“The politics of taxation is one of the most important policy concerns in the modern industrial state; yet we know very little about it,” author Sven Steinmo states at the opening of Taxation & Democracy, a publication detailing the politics and development of tax systems of the United States, Great Britain and Sweden. The three nations discussed are prime examples of “industrial democracies,” and Steinmo looks at each in comparative fashion, showing many differences but more abundantly the similarities between the three.
In his introductory chapter, Steinmo discusses how taxes are looked upon by us. “Indeed, not only do we know little about tax policy, but what we think we know is often wrong. ” As an example, he states that it is commonly assumed that the U. S. and Great Britain have had much more progressive tax systems than “socialist” Sweden, where the system leans much more to the regressive side. In addition, it is widely misconstrued what taxes are actually used for; it is usually thought of that taxes are simply a means to generate revenue and redistributing wealth.
Within the hundreds of goals of taxation are “raising revenue, redistributing income, encouraging savings, stimulating growth, penalizing consumption, directing investment, and rewarding certain values while penalizing others. . . indeed, taxation is a major instrument, if not the major instrument through which governments try to affect the private sector,” as the author explains. Steinmo offers three explanations as to give insight into the “wide divergences” between the public policies of different nations and cultures.
The first is the interests explanation that argues that “policy outcomes vary because the distribution of power among political interests differs from one polity to another. ” The interests theory also assumes that groups will always primarily pursue their self-interests and try to displace the burden of tax away from themselves. However, the explanation of why these public policies vary does not explain taxation policy, and tends to treat self-interest as a given. The second explanation provided is the values explanation, which looks into the fact that different publics want different public policies.
A major weakness of this explanation is that because political values are very broad and vague, they don’t specifically translate into policy alternatives. “In sum, the values explanation fails to link general ideas to specific policies,” Steinmo states. Thirdly, the state explanation looks at the role of the state and how it effects the role of public policies in different societies.
This explanation provides little in helping understand why “state actors have certain preferences and why these preferences vary. . . sum, values, interests, and state-centered theories fail to explain how preferences and interests are, on the one hand, shaped and, on the other hand, translated into specific policy choices. ” Next, Steinmo offers a sociological view by looking at the institutional level and how the institutions profoundly affect how interest groups, politicians and bureaucrats develop their own policy preferences. This approach focuses on the environmental context of policy choices over time and demonstrates how specific policy outcomes are derived within different economic and political structural contexts.
Steinmo states that the institutional foundations that the three nations are based upon are of the most critical importance to the decision-making structures. Since the U. S. , Sweden and Britain are representative democracies, they are presented with the dilemma of linking the wishes, desires and preferences of those who they represent with the decisions of the “political elite,” even when the public may be ignorant to the facts and the government must enact policies out of absolute necessities. This is a key variable in understanding why the nations have developed such contrary policies regarding taxation.
The characters of all the countries’ systems of taxation and public revenue are a result of their own institutional structures. With Constitutions of most countries either being either vague or unwritten, every country has had to adapt to the realities of governing and to the increasing complexities of modern government. Although each country carries out these adaptations in different fashion, Steinmo states that the nations all want similar things: “Politicians want to be reelected, bureaucrats want to manage a stable and efficient tax policy, and interest groups want to promote the well-being of their constituents.
But how these general desires get translated into specific policy preferences and specific political strategies depends on the rules of the game; and the rules of the game are written by the institutions through which the game is played. ” Indeed, to understand why these policies are enacted, it first must be understood the broader social, economic, and political settings in which they are embedded. In the chapters that follow, Steinmo characterizes the systems and highlights the basic, most consistent differences between them.
Steinmo opens the second chapter with the objective to “fill some of the gaps in our knowledge about tax policy and tax policy development generally. ” There are basically five taxes – personal income, corporate profits, general consumption, property and social security charges – that contribute to 79. 5 percent of all government revenues in OECD (Organization for Economic Cooperation and Development) nations. However, most of these taxes did not even exist a hundred years ago.
Governments have tended to develop and change their systems of taxation at approxiamately the same times and in similar ways throughout the course of the twentieth century. Although they may dependent on the same types of taxes, the rely on different percentages of each tax levied for revenue. For instance, figure 2. 1 shows that a higher percentage of Sweden’s tax revenue comes from income tax compared to the income tax of the U. K and U. S. Over the past hundred years, the ways in which governments raise money for public spending have been radically transformed.
Progressive income taxes, social security taxes, corporate profits taxes, and VATs (Value Added Taxes, such as added taxes to gasoline) have become the norm, whereas they were unheard of nearly a century ago. All of these new sources of tax revenue can be attributed to common political ideas, social forces, economic needs, and technological advances which are commonplace in nearly all modernized economic systems. The commonalities between these states, according to Steinmo, are subject to explanation by two dilemmas.
The first is the that the “democratic capitalism is caught between the desire for greater social and economic equity and the apparent need for a degree of economic inequality. ” The second is the common wants of citizens for increased public spending coinciding with their hate of taxes. This dilemma “puts public officials in a difficult political position; to accomodate citizen preferences on one side of the budget, they must go against what citizens want on the other side of the budget.
The result of this is a move toward more broad-based taxes and taxes whose revenues grow automatically – that is, taxes that everyone pays and grow and simultaneously grow with the development of the economy. However, citizens prefer taxes that someone else pays, and the main target for that is the rich and large corporations. While this seems an obvious “solution” to the problem, it does not offer a sufficient remedy. According to Steinmo, if all incomes over $1 million were taxed 100 percent, it would only raise approxiamately 8. 4 percent of the total receipts of what the government usually receives.
Therefore, that idea is thrown straight out the window and gives more validity to the idea of the aforementioned automatically growing taxes. Another proposed idea is a simple “head tax,” or a single amount paid by each citizen. Although a simple head tax of $5,000 in the U. S. for each citizen would generate mass revenue in upwards of $1. 25 trillion, many would consider the tax “grossly unfair. ” When former English Prime Minister Margaret Thatcher proposed such an idea, it “evoked a massive revolt that substantially contributed to her eventual ouster.
An additional recent trend in taxation is for tax policymakers to develop and rely on taxes that can either be hidden or grow on their own. The most reliable source of this are personal income taxes due to the growth of tax revenues at a greater rate that than the growth of incomes, or what Steinmo refers to as bracket creep: “Bracket creep ensures that once income tax rates are set, revenues to the state will expand dramatically faster than the GNP even if policymakers simply sit back and wait.
As far as hidden taxes are concerned, the most popular is the social security tax. Although it is not subject to the bracket creep rule, many employees don’t know that a portion of their wages are being paid directly to the government by their employers. As with income taxes, citizens have a tendency to view social security taxes as more than other kinds of taxes; there is a feeling of getting something back with this type of taxation.
While there has been a tendency of growth of social security and income taxes in OECD nations, selective consumption and property taxes have seen a large drop-off in all of those same nations in the past 40 years. General consumption taxes, such as VATs that tend to grow with economy and are hidden from the consumer, on the other hand, have enjoyed great success and growth. Steinmo offers this summary: “In sum, the desire for increased revenue constrained by public resistance to taxes, the demand for more fair taxes, and the need for economic growth are pressures faced by taxing authorities everywhere.
As a result of these common forces, income, general consumption, and social security taxes have tended to go up since World War II both as a percentage of tax revenue and as a percentage of Gross Domestic Product (GDP), while property, corporation, excise, and a host of other smaller taxes haved tended to decrease. ” Next, Steinmo delves into a “Short History of Modern Taxation”, as the heading reads, and presents four major historical stages of modern tax policies in these industrial democracies.
Each stage “can be linked to major developments in the social, political, and economic contexts in which tax policy has developed. ” The first phase, which took place from 1900-20 and included the introduction of progressive taxation at the turn of the twentieth century, was in response to mass democratization and the public demand for greater social and economic equity. In years prior to the turn of the century, most countries were reliant uopn duties, fees, excises, charges, and taxes for national revenue.
In general this meant that the burden of taxation was borne most heavily by the poorer classes in society. ” In addition, ministers of finance were caught in a trilemma of a need for greater revenue, knowing those with political power did not want to pay taxes, and those with political power had nearly nothing to tax. In the era of Word War I, there was a growing need of every nation to increase revenues for defense. Consequently, the first income taxes on the wealthy and on corporations were introduced in nearly every industrial nation. However, income taxes were not imposed on all citizens until the 1940s.
In the second phase of the tax policy, the Great Depression “evoked mass discontent with both capitalism and the politicians who defended it,” but also offered mass change to the system of taxation. According to Steinmo, the key to understanding the development of tax policy during that period was the strength of both labor and capital to represent and protect their own interests in their respective legislatures. In all three countries, the stress of World War II forced all political parties to pull together and compromise over revenue issues. Just how much money is to be made in the business of war?
The new taxes will be severe, but it’s a million times cheaper to win the war than to lose it,” wrote U. S. Treasury Secretary Henry Morgenthau during the war. As mentioned before, by the end of the war in the mid-40s, the vast majority of citizens paid income taxes, whereas only 5 percent paid the same in the mid-30s. Also introduced at this time was the pay as you earn (PAYE) system, in which taxes were collected with each paycheck, rather than sending a lump sum to the government at the end of each year. The most important effect of this system was “maximizing the immediate yield of this tax and minimizing the political costs.
Taken altogether, the expansion of the tax base, increase in tax rates, and newly introduced systems of tax collection changed the revenue scene for modern democratic nations. With the increase in taxation rates during the war, many expected for the taxes to be “scaled back. ” Due to the national debt resulting from the conflict, governments felt compelled to maintain high taxes. Both progressive taxation and welfare state programs became mainstays during this period, from 1945-75. Although the governments wanted to tax so-called excess profits, it was in no one’s interest to tax away the capital necessary to build a strong defense.
It was generally assumed that the end of the war would bring an end to high rates of tax and an end to many if not all tax expenditures on defense. However, rates remained high. The postwar tax policy had three main characteristics: governments were either unwilling or politically unable to reduce formal tax rates on the rich and corporations; second, the political and administrative elites were both developing new tools and seizing responsibility for macro and micro manipulation for the economy; and the revenue systems established during the war offered hugee and automatic revenue surges with relatively limited political consequences.
It was during this time period income tax revenues and public spending expanded greatly. Since the mid-70s the economies of world countries has undergone massive changes. Capital has become more international, more mobile, and more integrated. Such changes have altereted the context in which domestic tax policies are made. The result of this has been the downfall of the postwar opinion over taxation policy. The once widely accepted idea that taxes should be progressive and that the state had the absolute right to tax as a powerful instrument of economic and social policy has now come under attack.
In addition to the lowering of tax rates, many tax expenditures and incentives have been scaled back or removed, and there has been a general attempt to make tax systems more neutral toward different types of income and investment. However, how these objectives have been executed has varied widely between nations. Although there are many glaring similarities between the tax policies of nations, the same can also be said for the differences between them. While some taxes are prominent and continue to go up in some countries, the same type of tax may drop substantially in another.
There is great variation in the amount specific taxes can contribute to the national revenue. However, “clear patterns emerge, allowing one to distinguish one tax system from another. ” Steinmo begins his comparative look at the three nations initially with the American tax system, with an interesting quote from Henry Aaron and Harvey Galper from their publication, Assessing Tax Reform,that gives a fine introduction to the section: “The U. S. tax system has become a swamp of unfairness, complexity, and inefficiency.
The accumulation of credits, deduction, and exclusions desinged to help particular groups or advance special purposes conflict with one another, are poorly designed, and represent no consistent policy. The taxy system causes investors to waste resources on low-yield investments that carry large tax benefits, while high-yield investments without such benefits go unfunded. The result is a shrunken tax base that requires needlessly high rates on wages, salaries, and other taxable income. Overall the system undermines the faith of citizens that tax burdens are shared fairly.
In looking at the formal tax structure of the U. S. , it becomes clear that we have a very progressive system. However, there is more to a tax system than its formal rate structure. Tax expenditures are tax measures designed to reduce the effective tax burden of particular groupos, classes or individual taxpayers, and are designed to make the tax system more horizontally equitable. Some only see this revenue code as “a perverse welfare system for the rich. ” The complexity of the U. S. Federal Revenue Code is unmatched, with incredibly specific detail in attempt to adjust tax burdens.
Even with this complexity, the U. S. still has the lowest revenue yield of any OECD country. This is due to two factors: first, there is no national sales tax or VAT. Second, with all the tax expenditures used, the income tax becomes highly inefficient. Thus, the three characteristics of the U. S. tax system are equity orientation, complexity and low revenue yield. Next, Steinmo looks at Sweden, a country noted for its efficient tax system. He characterizes it by its broad base, stability, and high revenue yield.
The Swedish have the heaviest and most regressive broadly based consumption tax in the world, while their VATs tax virtually all goods and services at a flat 23. 46 percent rate, exempts virtually nothing, not even food or clothing, has no reduced rates, and has no especially high rates for luxury goods. “They key here is that the Swedish tax system is designed to encourage teh use of capital because this will contribute to growth and jobs while taxing stagnant wealth, that is, wealth in the form of nonproductive holdings such as large estates, very heavily,” Steinmo explains.
He also goes on to give a summary of the system: “In sum, the Swedish tax system encourages the concentration of economic power while it discourages the conspicuous display of wealth. Sweden in effect, redistributes consumption, not production. The distribution of effective tax burdens for Sweden, then, is the consequence of a politco-economic logic designed to promote stability, economic effeciency, high investment, and growth while concomitantly financing the world’s most generous welfare state. “