The Politics of Domestic Taxation
Summary and Keywords
All governments require revenue, and domestic taxes are the primary means for generating it. Yet both the size and shape of taxation vary significantly across countries and have been transformed over time. What explains variation in domestic taxation? To answer this question, recent scholarship on taxation has focused on the politics of taxation as a tool for redistribution. This has led to a wide body of research on the fiscal impact of taxation and on the introduction, evolution, and variation in direct and progressive tax regimes, particularly the income tax. Yet the focus on taxation as a redistributive tool yields a puzzle, as more progressive tax systems tend to be found where redistribution is in fact the lowest. Explanations of this paradox often center on the impossibility of high and progressive taxes on capital in the context of international economic integration. Not as well studied are taxes other than the taxation of income, and the deliberate politics of nonfiscal, regulatory, and incentive effects of different tax choices. Methodologically, problems of endogeneity are ubiquitous in the study of tax policy choices, but more sophisticated experimental work is well underway in research on individual preferences for taxation.
Taxation provides the resources that governments need: while states have some alternative sources of resources, the bulk of what most governments wish to accomplish must be paid for via taxation. Moreover, scholars have long recognized that the choices made about taxation both shape and reflect the state’s fundamental relationship to its citizens. For Schumpeter, “Public finances are one of the best starting points for an investigation of society, especially though not exclusively of its political life” (Schumpeter, 1991).
That the political lives of different countries differ, even within advanced industrial democratic nations, is reflected in variation in national tax systems. In some countries, tax revenues amount to nearly half of GDP. In others, governments receive only around 20% of national income in taxation. Equally, how tax revenues are raised is highly variable: in Denmark and Australia, income taxation provides the lion’s share of tax revenues, while in France it amounts to less than one quarter of taxation. In New Zealand, Ireland, and the United Kingdom, around one third of revenues are raised by indirect taxes on goods and services; the absence of a national sales tax in the United States means that the corresponding U.S. share is around half that level.1
These tax choices have implications for outcomes crucial to understanding the political economy of each country. Tax policy choices affect the levels of resources available to governments as well as the distribution of incomes in the population. They also change the returns to different types of behavior—economic and non-economic—and so shape the decisions of private actors. But they also affect how voters perceive the state and their relationship to it, and their support for different kinds of government action (Beramendi & Rehm, 2015; Mettler, 2011).
Understanding the consequences of tax systems and their symptomatic significance (as effects, as well as causes) lies at the center of a burgeoning research agenda in political science and beyond.
Taxes are compulsory payments to governments. As such, they are not the only source of public finances, but they do provide the vast majority of resources to the state, particularly in advanced industrial democracies. The scale of the payments has increased over time with the transformation of the liberal “night watchman” state to the modern welfare state.
This development in itself has garnered no little attention. The growth of tax revenues was a cause for concern, particularly among “Virginia school” political economists, who channeled J. S. Mill’s premise that “The interest of the government is to tax heavily: that of the community is, to be as little taxed as the necessary expenses of good government permit” (J. S. Mill as cited in Brennan & Buchanan, 1980). In the now-seminal Meltzer-Richard model, the expansion of the public sector was the original motivation: the political power of the poor under democracy, coupled with unequal market outcomes, led to the growth of the state (Meltzer & Richard, 1981, 1983). But the public-choice accounts, despite their seductive simplicity, have found little support in the empirical record. In the case of the Meltzer-Richard model, it is not for want of trying (see Ansell & Samuels, 2014).
A large body of research, then, considers variation across space and time in the overall size of the state. However, while taxes are implicated in this literature, the intellectual focus on the size of government has tended to attend more to the spending side: the growth of government results from a desire for spending programs, with any associated tax increases as an inevitable side effect. Analyses of the size of taxation that do not make the public-choice assumption of the revenue-maximizing state are harder to find (but see Peters, 1991).
Types of Taxation
Beyond the simple level of revenue raised by the state, the politics of taxation concern how the revenues are raised and who should bear the burden. At the level of policy levers, the core choices concern the tax bases, rate structures, and rate levels across four main types of domestic tax, as well as the taxation of international transactions.
Despite their historic importance, and potential significance as barriers to trade, taxes on international trade and transactions raise little by way of revenue─around 2.35% worldwide in 2013 (International Centre for Tax and Development, 2016). Moreover, scholarship on international taxes has been largely distinct from that on domestic taxation, emphasizing the gains from international exposure and protection over the revenue implications.
The main domestic taxes, then, are income taxes, indirect taxes on goods and services, taxes on property and inheritance, and social security contributions. Income taxes are often further differentiated into their personal and corporate components, and they are studied as such to mirror their common separation within tax codes. General goods and services taxes, like the value-added tax, typically comprise about two thirds of indirect tax revenues, with the remainder made up of specific excise taxes, usually including levies on alcohol, tobacco, and fuel. Finally, property and wealth are taxed in most advanced industrial countries. Property is often taxed recurrently at the local level, and also when transferred at death, via inheritance and estate taxation. Scholarship on the domestic politics of taxation has typically been disproportionately concerned with the taxation of income, while work on the politics of indirect taxation is gradually beginning to emerge.
Social security contributions are the final major contributor to government revenues. Typically, these are levied on payroll, and so act as a tax on labor income, but there is variation over space and time in the extent to which the labor income tax base for social security contributions aligns with that for the taxation of labor income through the personal income tax. It is also important to note that the politics of social security taxation are somewhat distinct from those surrounding general taxation, as the “unrequited” characteristic of typical tax contributions is weakened by the entitlements generated by social security payments, politically if not actuarially. Existing scholarship on taxation in general varies in its treatment of these contributions, but the overall approach is one of generally benign neglect, which is replicated here. The contribution side of social security budgets is also often well studied in analyses of these programs as a whole (see Campbell, 2003).
Positive predictions about tax structure along these lines—Which taxes do we expect governments to choose?—have also emerged from the public-choice literature (Kenny & Winer, 2006). The analysis typically starts from the idea that governments must seek to raise taxes in politically, as well as economically, sensible ways: they seek to raise revenues while minimizing losses to political support. Voters are generally seen as self-interested and as harmed by taxation through the direct loss of income and the deadweight costs associated with behavioral responses. Voters may not be identical, but policymakers are seen as such, with office-seeking motivations.
The analyses tend to yield predictions that taxation is raised in a relatively “efficient” manner in terms of the trade-offs between political costs and economic losses. Higher administrative costs, lower revenue yields, and more elastic economic behavior or political opposition will tend to lower reliance on particular types of taxation.
However, this research tradition would benefit from the integration of more sophisticated accounts of political motivations and costs of different types of taxation (for an early example considering political costs, see Hettich & Winer, 1984). Moreover, the non-office-seeking motivations of elites and the elasticity of voters’ political responses may be, in many ways, what are really political in the politics of taxation. In particular, voters and policymakers may have substantive preferences over the distribution of the tax burden.
The Distribution of the Tax Burden
Scholarship on the politics of taxation focuses on the distribution of the burden of taxation on concrete, if not always easily identifiable, groups. In particular, the divisions of the burden between low- and high-income voters, and between those whose income comes from capital and those whose income comes from labor, have received a good deal of attention in the recent era of rising inequality. The progressivity of different tax systems has been an area of considerable interest: conceptually, the relative burden borne by the rich is a core question of fairness that political processes answer in their tax systems (Daunton, 2002; Scheve & Stasavage, 2016). However, there is no consensus on the operationalization of this core idea.
First, there is a difference between progressivity of taxation (the relative burdens of taxation at different income levels) and redistribution (the amount by which inequality is reduced). The two are related, but the overall level of inequality reduction depends on the size of the public budget as well as the slope of the tax schedule.2
Second, the burden of taxation overall depends not only on the structure of individual taxes but also on their relative importance. For instance, most income taxes are progressive in structure, but their importance in the tax system varies across countries. Taking tax systems as a whole, as far as the data will allow, reveals that overall most tax systems are close to proportional, or mildly regressive (Prasad & Deng, 2009).
Finally, there is little consensus about the best way to operationalize and measure the distribution of the tax burden. Scheve & Stasavage (2016) argue that top marginal rates of taxation of income and inheritance are a good indicator of progressivity, which seems like an intuitive approach. But more detailed microlevel data and modeling indicates that there may be little—or, indeed, a perverse—relationship between top marginal rates and overall progressivity (Verbist & Figari, 2014). Even within the income tax, other characteristics of the tax schedule (in particular, nontaxable allowances) provide progressivity independently of top rates, and to a non-negligible extent in many countries (Wagstaff & van Doorslaer, 2001). Microlevel data linking income to tax payments are increasingly available, at least for recent years (Prasad & Deng, 2009), but even so there is likely to remain a difference between true, economically relevant progressivity, and the politically salient features of tax regimes.
More difficult is incorporating the effect of taxes other than direct tax payments and social security contributions. In particular, it is difficult to link sales taxes to particular segments of the income distribution, as this requires information on individual consumption patterns. Instead, analyses of indirect taxes typically work indirectly: studies of the incidence of these taxes indicate that they are quite consistently regressive (Prasad & Deng, 2009), thus reliance on consumption taxation in general is used as an indicator of regressivity (Beramendi & Rueda, 2007). It is also worth bearing in mind that all of the analyses tend to focus on the legal incidence of the taxes, rather than their true economic incidence.
Variation Across Countries and Time
The size of tax revenues overall has grown over time, generally matching the growth of government, with the difference made up by deficits. Across countries, a core finding and ongoing puzzle in the politics of taxation is that there is a negative relationship between the level of taxation and the progressivity of its distribution.
Both large government (high tax revenues as a share of GDP) and high progressivity (disproportionate concentration of tax payments on the highest incomes) should have (at least in their direct effects) a positive impact on redistribution. Thus, if the politics of taxation is about distribution and redistribution, we should expect co-variation of the two across countries: high levels of progressivity should go along with large government. However, this does not tend to be the case (Steinmo, 1993; Prasad & Deng, 2009). The countries with the largest tax revenues (and, it turns out, the highest levels of redistribution) are not those with the most progressive tax systems. Indeed, not only is there no positive relationship between the two, but in fact the most progressive tax regimes are found in countries with the smallest government revenues, and vice versa. There is a negative association between tax revenues and tax progressivity.
This puzzling relationship has been the focus of much attention in the political economy of taxation, with (understandable) emphasis on the indirect ways in which the size of revenues and the distribution of their burden across the population co-vary.
Why Are Tax Systems Different Now?
Before considering differences across countries, however, it is worth also considering changes over time in domestic taxation. Indeed, the changes over the 20th century dwarf contemporaneous variation across countries: the tax systems of the advanced industrial democracies have moved together, and “if you could magically transport a finance minister from . . . 1890 and introduce him to the tax system found in his country today, he would be lost” (Steinmo, 1993, p. 17).
A large part of the fictional finance minister’s surprise would result from the changes to taxation made possible and necessary by broad changes in economic activity. The tools available in the service of taxation have radically altered. In early form, technological improvements in government administration (such as taking a census) and in literacy drove the adoption of income taxation (Aidt & Jensen, 2009a). Less dramatic later innovations included the withholding of tax at the source (Mehrotra, 2016) and the conversion of cascading turnover taxes, and other general sales taxes, to value-added taxation (James, 2015). The changes made possible by such technological advances have not been uncontroversial: modernization has often led to political protest when it has had material consequences for taxpayers (Martin, 2008).
War has driven changes in taxation over an even longer time period, at least in Europe. Indeed, one of the unique features of the modern welfare state is that it has normalized the use of tax revenues to support government activity beyond war. The increasing revenue demands of war on an ever-larger scale, and at increasing frequency, within early modern Europe, drove the transformation of European states (Tilly, 1992). The massive financial burdens associated with the world wars of the 20th century then caused the transformation of the scale of government and the concomitant increase in tax requirements, as well as the transformation of individual taxes, and extension of the reach of taxation across a much broader part of society (Brownlee, 2003). Mass warfare also prompted huge increases in the top rates of income and inheritance taxation (Scheve & Stasavage, 2016).
Nevertheless, the 19th century marks a watershed in terms of increasing levels of taxation, despite—or perhaps because—its relatively pacific status (Kiser & Karceski, 2017). In this period, trust in government in general, and its tax administration in particular, led to the emergence of greater voluntary compliance with taxation (Daunton, 2001; Levi, 1988). This kind of legitimacy is plausibly further enhanced by the emergence of democratic institutions (Kiser & Karceski, 2017).
Moreover, democracy has been seen as an important explanation of the growth of government, and the transition toward more progressive structures of taxation. As poorer people are politically empowered, the argument goes, they translate this power into higher levels of taxation in general, and higher taxes on the rich in particular. The idea of “democracy as Robin Hood” (Ansell & Samuels, 2014) underpins accounts of democratization itself (Boix, 2003), and it has also been central to explanations of tax outcomes (Aidt & Jensen, 2009a,b; Boix, 2003; Peters, 1991). On the other hand, researchers focused on the non-European experience have tended to be more concerned about the inability of democracies to raise sufficient tax revenues, compared to autocratic regimes (Cheibub, 1998). Recent evidence suggests that democracy may not in fact lead to any greater redistribution (Ansell & Samuels, 2014), and while democracy tends to increase taxation as a share of GDP, there is no consistent evidence that it reduces inequality (Acemoglu et al., 2015).
Moreover, the introduction of progressive income taxation in Europe typically predates the expansion of the franchise to many lower-income citizens, and as such seems more likely to require an explanation grounded in elite competition rather than in popular pressure (Mares & Queralt, 2015). Mares and Queralt highlighted the impact of economic change within elite groups, as the income tax was supported by (some) elites as an effort to shift the burden of taxation to assets they themselves did not hold. Where land-owning inequality was high, concentrated interests were better able to bargain to secure the taxation of income and capital, rather than land, through the introduction of modern income taxation.
The role of ideas in the domestic politics of taxation, and specifically in the content of ideas themselves, has been highlighted to explain early 20th century change in taxation, as well as reform in more recent times.
First, while for Scheve and Stasavage (2016) the first moving cause is war, it is through ideas about fairness that wars of mass mobilization in the early 20th century are argued to have promoted the expansion of progressive taxation. As lower-income people made up the bulk of conscripted armed forces, while capital enjoyed disproportionate returns, the idea that progressive taxation was warranted as a fair balance gained in strength. The experience of mass warfare drove high top rates of taxation via this change in ideas about justice in taxation.
But the 20th century saw ideational evolution, and a second major period of tax policy change resulted from a shift in tax ideas favoring lower, and more “market-conforming,” rates and structures. Between the early 1980s and mid-1990s, “attacking redistributive taxation undermined one side of the embedded liberal order” (Blyth, 2002, p. 178): the politics of domestic taxation were subject to the same ideational changes that ran more broadly through economic policymaking. This change of ideas, where policymakers in general, and expert economists in particular, became more skeptical about the desirability of redistribution and increasingly expressed support for regressive forms of taxation, is cited to explain a global wave of tax reform (Steinmo, 2003). In general, top marginal rates of personal and corporate income taxation were cut, schedules were simplified, and bases were broadened.
Some of the explanations of variation over time also help to explain differences across countries. For example, the changes over time in ideas about tax justice as the consequence of mass warfare that Scheve and Stasavage documented affected the countries that participated in the mobilization much more strongly than those that did not participate. Similarly, although some of the neoliberal trends of the 1980s were global, variation in the degree to which the ideas gained currency and support across countries could explain different reform outcomes across countries. However, a generally distinct set of variables has been employed to explain variation in tax policy across countries, largely because the trends in terms of technology, democracy, and ideas have been shared within the developed democracies.
Why Do Tax Systems Vary Across Countries?
In particular, the puzzling relationship between progressivity and overall levels of redistribution has been the focus of many explanations of why tax systems differ across countries. Here, ideational and democracy-based explanations tend to fall short, as the same features that would promote redistribution would also seem to promote progressivity. Instead, a large body of scholarship takes the level of taxation overall as an underlying explanation for how tax systems are structured.
Economic Factors: Globalization and the Size of the Welfare State
Two important dimensions of variation highlighted in explanations of tax policy variation across countries, as well as change over time, are international economic integration (“globalization”) and the size of the welfare state. The core mechanism in each case is similar: taxing capital at high levels is likely to be both difficult and undesirable. Globalization makes this increasingly true; large welfare states make it increasingly important. Moreover, limiting the extent of capital taxation has implications for the distribution of the tax burden. To the extent that high taxes on capital are progressive, undermining capital taxation may undermine progressivity.
That capital taxes should be zero, or very low, is a prescription from theoretical results in economics. In political economy, though, attention has also been focused on how globalization increases the mobility (and hence structural power) of capital relative to national governments. In this context, taxation is seen as subject to the same pressures as the rest of the welfare state and is more directly exposed. Thus, increasing global economic integration has been argued to reduce capital and corporate taxation (Tanzi, 1995). In conjunction with the stylized facts about globalization and the size of the state (as epitomized by the “compensation hypothesis”), voters may demand more protection as a consequence of globalization, and yet they may end up with more regressive tax systems by virtue of the increasing limits on capital taxation. If true, this could explain the paradoxical link between larger spending and more regressive structures.
But even those who argue the economic “need” for lower taxes on capital recognize that governments trade off this desire against other goals, and that any package of policy solutions must come through political decision-making. Thus, domestic economic change and political commitments also matter (Swank, 2006; Swank & Steinmo, 2002). However, more detailed attention to the specific provisions of tax policy choices highlights that the economic constraints on progressive and redistributive taxes are only partial. There are policy options that enable market-conforming progressive systems, separating the taxation of capital within the taxation of income (Ganghof, 2006b). Moreover, despite increasing globalization, capital remains only partially mobile, and countries vary in the degree to which competition for international capital is an effective economic strategy, depending on country size (Plümper, Troeger, & Winner, 2009) and the degree of economic reliance on the kind of capital that is most footloose (Troeger, 2013). In the most recent study of corporate tax reforms, Swank (2016) found that high public debt, leftist voters, and institutional veto points constrain downward movements in tax rates.
The same logic might drive the paradoxical link between the size and structure of taxation, even without a reliance on a globalization-based account of a “race to the bottom.” Ganghof (2006a) argued that the need for high revenues leads directly to a reliance on regressive taxation by virtue of the need to limit the tax burden on capital. Cusack and Beramendi (2006) also sought to explain cross-national variation in the degree of reliance on regressive taxes, considering taxes on labor in particular. They argued that the burden of supporting a large welfare state falls on labor both because of the direct difficulties of taxing capital, and because of a subtler kind of “exit threat”: withdrawal from the corporatist bargain underpinning wage coordination and the welfare state. Beramendi and Rueda (2007) cited a similar logic of maintaining capital’s incentive to support the corporatist bargain in explaining higher rates of indirect taxation in social democratic countries as international economic integration increases. This pattern is particularly pronounced for the social democratic parties of northern Europe’s largest welfare states.
Political Partisanship and Political Institutions
The puzzle surrounding the size and structure of taxation, paired with the idea that left parties typically seek more egalitarian outcomes—and, therefore, more redistribution—points to a pattern in which left governments pursue higher levels of taxation, but rely on more regressive tax structures. Timmons (2005) argued that this is a consequence not of global capital flight, but rather of a “contractual” underpinning of taxation for different political parties. Because of a more credible commitment to the kind of spending policies their constituents prefer, left (right) parties are able to levy higher taxes on their core constituents—poorer (richer) voters.
But there is little consensus here, as analyses within countries, and also within taxes, find that left governments pursue more progressive taxation. For example, Osterloh and Debus (2012) found not only that there are partisan differences in corporate tax policy (with left governments pursuing higher levels of corporate taxation), but also that the kind of ideological difference between parties that is most associated with high corporate tax levels is support for welfare expansion (in contrast to the economic necessity, corporatist bargain, and tax contract arguments). In income taxation, too, the interaction of partisan preferences and institutional veto points helps explain different outcomes: left government in Denmark led to the differentiation of more- and less-sensitive types of capital income in order to maintain a high degree of progressivity (Ganghof, 2006b, p. 85).
The institutional features of political systems, though, have been more often employed to explain variation in the level of taxation than in its structure. Following the same common pool logic that Bawn and Rosenbluth (2006) employed to argue that larger coalitions lead to large government on the spending side, Ashworth and Heyndels (2001) argued that dispersion of political power generates political indecisiveness, so any shocks that move a country’s tax structure away from the ideal (as proxied by the OECD average) last longer under weak (coalition) governments. This forms part of a larger literature about the failure of coalition governments to make hard policy choices, in particular with regard to bringing public deficits under control (see Hallerberg, 2016). However, this literature is typically focused on taxes only in combination with spending; moreover, the empirical record is mixed (Cusack, 1999).
However, some more nuanced effects of government characteristics on the tax side specifically have also been considered. Ashworth, Geys, and Heyndels (2006) studied the introduction of environmental taxes in Flemish municipalities. They found that the effect of political fragmentation is nonlinear: at low levels of numbers of parties (coalitions versus single-party governments, in particular) more parties increase the likelihood of tax innovation, while at higher numbers, the effect is negative. The authors account for this nonlinear effect by the offsetting impact of a logic of “clarity of responsibility” (or its absence) making coalitions more able to levy costly reforms, and the more typical gridlock effect of a larger number of veto players. The approach of many of the institutional studies is to seek explanations of deviation from an economic best-practice ideal.
Tax Systems as Independent Variables
The choices made to determine domestic tax policies are thus seen to be made in anticipation of their consequences, both political and economic. Policymakers’ understanding of the effects of taxation, at least, are important in this strategic sense. Tax systems as independent variables have also been important for scholarship in this area.
First, some approaches to the relationship between the size of redistribution and the shape of the tax system consider the causal relationship to run from taxes to spending, rather than the other way around. Thus, Kato (2003) provided a path-dependency argument about the politics of welfare state expansion that takes the tax system as relatively exogenous, and argued that the early and uncontentious adoption of regressive taxes (in particular the VAT) facilitates the growth of government revenues. The link runs from regressive taxes to high revenues, while countries that remain reliant on progressive taxes are limited in the size of government achievable, not least because of the greater visibility and political dispute over the kinds of taxes. Hart (2010) echoed this logic to explain a mirror-image paradox in South America, where he found leftist governments typically raise less revenue than rightist governments, because they forgo (regressive) value-added taxes on consumption.
In broader historical terms, the levels of revenue mobilized through taxation have been seen to determine military success: the flip side to the argument that the need for war revenues drove the development of taxation, so the degree to which that development was successful drove outcomes in the military competitions it financed (Tilly, 1975), and the ways in which taxes are levied has been argued to shape outcomes even as broad as democratization, as the revolt of those outside the (tax-) advantaged elite in nondemocratic, expropriating systems forces rulers to concede political inclusion in the bargain to preserve their position (Kiser & Levi, 2015, p. 566; Tilly, 2009). Even in contemporary advanced industrial democracies, the incentive effects of specific tax choices shape relationships not usually considered to be fiscal: charitable behavior (List, 2011) and even marriage and civil partnerships (Alm & Whittington, 1999; Leturcq, 2012) are shaped by the tax system. Less systematic attention has been given to these effects as questions of taxation per se, as opposed to within the specific policy areas that the taxes relate to (charitable donations or family policies). This pattern is also replicated in the study of environmental taxation, more often considered by scholars of the environment than in the context of the tax system as a whole.
However, many, if not most, of the important downstream effects of taxation for more narrowly political outcomes run through the knowledge, attitudes, and preferences of individual voters themselves. These and other microlevel political relationships have generated in important body of scholarship.
Individual Attitudes Toward Taxation
The institutions of taxation may affect attitudes toward tax. The research on this question can be divided into three main categories, and there is a final “gray area” of scholarship that is not self-consciously focused on tax systems as the explanatory variable, but with national variation in individual preferences, which is empirically difficult to differentiate from existing tax systems (which vary by country).
First, a more political explanation of the link between regressive taxation and large welfare states runs through the preferences of voters for more redistribution when the taxes used to pay for it are less visible. The theoretical argument relies on two steps: first, that visible taxes are more disliked (and thus it is harder to raise revenues when taxes are highly visible), and, second, that progressive taxes are more visible than regressive ones. Then, visible, progressive taxes create a “backlash” against the welfare state and undermine support for taxation and spending (Prasad, 2006; Wilensky, 2002). However, there is little evidence that reliance on progressive taxes leads to tax protest at the aggregate level (Martin & Gabay, 2017). However, there is good evidence that the progressivity of the tax system may make higher-income individuals more resistant to redistribution. Here, a simple material interest story makes sense of the pattern (Beramendi & Rehm, 2015). This finding, combined with what we know about unequal influence on policy across the income distribution (Bartels, 2008; Gilens, 2012), may make sense of the relationship overall, but the full theoretical chain has yet to be articulated and investigated.
A similar theme underpins recent literature on the “submerged state” in the United States, which argues that a greater awareness of tax than of the benefits it provides undermines a willingness to pay for government (Mettler, 2011). This dovetails with the literature on the use of tax expenditures (specific exemptions from taxation) for social policy purposes: the “hidden welfare state” via taxation is one that has less effect on how people perceive government intervention than direct spending policies. But this has distributional consequences, as direct spending tends to benefit lower-income groups, while tax exemptions and deductions benefit more affluent citizens (Howard, 1997). However, framing and implementing policy interventions as tax breaks rather than spending programs may garner greater support (Haselswerdt & Bartels, 2015). More generally, misperceptions of the existing tax system, and of proposed reforms, have been argued to lead to erroneous support (Bartels, 2005). However, a consistent finding in recent experimental work is that, while factual errors and misperceptions can be improved by the provision of information, the information generally has little influence on policy preferences (Barnes et al., 2018; Kuziemko et al., 2015).
Third, there is a body of scholarship emerging from lab experiments comprising tax “games.” Typically, respondents perform real tasks to earn income within the experiment, and then are subject to experimentally manipulated tax schemes. Drawing on experimental work in economics and psychology, this literature has not typically focused on highly political questions. However, political scientists are increasingly contributing to this body of scholarship, in particular in considering differences across tax systems. By varying specific features of the tax schemes, the impact of the features on behavior can be isolated. For example, Solaz and Duch (2016) studied compliance under different tax regimes. An obvious extension to this approach is to consider more political outcomes—for example, the kind of tax systems that players in these games will vote for—as well as the more conventional economic outcomes. Nevertheless, the experiments remain better suited to identifying the impact of the features directly manipulated in the lab—such as the characteristics of the tax systems—than the effect of differences across individuals that precede the random manipulations. Yet, it is the latter individual differences that are often the motivating question in such studies (ability for Duch & Solaz, 2016; nationality for Zhang et al., 2016).
Finally, the literature on what is termed tax morale—the willingness to pay taxes, and to comply voluntarily with the system—has centered in part on nationality as the characteristic explaining variation across individuals (Edlund, 1999). In the context of the feedback effects documented above, and the reciprocal relationship between (expected) support and policy choice, the degree to which such differences are pre-institutional, cultural differences, or are the consequence of the history and evolution of the tax system, remains relatively intractable. In recent experimental work, Zhang et al. (2016) found national differences in behavior in otherwise identical experimental situations, but even this highly controlled empirical strategy cannot determine what it is about Italians (their nationality per se, or the institutional experiences that come with it) that differentiates them from the British, and vice versa.
Preference Variation Within Countries
Variation in tax policy preferences across individuals within countries, rather than variation depending on the tax systems themselves, is also well documented. Here, there is some overlap with the broader scholarship on individual preferences for government spending and redistribution (Edlund, 1999; Meltzer & Richard, 1981). Those who we would expect to benefit materially from government intervention tend to be more supportive of higher tax levels; the relevant individual characteristics include income level, exposure to economic risk, and employment in the public sector (Barnes, 2015).
Beyond material interest, both political trust and more general social trust have been shown to be important drivers of support for taxation. Those who distrust the government are unlikely to support allocating it greater resources through taxation. Thus, low political trust has been shown to be associated with antitax attitudes (Sears & Citrin, 1982) and acceptance of tax fraud (Marien & Hooghe, 2011). More recent work on the United States finds that the relationship between trust and support for taxation may vary depending on ideology (Rudolph, 2009; Rudolph & Evans, 2005).
Similarly, an intuitive theoretical logic underpins the idea that higher social trust should predict more positive attitudes toward taxation. Domestic taxation requires voluntary compliance, and high trust will allay fears that others are shirking their contribution. Here the empirical evidence is more limited and is generally based on cross-national comparisons where the multiplicity of varying factors makes clear identification of the impact of trust difficult (Jensen & Svensen, 2011; Rothstein & Uslaner, 2005). For both social and political trust, in the observational survey data that much of this literature relies on, it is impossible to determine whether articulation of low trust is a consequence, rather than a cause, of antitax attitudes, perhaps as ex post rationalization.
What about the link between spending and preferences? Will voters irrationally want “something for nothing” and tend toward tax preferences that do not match their demand for spending? The evidence does not support this: in general, voters seem quite aware of the tax costs of their spending preferences (Barnes, 2015), and something-for-nothing attitudes are more indicative of free-riding than irrationality (Edlund & Sevä, 2013). Moreover, expectations about the direction of the problem seem to depend on ideological predispositions: on the right, the worry is that voters do not adequately perceive the level of taxation, so fiscal illusion drives a “too large” government budget (Browning, 1975). On the left, the greater concern is that the benefits paid for by taxation are underappreciated, leading to excessive resistance to taxation (Downs, 1960; Mettler, 2011). However, as already seen, the transmission mechanisms from information to knowledge to policy preferences may be weak.
Methodologically, the individual-level research increasingly chooses deliberately and explicitly between providing accurate, general, and comparative description and providing narrower but more credibly identified causal inferences. Certainly, with hypotheses at the microlevel (“certain types of tax structure cause certain types of attitudes”), the additional control provided in lab or survey experimental conditions helps insulate against the endogeneity problems associated with observational studies.
The Agenda and Challenges Ahead
Moving Beyond the Income Tax and Fiscal Redistribution
The transformation of government activity associated with the emergence of income taxation has focused attention on the conditions of its rise. Indeed, Mares and Queralt (2015) argued that the extractive capacity of the income tax “makes [it] the most advanced fiscal instrument to date” (p. 1975). Moreover, the income tax looms large in the politics and public perceptions of taxation, especially in English-speaking countries, where it typically plays a larger role in revenue provision, and where leading scholars on the political economy of taxation have largely been based.3
Yet revenues raised from consumption taxation and social security contributions provide a similar share of revenues to the state. Moreover, value-added taxes do occasion political protest, and while indirect taxes are often characterized as politically invisible, this may not be accurate (Martin & Gabay, 2017). Further, even gradual and hidden changes have political content: politics are at work even in low-salience decisions, and these decisions can have important consequences (Culpepper, 2010; Hacker & Pierson, 2010). Finally, the political salience of different types of taxation is better seen as an outcome of the processes of tax politics—and one in need of explanation—than as a set of natural and immutable facts.
This points to an important need to move beyond the politics of direct taxation in general, and income taxation in particular, to understand the politics of the tax systems more broadly. Given their importance for revenues, especially in low- and middle-income countries, taxes on consumption, such as the VAT, merit particular attention. Even the existing works that focus on indirect taxation (for example, Beramendi & Rueda, 2007) tend to do so through the lens of income tax: countries that rely on indirect taxation do so because of the difficulties associated with taxing capital income. Moving forward, scholars of domestic taxation should attend more directly to the positive politics of other types of taxes: where, when, and why, for example, are VATs adopted, and what explains variations in their shape? This research agenda is already applied outside political science (see, for example, James, 2015).
The research agenda for the politics of taxation also needs to broaden its focus on the functions served by domestic taxes, even for the big revenue-raising instruments. That is, not only do income, inheritance, value-added, and excise taxes serve to raise revenue and reduce inequality via fiscal mechanisms, but also they have important regulatory and incentive-based effects that change political and economic outcomes, without appearing on fiscal redistribution balance sheets. For example, progressive economists are increasingly calling for more progressive income taxation, not by virtue of the efficiency of revenue raising, but rather precisely because of the incentive effects on the pretax income distribution (Piketty, Saez, & Stancheva, 2014). Such regulatory effects give political actors alternative motives for supporting different types of taxation.
Similarly, there are few tools in modern political science that aid in understanding the tax changes used as part of fiscal stimulus packages after the financial crisis of 2008 (for example, changes to VAT rates in the United Kingdom and income tax rebates in the United States), as the politics of such macroeconomic management was again “quiet” during the Great Moderation. We need to understand the 21st century “demand side” motives for changing tax policy. Thus a reconsideration of the politics of taxation beyond direct taxation, as well as incorporating economic, political, and social motives beyond simple revenue-raising and redistribution, offer an important way forward, and one that may even resolve outstanding empirical puzzles (for example, the effect of partisanship on tax outcomes).
Maintaining Evidentiary Pluralism
The Schumpeterian view of taxation as a record of the “thunder of history”—reflecting core macrolevel features of societies—leads to “big picture” research questions about large-scale variation and change over time and across countries. But important questions with this kind of broad perspective, as well as comparative and historical approaches to taxation, are ones where exogenous variation is hard to find. On the empirical side, the turn toward causal empiricism in quantitative research asks difficult questions of any big causal claims in this area.
The causal empiricist agenda emphasizes identification by design within quantitative studies of causal questions, and “realism about the specificity of causal facts” (Samii, 2016). As we have to some extent already seen, tax policy acts fundamentally as both cause and effect of variation between, and change within, polities (Martin, Mehrotra, & Prasad, 2009, p. 2). This makes it very difficult to achieve credible identification of causal relationships, and a focus on macrolevel variation presupposes at least some generality of mechanisms. Ideally, this agenda will ensure that scholars of public finance take their causal claims seriously and maintain realism about whether causal inferences are well identified.
But the study of taxation highlights the value of research questions other than quantitative causal ones in the agenda of political science as a whole. Large-scale, observational, comparative time-series cross-sectional analyses are imperative in order for us even to understand what variation exists in terms of tax policy; therefore, they are a necessary prerequisite for any explanations of such variation. Equally, the turn toward causal identification by design in quantitative observational studies should ideally move quantitative scholars closer in their thinking to well-designed historical and comparative qualitative designs that rely on between-case variation for identification. Because of its inherent complexity and holism, as well as its essentially quantifiable outcome and the wealth of data available, the study of tax politics is an area ripe for sophisticated treatment of the methodological issues that are central to the discipline as a whole.
More negatively, the risks associated with the denigration of “big picture” questions of causation and comparison are highly pronounced in the field of domestic tax policy. A withdrawal of careful political scientists from the study of taxation on the grounds of causal skepticism, however warranted, will not prevent policymakers, advocacy groups, or indeed less circumspect academics, from drawing inferences from the patterns in the observational data. It is more likely that the agenda in the study of taxation will simply be set by those with less awareness of the core political questions and processes at work. Therefore, the challenge for scholars in the field of domestic tax politics is how to maintain intellectual space for pluralism in the types of evidence and the types of empirical project that are valued, as well as to maintain, or indeed create, the theoretical frameworks that can synthesize such diverse forms of inquiry.
In the study of taxation, the problem of endogeneity is ubiquitous, but in trying to understand domestic (and indeed global) politics, the importance of taxation is obvious. There is a narrow course to chart between the Scylla of causal overclaiming, and the Charybdis of undertheorized and undersynthesized, nongeneralizable and noncumulative causal empirical findings.
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(1.) Figures quoted are 2014 data from the OECD revenue statistics: “Tax revenue as % of GDP” and “Tax revenue as % of total taxation,” at https://stats.oecd.org/Index.aspx?DataSetCode=REV#.
(2.) Of course, the amount of redistribution done overall will depend on how tax revenues are spent, as well as where the taxes are raised.
(3.) In broader comparative perspective, it is important to note that the revenues raised from income taxation set high-income countries apart from low- and middle-income countries (see Figure 7, International Monetary Fund, 2011). Most developing countries have a VAT, and the VAT continues to be promoted as a core tool for revenue raising (James, 2015), while there is less advocacy for income taxation as a tool for revenue mobilization in countries where income tax revenues remain low (International Monetary Fund, 2011).