According to classical works on fiscal policy, societies face a trade-off between equality (favored by the left) and economic growth (favored by the right). Progressive taxation ostensibly embodies this trade-off: politicians may reduce inequality through redistributive taxes, but will wind up distorting economic incentives to work.1 Paradoxically, however, it is historically left-leaning nations with generous welfare states and low inequality that tax the masses with comparatively regressive income tax bases, high consumption taxes, and low capital taxes. In contrast, liberal countries with high inequality and limited welfare states embrace progressive taxation (until recently), high tax rates on upper-income people, high taxes on capital, and limited consumption taxes.2
Our chapter explores the political origins of these paradoxical âmassâ versus âclassâ tax strategies that date back to the early twentieth century and have created path dependencies for subsequent policy reforms with the expansion of modern welfare states.3 Thus although this volume generally focuses on the postwar period, our contribution reflects on path dependencies established at the beginning of the twentieth century. We suggest that âmassâ and âclassâ tax strategies come from radically different models of revenue policymaking, organized around the logic of state-building versus crisis mobilization, and each model is associated with distinctive institutional policymaking processes and coalitional bases. A state-building model of revenue system development, which produces the mass tax, transpires in countries with strong political institutions for consensual policymaking (corporatist industrial relations and multiparty systems), and includes broad support by business and the right. Muted class conflict permits significant reforms to happen under politics as usual, in response to economic transformations and expanded need for social and fiscal policies. Employers are incorporated collectively into the policymaking process by their strong associations and dedicated business parties, and participate in the design of social and revenue policies. Consequently, they consent to a large revenue base, wield leverage to shift taxes off capital and onto labor, and facilitate the adoption of broad-based, less progressive tax systems and extensive welfare states.
In contrast, a crisis-mobilization model of revenue system development, which produces the class tax, occurs in countries with few political institutions for consensual policymaking and, therefore, with intense class conflict. Significant reforms are delayed until crises (namely war) demand new fiscal instruments, contentious tax politics produces âsoak the richâ progressive levies, and business and the right largely oppose social and fiscal policy expansions. We employ comparative qualitative and quantitative evidence to support our claims. Quantitative analyses demonstrate that well-organized employersâ groups and multiparty systems are both powerful predictors of the distribution of the tax burden from 1900 to 2000 in the advanced economies. Countries with greater employer coordination and multipartism had lower top income tax rates and relied more on regressive production and sales taxes compared to countries with weak industrial relations organizations and majoritarian electoral rules, even when controlling for other social, political, and economic factors. Consistent with our distinction between crisis-mobilization and state-building politics, war mobilization results in increases in the top income tax rates in majoritarian systems, but not in multiparty governments.
Qualitative case studies of the paradigmatic countries of the United States and Denmark illustrate the causal mechanisms by which crucial tax initiatives were created at critical junctures and set historical paths for the postwar evolution of revenue systems. Political coalitions supporting tax reforms were dramatically different in coordinated Denmark and the liberal United States. Strong Danish industrial relations organizations and multipartism nurtured class consensus. In contrast, weak American industrial relations organizations and fierce competition between the two parties encouraged class warfare. Accordingly, the American national tax system was characterized by a relatively progressive income tax bolstered by progressive levies on capital expanded during moments of crisis, especially war mobilization. These conclusions offer several contributions to comparative political economy. First, we engage with burgeoning research on the long-run determinants of tax systems, offering a new set of explanatory factorsâcentered on the organization of industrial relations and the structure of party systemsâthat remain underexplored in previous studies.4 Moreover, we provide insights into the timing of contemporary variation in tax policies, showing that cross-national differences in tax progressivity were already largely established by the 1950s.
Second, we shed light on debates over the âtax-welfare paradoxâ5 by revealing similarity in political coalitions undergirding revenue and social spending initiatives. Both tax and welfare systems were...