage Inequality and Varieties of Capitalism', World Politics, 52 (2000), 350-84;
46. Lane Kenworthy, 'Quantitative Indicators of Corporatism', International Journal of Sociology, 33 (2003), 10-44;
47. and Pablo Beramendi and Thomas R. Cusack, 'Diverse Disparities: The Politics and Economics of Wage, Market and Disposable Income Inequalities' (Wissenschaftszentrum Berlin für Sozialforschung, Discussion Paper, SP II 2004-08, 2004).
48. Hibbs, 'Political Parties and Macroeconomic Theory'; and Alt, 'Political Parties, World Demand, and Unemployment'.
49. The definition of what constitutes a 'Left' party is taken from Manfred Schmidt, 'When Parties Matter', European Journal of Political Research, 30 (1996), 155-83;
50. and Klaus Armigeon, Michelle Beyeler and Sarah Menegale, Comparative Political Dataset 1960-2001 (Institute of Political Science, University of Bern, 2002).
51. This means that the 'Left' denotes social democratic parties and political parties to the left of social democracy. For example, while in Germany both the SPD and Bündnis 90/Die Grünen would count as Left parties (if in government), in the United States no party is defined as Left (and the percentage of cabinet seats is, therefore, always 0).
52. Franz Traxler, "The State in Industrial Relations', European Journal of Political Research, 36 (1999), 55-85;
53. and Kenworthy, 'Quantitative Indicators of Corporatism'.
54. Kenworthy, 'Quantitative Indicators of Corporatism', p. 11.
55. Hicks and Kenworthy, 'Cooperation and Political Economic Performance in Affluent Democratic Capitalism'.
56. David Cameron, 'Social Democracy, Corporatism, Labor Quiescence, and the Representation of Economic Interests in Advanced Capitalist Societies', in John Goldthorpe, ed., Order and Conflict in Contemporary Capitalism (New York: Oxford University Press, 1984), 147-78;
57. and Wilensky, Rich Democracies Political Economy, Public Policy, and Performance.
58. Adam Przeworski and Michael Wallerstein, 'Structural Dependence of the State on Capital', American Political Science Review, 82 (1998), 11-29;
59. and Thomas R. Cusack and Pablo Beramendi, 'Taxing Work', European Journal of Political Research, 45 (2006), 43-75.
60. Kato, Regressive Taxation and the Welfare State.
61. Iversen and Cusack, 'The Causes of Welfare State Expansion: Deindustrialization or Globalization?'
62. See, for example, Fritz Scharpf, Crisis and Choice in European Social Democracy (Ithaca, N.Y.: Cornell University Press, 1991).
63. Thomas R. Cusack, 'Partisan Politics and Fiscal Policy', Comparative Political Studies, 32 (1999), 464-86.
64. Cusack, 'Partisan Politics and Fiscal Policy', p. 484.
65. Admittedly, our theoretical argument does not leave room for extraordinary circumstances such as revenues emerging from recently found natural resources (e.g., Norwegian oil). While we believe that these circumstances are important in accounting for particular historical experiences, they do not affect the empirical regularities with which this article is concerned.
66. This is, however, a contentious point. For evidence that opposes this argument, see, for example, Duane Swank, Global Capital, Political Institutions, and Policy Change in Developed Welfare States (New York: Cambridge University Press, 2002);
67. Swank and Steinmo, 'The New Political Economy of Taxation in Advanced Capitalist Democracies';
68. and John M. Hobson, 'Disappearing Taxes or the "Race to the Middle"? Fiscal Policy in the OECD', in Linda Weiss, ed., States in the Global Economy (New York: Cambridge University Press, 2003), pp. 37-57.
69. Genschel, 'Globalization, Tax Competition and the Welfare State' ; and Basinger and Hallerberg, 'Competing for Capital'.
70. For instance, Wallerstein and Przeworski (in 'Capital Taxation with Open Borders') show that capital can only be efficiently taxed in an open economy through a stable tax rate on un-invested profits (provided that investment costs are fully deductible).
71. Hallerberg and Basinger, 'Internationalization and Changes in Tax Policy in OECD Countries'.
72. Ganghof, 'Global Markets, National Tax Systems, and Domestic Politics'.
73. For example, Ganghof (in 'Global Markets, National Tax Systems, and Domestic Politics') shows that starting in the 1990s, the Danish government has tended to tax the income generated by mobile capital assets much less than both labour and immobile capital income. Note, however, that the empirical evidence on this issue is rather inconclusive. While Swank and Steinmo (in 'The New Political Economy of Taxation in Advanced Capitalist Democracies') find no negative impact of liberalization on effective average tax rates on capital income, Bretschger and Hettich (in 'Globalisation, Capital Mobility and Tax Competition Theory and Evidence for OECD Countries') do find a significant negative impact of openness on effective average corporate taxes that is consistent across different specifications and samples.
74. Peter Lindert, Growing Public (New York: Cambridge: University Press, 2004);
75. Cusack and Beramendi, 'Taxing Work';
76. and see also Garrett, Partisan Politics in the Global Economy.
77. Cusack and Beramendi, 'Taxing Work'.
78. Gøsta Esping-Andersen, Politics against Markets: The Social-democratic Road to Power (Princeton, N.J.: Princeton: University Press, 1985).
79. Such a policy would entail a decrease in total revenues in a context of growing demands. Population ageing and skilled-biased technological change have led to a steady increase in the dependency ratio (defined as the ratio between the sum of unemployed and retired people over the total population) across OECD nations. In response to these trends, policies can be marginally adjusted, see Paul Pierson and John Myles, 'The Comparative Political Economy of Pension Reform', in Paul Pierson, ed., The New Politics of the Welfare State (New York: Oxford University Press, 2001), pp. 305-34. But the overall combination of large numbers of new recipients and moderately adjusted levels of generosity leads to a likely increase in the demand for tax revenues. There are also many built-in mechanisms in advanced welfare states that lead to endogenously generated needs for more expenditure (e.g., administrative costs).
80. Note that both axes in Figure 1 represent the relative weight of two different sources of revenues (labour and consumption) for a given degree of redistribution. A movement from A to C does not imply that labour income taxation is reduced. Rather it implies that the labour share of total taxation is lower due to an increase in revenue collection via indirect taxes.
81. This is the most conventionally used measure of welfare effort in the extensive literature on comparative welfare states. See, for example, Huber and Stephens, Development and Crisis of the Welfare State. We have replicated our analyses with alternative measures of welfare effort (such as government civilian consumption as a percentage of GDP) and they do not affect our results.
82. Sven Steinmo, Taxation and Democracy (New Haven, Conn.: Yale University Press, 1993), p. 8.
83. Hallerberg and Basinger, 'Internationalization and Changes in Tax Policy in OECD Countries', p. 322.
84. Herman Schwartz, 'Small States in Big Trouble', World Politics, 46 (1994), 527-55.
85. Paulette Kurzer, Business and Banking (Ithaca, N.Y.: Cornell University Press, 1993);
86. and Scharpf, Crisis and Choice in European Social Democracy.
87. Carles Boix, Political Parties, Growth and Equality (New York: Cambridge University Press, 1998);
88. and Geoffrey Garrett and Peter Lange, 'Political Responses to Interdependence: What's 'Left' for the Left?' International Organization, 45 (1991), 539-64.
89. Garrett, Partisan Politics in the Global Economy.
90. For an explanation of a similar procedure, see Michael Wallerstein, 'Wage-Setting Institutions and Pay Inequality', American Journal of Political Science, 43 (1999), 649-80, at p. 662.
91. Data is missing for the earliest period in three countries: Ireland, the Netherlands and Belgium.
92. Jeffrey Wooldridge, Econometric Analysis of Cross Section and Panel Data (Cambridge: MIT Press, 2002).
93. Nathaniel Beck and Jonathan Katz, 'What to Do and Not to Do with Time Series Cross-Section Data', American Political Science Review, 89 (1995), 634-47. The results of all tests are available from the authors.
94. Kato, Regressive Taxation and the Welfare State.
95. Ken Messere, Tax Policy in OECD Countries (Amsterdam: IBFD Publications BV, 1993), p. 368.
96. Messere, Tax Policy in OECD Countries, p. 372.
97. OECD, Taxing Powers of State and Local Government (Paris: OECD, 1999), p. 10.
98. See OECD, Taxing Powers of State and Local Government, p. 10, for details.
99. Torben Iversen and Anne Wren, 'Equality, Employment and Budgetary Restraint: The Trilemma of the Service Economy', World Politics, 50 (1998), 507-46;
100. and Andrew Glyn, 'Aspirations, Constraints, and Outcomes', in Andrew Glyn, ed., Social Democracy in Neoliberal Times (Oxford: Oxford University Press, 2001), pp. 1-21.
101. Lange and Garrett, 'The Politics of Growth: Strategic Interaction and Economic Performance in Advanced Industrial Democracies, 1974-1980';
102. Garrett, Partisan Politics in the Global Economy;
103. and Torben Iversen, The Choices for Scandinavian Social Democracy', in Glyn, ed., Social Democracy in Neoliberal Times, pp. 253-76.