2-3-Steinmo Political Institutions and Tax Policy in The US, Sweden, and Britain

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Political Institutions and Tax Policy in the United States, Sweden, and Britain Author(s): Sven Steinmo Source: World Politics, Vol. 41, No. 4 (Jul., 1989), pp. 500-535 Published by: Cambridge University Press Stable URL: http://www.jstor.org/stable/2010528 . Accessed: 11/09/2013 18:04
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POLITICAL INSTITUTIONS AND TAX POLICY IN THE UNITED STATES, SWEDEN, AND BRITAIN
By SVEN STEINMO*
faced by studentsof comparativepolitics:Why do different democraciespursue different public policies? I addressthisissue through a comof taxationsystemsin parativeexaminationof the politicsand structure threeprominentWestern democracies.Despite the paucityof literature taxes provide a that examines taxationfroma comparativeperspective, peculiarly appropriate arena in which to examine broad comparative questions.Taxation is at thecenterof ideologicaldebate betweenleftand arena in thepolrightin everymodernwelfarestate.Taxation is a critical iticsof who gets what in societyand who pays forit in all polities.And, to theverysize and functioning of governtaxesare fundamental finally, ment. to explain why public policies Those few analystswho have attempted varybetweenadvanced democracieshave positedthreedistinct explanations-"interests," "values," and "the state."The first explanationargues of power among politthatpolicyoutcomesvarybecause thedistribution in democraticpolities.Groups use theirpower to furical interests differs ther their short-term interests. of Thus, since the relative distribution in thesesocieties, power betweengroupsdiffers policyoutcomeswill also differ.'
* The authorwould like to expresshis thanksto the severalcolleagues,as well as the reof thispaper. The on earlierdrafts who have read and commented Politics, viewersat World Anthony King, Jonas commentsmade byJohnFreeman,PeterHall, Arnold Heidenheimer, useful. Kent Weaver,and JohnWittehave been especially Pontusson, of course,suggestedthisexplanationseveraldecades ago, but it is continually l Pluralists, that accepttheprinciple forexample,generally Corporatists, being reviewedin new versions. characterization butarguethatthepluralist groupswillfight self-interest, short-term fortheir of the bargainingprocessis inaccurate.See Frank Wilson, "InterestGroups and Politicsin Politics i6, No. i (i983). Western Europe: The Neo-CorporatistApproach," Comparative of politicsas the pursuitof ecouse thesame basic characterization Power Resourcetheorists public policies beand argue that various democraciespursue different nomic self-interest "power resources"with whichto fight groups(now parties)possessdifferent cause different See Francis Castles, "The Impact of Partieson Public self-interest. fortheirconstituency's Capitalist inDemocratic and Policies Politics in Castles,ed., TheImpactofParties: Expenditure," (LonClassStruggle States(BeverlyHills: Sage, i982). See also WalterKorpi, The Democratic
THIS
essayaddresses one of the broadest and mostcomplexissues
don: Routledge, Kegan Paul,
i980).
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Proponentsof the value, or cultural,explanationsuggestthatpolicies democracieswant different varybecause people in different things.The most famous of theseargumentsis, of course,Louis Hartz's explanation of American exceptionalism.Here, citizens have different expectations about the proper role of governmentin society,and this general value framespoliticaldebate withina polity.Ultimately, different value premises set nationson different policypaths.2 The thirdline ofargumentemphasizestheroleofstateinstitutions and actorsin explainingwhypoliciesvaryin moderndemocracies.3 The analysispresentedin thispaper fallsbroadlyinto thiscategoryin its attempt to explain variationsin tax policies between the United States,Sweden, and Britain. Institutionalist analysisis not new.4Indeed it pulls our attention back to analyticcategoriesthat have long been of centralinterest to political scientists.5But it also builds on a critiqueof the more recently dominant "society-centered" explanations. Institutionalists argue that both the fromat least two basic flaws.First, value and interest explanationssuffer neitherleaves adequate room forthe role of the state,eitheras an independentpolicyforceor as an organizationalchannel throughwhich poof how polliticalactionsmustpass. Second, both lack an understanding and interests are, on the one hand, shaped and, on the icy preferences into specific otherhand, translated policychoices. Certainlysome "state-centered" explanationscan also be criticizedfor being too narrow. In the early attemptsto draw attentionto the role of the stateand stateactors,the significance of social forcesand nonstateacof public policywas oftenleftundervalued.Few torsin the formulation today, however, would argue with the propositionthat a more subtle in orderbetter analysismustintegrate to understate/society perspectives act the way theyact. Such stand how and why democraticgovernments an approach is offeredhere. My analysispays attentionto the role state actorsand theirpreferences play in public policymaking,but at the same timeit notesthatstateactorsare rarely autonomous.Instead, particularly
2For perhapsthe best recentarticulation of the value (or in his words "idea") thesis,see Anthony King's three-part article, "Ideas, Institutions and Policiesof Governments: A ComPartsI, II, and III, British Journal parativeAnalysis," ofPoliticalScience3, Nos. 3 and 4 (I973). On theAutonomy 3See, forexample,Eric Nordlinger, oftheDemocratic State(Cambridge: Harvard University Press, i98i); Peter Katzenstein,BetweenPower and Plenty(Madison: University of WisconsinPress,I978); PeterEvans, DietrichRueschemeyer, and Theda SkoctheStateBack In (Cambridge: Cambridge University pol, Bringing Press, i985); Peter Hall, theEconomy:The Politicsof StateIntervention in Britainand France (Cambridge: Governing PolityPress,i986). 4 James March and JohanP. Olsen, "The New Institutionalism: OrganizationalFactorsin PoliticalLife,"American PoliticalScienceReview78 (Septemberi984), 734-49. E. E. Schattschneider, The Semi-Sovereign 5See especially People (New York: Holt, Reinhart,i960).
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they,like the societal actors with which theyinteract, operate within a particular institutional framework.This institutional frameworkprovides the contextin which groups and individualsinterpret theirself-interestand therebydefinetheirpolicypreferences. Ideas and/orinterests are importantforunderstanding variationin public policyamong modern democracies.But the centralargumentof thispaper is thatone must ground these variables in the contextin which theyare definedand interpreted.Neither interests nor values have substantive meaning if abstractedfromthe institutional contextin which humans definethem. thispaper will demonstrate thatthe different Specifically, tax systems found in Sweden, Britain,and the United States can best be explained through an examination of the institutional structures through which these tax systemshave been created. We will see, forexample, that the Swedish tax system is not particularly and thatSwedish capprogressive, ital is relatively lightly taxed,whereas the United Stateshas a somewhat thattaxescapitalincomemore heavilythanearned progressive tax system income.Neitherinterest-group nor value-basedexplanationscan account fortheseoutcomes.But throughan examinationof how theSwedish corporatistand American pluralistinstitutions shape the policy preferences of the actors involved in tax policy making we can make sense of these counterintuitive results. apparently This analysisexplicitly rejectsan economisticor substantive notion of self-interest. Instead, it takes the individual or group's definition of selfinterestas problematical.At the same time, this analysis proposes that neitherspecific nor generalpoliticalvalues appear out policypreferences of thinair. Values and preferences are derivedwithinparticular contexts. For thosewho begin withtheunderstanding of human rationality as fundamentallybounded, this argumentwill be uncontroversial. It marks a of thelinkage betweenindividbeginningtowarda better understanding ual preference formation and broaderissuesofpoliticalbehaviorand policyoutcomes. Much of the"new institutionalist" literature has eitheremphasized the autonomy of state actors without clearly specifying what accounts for theirvaryingdegrees of autonomy,and/orleftopen the meaning of institutions. Peter Hall, forexample,identifies institutions in the following way: The concept ofinstitutions ... refer[s] totheformal rules, compliance proand standard thatstructure cedures, the relationship operating practices between individuals in variousunitsof thepolity and economy. As such, havea moreformal they status thancultural butone thatdoes not norms, derive from necessarily legal,as opposedtoconventional, standing.6
6
Hall (fn-3), 23-
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The following analysis, in contrast,emphasizes more conventional variables.Understandingthatinstitutions are part of an interactive relationshipwith the public policies thatemanate fromthem,and appreciloci of decision-making forany particular atingthatthe specific authority policy arena can varyacross polities,thisanalysisintendsto refocusour attention on variablesas obviousas constitutional and electoralstructures. I argue thatthe decision-making models found in the threecountries I examine (pluralism,corporatism, and partygovernment) are rooted in and electoralstructures. different constitutional American pluralistpolicy making can only be understood if we firstappreciate the constituthe separationof powers,and theconsequentdiftionalfederalstructure, fusion of political authorityin the absence of programmaticpolitical parties. Similarly,Swedish corporatismoccurs within a constitutional in which nationalpoliticalauthority is unifiedin a parelectoralstructure to but the dominate that is muted due liamentary structure, power system to proportional whichdooms thedominantpoliticalparty representation, or coalitiongovernments. to virtually Britain'sparliaperpetualminority does not forcegovernments intocoalition,or indeed into mentary system a political electoralsystem, parliamentary compromise.Under theBritish less than 50 percentof nationalpopular votes partycan win substantially more than 50 percentof parliamentary but can still win substantially emanatesfromthisconstitutional seats.Partygovernment system. I do Having emphasized the importanceof constitutional structures, not intend here to present an ahistorical or unidimensional analysis. These foundationsare necessarybut in themselvestheyare insufficient. of the domestic economy. We must, in addition, consider the structure in the concentration Most specifically, we are interested of power within both labor and the business community. These variables are also somewhat historically determined(e.g., earlydevelopershave less centralized between regime economies)7but theremay also be an interdependence economic concentratypeand public policies thatpromoteand/orinhibit tion.I do not dwell on thisvariable,however,in large part because it has been the subject of much theoreticaland empirical investigation. The and regimetypeis largelyunconcorrelation betweeneconomicstructure troversial. My argumentdoes not attemptto draw a directunidimensionallink foundin a country and specific betweentheelectoralstructures tax policy outcomes.It does argue, however,thatthese structures set the stage for the developmentof particulardecision-making which must institutions, themselvesbe the subject of empirical investigation. These institutions
7See Alexander Gershenkron, Economic Backwardness in HistoricalPerspective (Cambridge:Harvard University Press,i962), forthebasic line of argument here.
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provide the contextin which interest groups,politicians, and bureaucrats definetheirpolicypreferences. As Peter Hall writes, "Organization does of particulargroups,it combinesand ulmore than transmit preferences Politicalinstitutions, timately altersthem."8 then,are thecriticalvariables forunderstanding how and why different democraticgovernments tend to choose different public policies.
TAXATION COMPARATIVE POLICY
As mentionedabove, the actual tax systems found in the threecountriesexamined here do not correspondneatlyto most people's expectations.Sweden, forexample,althoughfamousas the mostprogressive solittleon redistributive cial welfarestate,reliescomparatively wealth and propertytaxes which amount to less than 2 percentof total tax receipts income taxes (approximatelyI4 per(TTR), littleon national progressive taxes (2.4 percentof TTR). cent of TTR),and verylittleon corporateprofits Instead, Sweden reliesveryheavilyon regressive value-added taxes (VAT), flat rate local income taxes, and flat rate social securitytaxes (approxi28 percent, and 30 percentof TTRrespectively). On the mately20 percent, other hand, the United States, which is oftenregarded as a "laggard" on more redistributive welfarestate,reliesprincipally taxes,such as progressiveincome taxes (approximately 35 percentof TTR),corporateprofits taxes (io percentof TTR). Nevertaxes (io percentof TTR), and property theless,regressivesocial securityand consumptiontaxes contribute26 percentand I5 percentof U.S. receiptsrespectively. Moreover,stateand in Britain,genlocal sales taxes in the United States,like the nationalVAT of minierally exempt "basic necessities,"such as food, in the interests in contrast, is applied at mizing theirregressive impact.The Swedish VAT, a flatrate on all goods except those designed for investment or export. When all taxesare considered(includingstateand local taxes),theUnited more heavilyon "redistributive" Statesreliessubstantially individualand inheritance and wealth taxes than corporateincome taxes and property eitherBritainor Sweden (see Table i).9
THREE TAX SYSTEMS? Precisely because tax policies are so central to the operation of a modern mixed economy, they are profoundly complex. At firstthis complex8 Hall, "Patternsof Economic Policy: An OrganizationalApproach,"in David Held, ed., Statesand Societies (Oxford:MartinRobertson, i983), 370. 9 All data represent See OrganizationforEconomic Cooperationand Develi980 figures. in Tax Revenues opment(OECD) Long TermTrends of OECD MemberCountries: i955-I980 (Paris: OECD, i98i). Sweden has no generalproperty tax. The nationalwealthtax has been The U.S. and U.K. had no generalwealthtaxesin i980. included in the above figures.
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TABLE I REDISTRIBUTIVE TAXES (INCOME, CORPORATE PROFIT, PROPERTY, INHERITANCE, AND WEALTH) AS A PERCENTAGE OF TOTAL TAX REVENUE, i980
Sweden Britain U.S.A.

Source: OECD (fn.9).
44.3% 49.1 57.1
ityappears to be a dense thicketinto which no researcher could hope to But afterwe examine tax structures penetrate. forsome time,we come to appreciate that not all thicketsare alike. Indeed clear patternsemerge thatallow us to distinguish one tax system fromanother.Tax structures are not random collectionsof various revenuesourcesin which each tax fromthe others.Instead each nation's tax system differs fundamentally can be distinguished by itsbroad patterns. Focusing on thesebroaderpatternsenables us to examine and compare the tax systems. The U.S. tax systemis oftencriticizedforbeing "a perversewelfare to the rich."I' And it thathands out ... billion[s]a year,primarily system U.S. tax ratesare regressive. is commonlyassumed thateffective But as accurate. In our Figure I indicates,neither assumption is particularly distributionof common understandingof "progressive,"the effective in the United Statesas in either taxes appears to be at least as progressive Sweden or Britain.The U.S. tax system does indeed "hand out billions," and manyof thesebillionsgo to upper-income groups.But,as JohnWitte the poor and middle classesare also massiverecipients has demonstrated, of tax welfare." Indeed, one of themajor distinguishing characteristics of the American tax systemis the huge numberand amount of tax expendituresthatcomplicatethe tax code.-2 No othertax systemis as particularistic,nor as complex, as the American. In addition to its complexity and particularism, the American tax systemis distinguishedby its low revenueyield,its comparatively sourcesof heavy relianceon progressive tax burdenborne by the corporatesector.'3 revenue,and the significant
2I,
loMichael Harrington, "Do Our Tax Laws Need a Shake-up?" Saturday Review,October I972. Close to two-thirds of taxpayers in the U.S. feelthatthe current tax system is "unfair";H and R Block, The American Public and theFederalIncomeTax System (Kansas City: H and R Block, i986), 9. Witte,"The Distribution of Federal Tax Expenditures," PolicyStudies JournalI2 (Septemberi983). The term"tax expenditures" refers to exemptions, deductions, tax limitation, reduced rates,credits, or otherspecial measuresin the tax code thateffectively reducethe tax burden forsome individuals, groups,or companies.Tax expenditures are oftencalled "loopholes" in common parlance.The term"expenditure"has been used to remindus that each of these measuresproducesa loss of revenueto the treasury and as such constitutes expenditures by thegovernment. 13 King and Fullertondesigned a general equilibriummodel with which to estimatethe
12
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FIGURE I
TOTALEFFECTIVE TAX BURDEN AS PERCENTAGE OF INCOME
Sources: Joseph Pechman, "Taxation," in R. Caves and L. Krause, eds., Britain's Economic Performance (Washington, DC: The Brookings Institution, i98o), Table I2. For the U.S., data courtesy of Joseph Pechman, The Brookings Institution; for Sweden, Riksrevisionverket, StatistikaMeddelanden, SOU: i983:7. i, Tables 4.8, 5 -I, I 0.7, and OECD, The Impact of ConsumpIncome Levels (Paris: OECD, i98i). (It is assumed here that the distrition Taxes at Difjferent bution of consumption taxes is the same in Sweden as in Norway.) For a more detailed istributions of taxes in these countries and the assumptions underdiscssin o th efectve lying the incidence distributions, see Sven Steinmo, "Taxes, Institutions and the Mobilization of Bias" (Ph.D. diss., University of California, Berkeley, i987).
the U.S. had the marginaltax rate on capital income.Accordingto theirestimates, effective highesttax rate of the threecountriesI examine here. Though ratesvaried accordingto asto be: U.S., 37.2%; Sweused, theoverallmarginaltax ratesin i980 wereestimated sumptions den, 35.6%; and Britain, 3.7%. Don Fullerton and Mervyn A. King, The Taxation of Income DC: National Bureau forEconomic Research,i983). FromCapital (Washington, have takenplace changesto thesetax systems were made, significant Since theseestimates thearguments support largely thoughtheFullertonand King findings (see below). Moreover, For a good analysis. made here,we need to be somewhatcarefulwiththistypeofeconometric see JohnWalley, "Lesoverviewof general equilibriumanalysisand some of its limitations Pechsons fromGeneral EquilibriumModels," in HenryAaron,HarveyGalper,and Joseph
man, eds., Uneasy Compromise (Washington, DC: The Brookings Institution, i988), I5-58.
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The Swedish tax system, in contrast, is distinguished by itsheavy reliance on relatively formsof taxationand relatively regressive light taxationof capital and corporateincome. Instead of using taxationas a direct of redistributive instrument policy,Swedish authorities have constructed a tax system thatgenerateshuge revenueswhileat thesame timeattemptof domesticproductiveinvestment. ing to encouragetheconcentration In practicaltermsthishas meant thatthe Swedish tax systemtaxes average workersexceedinglyheavily,yet taxes capital and corporateincome remarkablylightly.Of all OECDcountries,Sweden's corporateincome tax contributes the lowest tax yield,both as a percentageof GDP and as a percentageof totaltaxation(see Figure 2). Moreover,as severalrecentstudies in Sweden have shown,thereare currently so manygeneroustax expendituresforcapital income in Sweden today that,taken together, thereis a net revenueloss fromcapital income taxation.'4 25 .-..
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FIGURE TAXES ON CORPORATE INCOME 2 OF TOTAL TAXATION AS PERCENTAGE
Sources: OECD (fn.9), and OECD, RevenueStatistics of OECD MemberCountries: i9651986 (Paris: OECD, i987). 14See GustavLindencrona, Nils Mattsson, IngemarStahl,and JanBroms, Enhetlig Inkomst incometax](Stockholm:SACO/SR, i986); or SOU:i986:40, Utgiftsskatt [ExSkatt[Integrated penditure tax] (Stockholm:SOU, i986).
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to characterizethan eitherthe is more difficult The Britishtax system Swedish or the American. In many respects,it appears to stand in the middle betweenthem.In revenuetermsBritishtaxesare neitheras onerous as the Swedish, nor as lightas the American (see Table 2). The same can be said with respectto Britain'srelianceon progressiveratherthan taxes (see Table I). But thisdoes notimplythatBritishtaxation regressive is distinguished by instais unremarkable.Instead,the Britishtax system Since World War II at bilityand lack of fiscalcoherencein its structure. least, Britishtaxes have seesawed: particulartaxes have gone up, down, tax rates); new and up again (both in termsof marginal and effective and and repealed; old taxes have taxes have been introduced,reformed, been manipulated in major ways. Seldom, however, do British policy attentionto how changes in one tax affect other makers pay significant makes it taxes. Indeed, the ad hoc characterof the Britishtax structure at all. difficult to describeit as a system
TAXING Vs. SPENDING?
address an obvious Beforewe continuethisanalysiswe mustexplicitly question. Does it make sense to look at taxationpolicy separatelyfrom spending policy? Though it is clear that most studentsof comparative policyrarelyaddress the flipside of thisquestion-does it make sense to disincorporating talk about public expenditurepolicywithoutexplicitly and incidenceof tax policies?-this, in itself, cussion of the distribution a sufficient justification fortreating does not constitute taxingand spending in isolationfromeach otherhere. It makes sense to studytaxingand spendingas discreterealmsof activThe itybecause in most cases theyare discreterealmsofpoliticalactivity. is dense with exhortations fiscalpolicyliterature thatpublic policygoals could more efficiently be pursued via currently pursued in the tax system directspending. But in most cases the politicalprocess simplydoes not and distribution of taxesin a society work thisway. The incidence,effect, or are affected effects of by,discussionsof the distributional rarelyaffect, public spendingprograms.
TABLE 2 TOTAL TAX BURDEN AS A PERCENTAGE OF
GDP,
i985
Sweden Britain U.S.A.

OECD,
50.5% 38.1 28.7
EconomicConditions UnderChanging IncomeTax Systems: (Paris: Source: OECD, Personal
1986).
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I sayrarely and in mostcasesdeliberately. As we shallsee,in one case examined here(Sweden), taxand spending choices are explicitly considIt is integral eredtogether. to thevery herethatthe argument presented extantin corporatist specific decision-making institutions Sweden encouragethe jointconsideration of tax and spending decisions. Because these arenas are considered policy in Sweden, thepolicy together preferencesofparticipants almost differ from thepreferences inevitably ofpolin theUnitedStates, icyactivists thecountry in whichtaxand spending decisions arevirtually alwaystotally divorced.
TAXATION IN THE UNITED STATES
It willperhaps be surprising tomany todiscover that theUnitedStates has had a relatively taxstructure for progressive mostofthepastseventy Few realizethat theU.S. federal years. income taxhas had higher maxiand lowerminimum mumtaxrates rates formostofthetwentieth century for SocialDemocratic than, example, Sweden.Moreover, due tothe absence ofa national taxand thelow rates ofmost state and consumption localsalestaxes, theU.S. taxsystem bearsvery on lightly thosewiththe smallest topaytaxes. On theother hand, inheritance and property ability taxeshavebeenexceptionally formostof this steepin theUnitedStates the nationhas consistently forced century.'5 Moreover, to corporations bearone of theheaviest shares of thetotaltaxof anyindustrial democthe UnitedStates, at least,taxescapitalgains racy.i6Finally, currently moreheavily thananyofitsdemocratic counterparts.I7 But whatmaybe moreimportant thanformal taxrates, or evenpertaxrevenues, oftotal for centage theU.S. taxsystem understanding (and itsproblems) are thethousands ofexemptions, deductions, credits, minimumtaxes, and specialrulesthat litter thetaxcode.Indeed, these taxexare so significant to thesystem that penditures they profoundly shapeits
15The U.S. topped the OECD listin revenuecollections (as a percentage of GNP in i980) in property taxes(exceptforBritain);inheritance and gifttaxes(exceptforBelgium); and finally,in corporate taxes(exceptforNorway,Canada, Australia, profits and Japan). i6 There is muchcontroversy in thefiscal economicsliterature overwheretheactual burden of corporate taxationlies. It is a matterof considerableimportance fordesigningreforms of the tax code whetherone believesthatconsumers, or capitalists bear the burdenof workers, thistax.But fora politicalscientist, who is principally in understanding interested whycertain taxeshave been chosen,the real incidenceis of less significance than the perceivedincidence on thepartoflegislators and voters. On thisscoretherecan be little doubtthatbothpoliticians and mass votersgenerally believethatcorporatetaxesare in the end paid by "the rich" who largelyown thecorporations. 17See Arthur Andersonand Co., "Comparisonof IndividualTaxation of Long-Term and Short-TermCapital Gains on Portfolio Stock Investments in SeventeenCountries"(Paper preparedfortheSecurities Industry Association, Washington, DC, April i987).
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verystructure. First,the United Statesloses more revenuevia tax expenI examine. In i986 the revedituresthan eitherof the othertwo systems nue lost via tax expenditures equaled 55.3 percentof totalfederaloutlays (excluding tax expenditures)and I00.3 percentof income tax receipts. Second, due to the huge number and highlyspecificnature of U.S. tax no othertax systemcomes close to being as particularistic expenditures, and as complex. There are literally thousandsof tax expenditures(perhaps more appropriatelycalled loopholes in this context)that are deor individual. The signed to give tax reliefto a specificgroup, interest, resultingcomplexityhelps explain why the U.S. income tax has been called the "Lawyers' and Accountants'ReliefAct" (Cedric Sandford); "a house of horrors"(Wilbur Mills); and "a disgrace" (Jimmy Carter). Tax expendituresexist in all Western democracies,but not all countrieshave loopholes like the United States. Indeed, tax expendituresare in each countrystudied here. In both Britainand different substantially Sweden it is quite rareforthetax code to specify particular groups,interests, companies, or individuals; this is quite a common U.S. practice. are foundin Britainand Sweden, they Moreover,while tax expenditures tend to be focusedon thoseat the upper end of the income scale, whereas also benefit U.S. lower- and middle-incometaxpayers fromthe mightily to provideexceptions revenuecommittees' to thetax code. Inwillingness deed, in both Sweden and Britaintoday the vast majorityof average income tax payershave so few tax loopholes of which to avail themselves at the end of the year.'8 thattheydo not even fillout tax returns The specific distributionof effectivetax burdens observed in the United States,then,resultsin large part fromthe porosity of the major revenue source-the income tax-and the unwillingnessof Congress to would generatemore revenue. impose othertaxesthat,thoughregressive, This in no way implies that the U.S. systemof taxing and spendingwhen taken as a whole-is particularly progressive. But, in thiscountry at least,taxingand spendingare definitely not consideredtogether.
PLURALIST TAX POLICY MAKING
When the foundingfathersconstructedthe basic form for the U.S. in order constitution, theyclearlyintendedto fragment politicalauthority
i8 Britain in whichtheemployer has long had a Pay as You Earn (PAYE) system, computes the taxesdue forthe employeewitheach pay check.Only in veryunusual circumstances will at year'send. Sweden has recently converted to a "no an individualeven fillout a tax return in which the average taxpayer thathe or return"system, simplysignsa statement testifying she has earned no incomeotherthanthatreported The individual's byhis or heremployer(s). at theend of the tax year. tax paymentis thencomputedby the tax authorities
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in American politicalhistory, Federalistio, JamesMadison wrote:
to makeit difficult for one faction to impose itswillon others. Taxation was a particular forthem. In perhaps worry themostcritical document
The apportionment of taxeson thevarious of property descriptions is an actwhich seems torequire themost exactimpartiality; there yet is,perhaps, no legislative act,in which greater opportunity and temptation aregivento a predominant on therulesofjustice. to trample party Every shilling, with whichtheyoverburden the inferior is a shilling number, saved in their
pocket.'9
It wouldbe toosimplistic toarguethat U.S. taxpolicy today is a direct reflection of theinstitutional structures created overtwohundred years ago. Suchan ahistorical woulddo great analysis tothedynamics injustice ofthepolitical and to thepotential forpolitical process A more change. would require a morefully complete explanation elaborated of analysis thedevelopment of American institutions overtime20 political and the oftheseinstitutions interaction and thelarge, dynamic and fragmented, expanding economy.2I Unfortunately, space does not allow us to delve intothisdiscussion here.Few readers willobject, however, to thecharacterization of theU.S. political in as one which process poweris fragmented and authority There can be little dispersed. thatthe argument a "distinctive UnitedStatespossesses of weak national admincomplex dividedand fragmentary istration, and non-programpublicauthority matic political parties. It is these institutional facts that besthelpus understand theparticular taxpolicy outcomes above.First described letus takethecaseoftheheavy use ofparticularistic taxexpenditures in theUnitedStates. The U.S. tax is notlittered withthesespecialamendments system becausetax policy makers feelthatthisis a good wayto write taxlaw. Instead, theseoutcomesarea direct ofthefragmentation ofU.S. political consequence auWhereas taxpolicy-making rest with thority. central powers government in parliamentary authorities in theUnitedStatesit is Congress regimes,
19 See also Federalist Nos. 3 I, 32, and 33. See forexample StevenSkowronek, BuildingtheNew American State(Cambridge:CambridgeUniversity Press,i982). See Walter Korpi and Michael Shalev, "Strikes,IndustrialRelationsand Class Conflict in CapitalistSocieties,"British Journal ofSociology 30 (JuneI979), i64-87. Theodore J.Lowi also presents a particularly relevantdiscussionof thesevariablesin "Why Is There No Socialismin theUnited States?A Federal Analysis,"in RobertGolembrewskiand Aaron Wildavsky, eds., The CostsofFederalism (New Brunswick, NJ: TransactionBooks, i984), 37-54, where he offers a compellingargumentlinkingthe absence of programmatic partiesin the U.S. to federalism. 22Margaret Weir and Theda Skocpol, "State Structure and the Possibilities forKeynesian Responseto the Great Depression in Sweden, Britainand the United States,"in Evans et al. (fn.3), I36.
20
21
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is itself a highly that writes taxlaw. Congress, moreover, fragmented deAbsent cision-making institution. programmatic political parties that can influence electoral members ofCondecisively representatives' fortunes, in a way thatmakes them gressare tied to theirlocal constituencies uniquely vulnerable tolocally defined demands and special interest group pressures. Lackingstrong institutional support and linkages toa national ofCongress party, individual members become independent political entrepreneurs. This implies thatthey mustseeksupport forelection from groupsthatare often particularly interested in specific legislative outcomes.Tax amendments are often highon theagendaof theseinterest groups. of the revenuecommittees are besiegedby reEach yearmembers interest or from other members of Conquestsfrom particular groups, gresson behalfof specific interests, forspecialamendments to the tax are dependent of thesesame code. Becausemembers upon thesupport and logistic in theirreelection forfinancial bids,they interests support to accedeto suchpressures.23 For example, havea strong incentive Witte ormodified of402 taxexpenditures introduced between reports that I970 in theadministration morethan26 percent and i98i, barely originated The rest or withtheInternal Revenue Service. wereputin thetaxcode of Congress, on behalf of someparticularly bymembers usually imporofthese on tant constituency. Indeed,fully 37 percent changes originated oftheHouse and Senate."Just as taxpolitics in general thefloor centers on Congress," Witte tellsus,"so doesthetaxexpenditure 'problem.' over tax policymakingaffects control not only the Congressional of tax expenditures foundin theU.S. tax code,but also their quantity character. This system incentives forpolicy makers and provides strong taxlegislation. to write narrow Becausepolitical auinterest groups very it becomesexceptionally is fragmented, difficult to changethe thority butintroducing or amending basicrulesofthetaxsystem, specific meaon behalf of specific suresto adjustthesystem can be done relagroups wishto distribute taxbenefits forwhichthey can tively easy.Politicians takecredit, cannot yetareawarethat they giveawaythebank.Similarly, of thissystem theincentive structure forces interest for groupsto fight taxmeasures evenwhentheir particularistic general ideological positions wouldtendto favor a moreneutral taxsystem. is more as in Britain Wherepolitical and Sweauthority centralized,
"24
23The literature thisprocessis voluminous.See, e.g., JohnManley,The Poldocumenting iticsofFinance (Boston: Little,Brown, 1970) and JohnWitte,The Politics and Development of theFederalIncomeTax (Madison: University of WisconsinPress,i985). 24Witte(fn.23), 322-24.
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den,highly interest specialized havelessleverage groups than generally they do in theUnitedStates. Thus to achieve their taxpolicy endsthey areforced toorganize into broader coalitions. The taxpolicy changes they will demand,then,will necessarily be broader and less particularistic. This is notbecausefootball chicken teams, tuxedorental farmers, companies,or individual taxpayers wouldnotlike to have specialtax measuresbenefiting their interests specific (as in theUnitedStates), butbecause interests thisnarrowly drawnare unlikely to haveanysignificant in a morecentralized impact on policy makers political setting. The fragmentation oftaxdecision-making can thushelpto authority another ofthedistinguishing explain features oftheU.S. taxsystem: the taxation ofthecorporate comparatively sector. heavy We tendtofind this outcome because we knowthat surprising precisely thepluralist decisionmakingprocess yieldspowerto the well organized and well financed. not benefited Why have corporations fromthisinstitutional mightily structure? The answer, ofcourse, is that somecompanies have.The critical difference is thatthough theU.S. tax system contains hunliterally dredsof taxinstruments to benefit designed inquitespecific corporate terests and evenspecific broadtaxwrite-offs companies, very to designed promote corporate and investment savings havegenerally beenmuchless common thaninEurope.Taken together, these taxloopholes specific cost theTreasury lessrevenue thanbroadly basedtaxexpenditures designed to benefit or investment moregenerally. corporations In Sweden and in contrast, Britain, taxexpenditures broad-based that benefit thecorporatesector are generally quitecommon. America's relatively limited experiencewith accelerated schedules and investment depreciation tax ioo percent credits to Sweden'shistoric pales in comparison first-year write-offs and theInvestment or Britain's Reserve Investment System,25 and InitialAllowancesystems.26 in the United Thus, States there can be remarkable in effective disparities tax ratesborneby particular companiesevenwhilethecorporate sector as a wholebearsa relatively heavy
burden.27
Another majorfeature of theU.S. tax system is theabsenceof a nationalconsumption tax.28 The lack of sucha taxcontributes mightily to
25See Sven Steinmo,"So What's Wrong With Tax Expenditures? A Re-evaluationBased on Swedish Experience," Journal ofPublicBudgeting and Finance6 (Summer i986). See MervynA. King,Public Policyand theCorporation (London: Chapman Hall, I977). 27 For a discussion ofefficiency lossesin theU.S. tax structure and a specific examination of effective ratesby asset type,see JaneGravelle, Tax Reform Act of 1986: Effective Corporate Rates(Washington, DC: Congressional ResearchService,i987). Gravellefinds thatbeforethe i986 act effective tax ratesbyassettyperangedfromI% to 45%. After thereform theyranged fromI2% to 40%. State,local, and federalgovernments combined in the U.S. collectless revenuein con26 28
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of effective U.S. tax burdens and to a boththe apparent progressivity taxburden. Butwhataccounts for theabsence comparatively low overall in thenation's political peculiar ofthistax? Again,theansweris rooted have attempted to persuade Congress of institutions. Severalpresidents it is defeated-even But each timea taxis proposed MeansCommittee. inboth hashada strong This houses. majority whenthepresident's party couldnothappenin a parliamentary system. tax routinely deconsumption And whyare calls fora revenue-rich The answer cannot be that intheUnitedStates? Americans feated simply traditionally traditionally opposethistax,becauseSwedes and Britons tax legislation authorities have enactedconsumption over government becausethegovernment thistaxwas necfelt.that clear publicopposition commitments. This was clearly thelogicthat forfuture revenue essary and high-level revenue officials toproseveral U.S. presidents motivated pose similartaxes.In the UnitedStates, interests however, opposition to use thecumbersome institutional have unique opportunities process his to veto revenue even and createdby Madison colleagues proposals comefrom and their Though popular presidents parties. whenthey very orother blamedon thewealthy, thecorporations, areusually these vetoes vetoes theclosing oftheir it interests loopholes), prevent special (i.e.,their and Democratic have Party politicians is also truethatliberalinterests This powerhas repeatedly beenused to prevent vetopowers. theintroofthetaxbase. ofa national salestaxand thebroadening duction inthelongrunrevenues Whileonecouldarguethat from a conraised taxbase wouldbe good fortheconstituents of taxor broader sumption thefragmentation ofauthority in theUnitedStates theDemocratic Left, and interest to look at theshort rather thanthe leads politicians groups taxpolicy activists wereinterviewed on their opinions liberal nearly thirty Sweden'slead and introas to whether theUnitedStatesshouldfollow duce a value added tax. The answerwas nearly alwaysthe same. To quote one aide to a prominent liberalsenator: "It doesn'tmatter what world.This is America, political theydo in Sweden.That's a different
sumptiontaxes than in any OECD nation (5.2% of GNP in i985). The OECD average is only2% ofGNP in theU.S., whereastheEuropean EcoI I.2%. General sales taxescontribute nomic Communityaverage is morethan6%. 29 Witte(fn.23). 3 See, e.g., Axel Hadenius, A Crisis State? Opinions about Taxes and Public of the Welfare Expenditure in Sweden(Stockholm:Almqvistand Wicksell,i986).
as has at least one chairman of the Ways and the need for such a tax,29
In both Britainand Sweden central oppose thistypeof taxationas well.30
long run. An example will help illustratethis point. In
i985
and
i986,
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and no one can guaranteeme thatthemoneytaxed out of thegrocery bills of American workers will ever be used to benefitthose same workers. How am I to know whetherthattax moneywill be used forsocial spending or formore waste at the Pentagon?" A congressionalaide reported: "We don't have a deficitproblem because our tax systemis too easy on workers.Our problemis thatwe spend too much on themilitary and that the richdon't pay theirfairshare."3' No matterhow persuasive the argumentsof academics, economists, Treasury officials, and even presidentsthat the revenue generated via broader-basedtaxes could or would be used forsuch redistributive programsas welfareor health,congressmen respond"not on myconstituents you won't." This responseis conditionedby the basic factthattheycan be held personally responsibleforvotingfortax increaseswhile theymay findit difficult to take creditforpopular spendingprograms.32 Moreover, thefragmentation of politicalresponsibility in Congressallows politicians to support popular spending and oppose unpopular tax simultaneously increaseseven while in office. In sum, Madison's fragmentedpolitical institutions provide a profoundlyimportantvariable for explaining the complexity, low revenue yield,and ultimately the distribution of effective tax in the United States. The diffusionof political authority and responsibility, and consequent openness to particularistic demands, has encouraged policy activiststo pursuetheirobjectivesvia narrowinterest group organizationsand to definetheirobjectivesas narrowlyas possible.Lacking centralauthority to which to defer,politiciansare uniquelyvulnerableto theseparticularistic demands. Since no one is in control,accountability is missing,and it becomes nearlyimpossibleforpoliticians, interest groups,and bureaucrats to pursue long-rangeobjectives.I have foundno evidence to suggestthat politiciansand/orinterest a complex,loophole-ridgroup activists prefer den tax system. But in thecontext of theAmericanpoliticalstructure they continueto circumscribe theirpolicy objectivesin ways that have some hope of legislativesuccess. Barber Conable, when a congressman,explained how the American tax code had developed: out withtheidea to make a complex Nobodystarted tax system. In the was simpleand comprehensive. early1920S, the system Maybea lot of werenottaxed, butatleasteverybody things wastaxedaboutthesameway. Then we found thatwe had a complicated and thatthetaxcode economy,
3'
32See AnthonyDowns, "Why the GovernmentBudget Is Too Small in a Democracy," World PoliticsI2 (July i960), 54I-63.
Interviews withauthor,May i987.
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was unfairto some people, so we made exceptions,and then we made exceptionsand exceptions.33
The i986 tax reform, despiteits image as a major simplification of the tax code, well illustrates thearguments made above. Indeed, theextentto which the new tax systemis distinguished by the same characteristics as the old, despite the radical and comprehensive character of the reform, is nothingshortof remarkable. We have no space here foran elaboratediscussionof the i986 reform, but it yields several useful observations.First, the major policy consemoreprogressive than the quences of the act were to make the tax system as many would have one it replaced, though clearlynot as progressive liked (see Table 3). fortheheavytax Second, we saw thatthe United Stateswas distinctive increasedthisburden burden borne by the corporatesector.The reform It is significant thatthe singlelargestrevenueenhanceby $I20 billion.34 ment on the corporate side was the eliminationof the investmenttax available to a wide variety of corporate credit-a generaltax expenditure is even more complex thanthe one it interests. Third, the new tax system replaced.Fourth,thougha large numberof tax loopholes were removed, and complex the U.S. tax systemremained radicallymore particularistic than the othersI examine.35 Lastly,even though the U.S. national governmentfaced a $2 trilliondebt and an annual public deficitof nearly $200 billion,the new tax law raised no new revenue.
TAXATION IN SWEDEN
theSwedish tax system to expectation, is not distinguished Contrary by steepprogressivity up theentireincome scale,nor byheavy-handedtreatment of capitalistor capital income. Instead,the hallmarksof the Swed33Quoted in Charles Daley, Tax Cutsand Tax Reform: The Quest forEquity (Washington, DC: AmericanEnterprise Institute, I978), 20. 34 Corporatetaxesare expected to risefrom8.2% of totalfederalrevenuein i986 to i I% by i988. Thus the corporatetax share of totaltaxationwill be close to the pre-Reaganlevels (in 1980 the share was 12.5%). See CongressionalBudget Office, Economicand BudgetOutlook: Fiscal Years 1989-93 (Washington,DC: CBO, February i988). Accordingto Fullertonand Karayannis'model,themarginaleffective tax rateon capitalincomeincreasedfrom23.5% in i98i (which was down fromthe rate beforethe Economic RecoveryTax Act of 37.3%) to 42.I% in i986. See Don Fullertonand Marios Karayannis,"The Taxation of Income from Capital in theUnited States,i980-i986" (Paper presented to the International on Conference the Cost of Capital, Cambridge,MA, I9-2i November i987), Tables IV.I, IV.2, and IV.6. 35 An incredible arrayof particular interests (fromsportsteamsto certainIndian tribesto the Gallo wine-makingfamily)receivedspecial tax favorsin i985 and i986. For a general analysisof the effects of the i986 tax reform on tax expenditures see CongressionalBudget Office, of Tax Reform on Tax Expenditures DC: CBO, March i988). (Washington, Effects
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TABLE 3 ESTIMATED CHANGE IN U.S. TAX BURDENS IN i988 BY INCOME BRACKETS
Class Income Under$10,000 $10,000-20,000 $20,000-30,000 $30,000-40,000 $40,000-50,000 $50,000-70,000 $70,000-100,000 $100,000-200,000 and above $200,000
in Change and Personal Income Income Corporate Tax Burdens -32.0% - 8.1 -4.1 -4.1 - 6.1 + 0.7 + 5.3 + 6.0 + 9.2
Change in TotalFederal Tax Burdens - 12.5% -3.1 - 1.8 - 2.0 -3.1 + 0.4 + 3.9 + 5.0 + 8.2
Source: Henry Aaron, "The ImpossibleDream Comes True: The New Tax ReformAct," Review5 (Winter1987),Table 4. Brookings
are itsbroad base, its high revenueyield,itscomparatively ish tax system of corporateand capital income,and its heavy taxagenerous treatment tion of ordinaryworkers. The Swedish tax systemreaches verydeeply into everyone'spockets, but triesto avoid taxingthe investment potentialout of the society'scaphave built a broad-based italists.As a consequence, Swedish authorities while eschewingthe use economic redistribution thatfinances tax system of symbolicpunitivetax rates."Ironically,"Rose and Petersnote, "taxes are least progressivein Sweden [of all OECDdemocraciesexamined] beA fewexamples workers."36 cause ofthehighlevel of tax paid byordinary of havingthe heaviSweden bears thedubious distinction are illustrative. est and most regressive consumptiontax in the world. The Swedish VAT taxes virtuallyall goods and servicesat a flatrate of 23.46 percent,exhas no reduced rates, nothing(not even foodor clothing), emptsvirtually The Swedish income and has no speciallyhigh rates forluxurygoods.37 tax,similarly, has a much broader base and fewerexemptionsor deductionsfortheaverage workerthando eithertheBritishor U.S. income tax
36
I978), 99. 37See Enrique Rodriguezand Sven Steinmo,"The Developmentof the Americanand the Swedish Tax Systems:A Comparison,"Intertax, i986/3. Of all OECD countries, only Den-
RichardRose and Guy Peters,Can Governments Go Bankrupt? (New York: Basic Books,
mark,Norway,and Sweden have no reducedratesforbasic necessities. Denmark, Germany, Ireland,Luxembourg,Norway, Sweden, and (currently) Britainhave no special high VAT rateson luxury goods.
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the social security systems.38 tax (which is paid forworkers Additionally, almost three times heavier forSwedish workersthan it by employers)is is foreitherBritishor U.S. workers.39 The paucityof tax expenditures available to workerswithaverage and lower wages has broadened the base of the Swedish tax system and thus increased tax revenues.However, these same measures has substantially have pulled the tax system away fromthe traditionally important goal of abilityto pay,or what Americanswould simplycall fairness.40 At the otherend of the scale,however,the Swedish tax system appears less onerous. A I974 studyof theincome tax system in Sweden foundthat "the conceptof global progressivity has to be qualifiedbythe factthatthe distribution takes place mainlybetweentaxpayers in the middle and low income brackets.That is, tax redistribution has affected basicallyincome concentrationbeneath a certain level. The redistribution process has 'spared' the highestincomes."4I The taxationof the verywealthyin Sweden differs fromthe taxation of average income earnersbecause capital income receivesmuch more fathan does earned income.This does not necessarily vorable tax treatment implythat the rich as a group do not pay taxes in Sweden. On the conas a group the rich bear a heavier tax burden than do eithertheir trary, Britishor U.S. counterparts. Swedish taxesare oftenblamed when entertainers,movie directors,and tennis playersemigrate.Owners of large in contrast, are much less inclinedto leave Sweinterests, manufacturing den because of heavytaxes. The keyhere is thattheSwedish tax system has been used to encourage the use of capital (because thiscontributes to growthand jobs) while taxThe wealthyare able to shield their ing stagnantwealth veryheavily.42 wealth and income fromtax authoritiesin Sweden by refraining from consuming that wealth and instead placing it in the economy's active and the United Statesto a workingcapital stock.In Britainin particular,
38 Aguilar and Gustafsson also findthat,as measuredby the Kakwanis index,Sweden has the least progressive income tax system of the eighttheystudy.On the otherhand, Sweden has the most progressiveincome distribution. See Renato Aguilar and Bjorn Gustafsson, "The Role of Public Sector Transfersand Income Taxes: An International Comparison" (Working Paper, LuxembourgIncome Study,April i987). 39The Swedish social security tax is less regressive than the Britishand U.S. equivalents, however.While both the Britishand U.S. versionshave a ceiling,the Swedes tax all earned incomeat the same rate,but capital incomeis exempt. 40 Gustav Lindencrona, och individuel "Skatteformagaprincip beskattning" [The principle of abilityto pay and individualtaxation], in Lindencrona,ed., Festskrift tilJanHeller [Festschrift forJanHeller] (Stockholm:Norstedt,i984). 4- Eduardo fayosSola, "The Individual Income Tax and the Distribution of Its Burden: The Swedish Case" (Thesis, University of StockholmInternational Graduate School, I975),
to wealth thatis consumedor saved in nonproductive 42 Stagnantwealth refers holdings etc. See Steinmo(fn.25). such as jewelry, largeestates,
I52.
519
thetaxsystem somewhat lesser extent, encourages conspicuous consumptionon thepartoftherich.43 are welltreated Swedishcorporations byanystandard, though Swedon corporate taxrates do nottraditionally differ ishformal profits much in theUnitedStates Effective from those found and Britain. taxrates for on theother large, successful Swedish corporations, hand, arevery low by totheSwedish international ofIndusstandards. According Department borne theaverage taxburden industrial firms in i98i was try, bySwedish of profits. has recently between recalcu3 and I3 percent JanSddersten taxrate on capital latedtheeffective marginal using Kingand Fullerton's thatconsidering modeland concluded taxesalone,theoverall corporate "One of thesecrets on therateof inflation.44 of theSwedish depending havelookedtomajorcorporations is that tocreate economy governments chairman of Volvo and one of Sweden's PehrGyllenhammer, wealth," in a recent interview. "There is mostpowerful industrialists, reported in Sweden,"he added,"thanin forlargecorporations freedom greater
the U.S."45 marginaltax ratein i985 was between0.2 percentand minus 2.6 percent
the numerousmechanisms available to corporate Taken together, ofexpanding in Swedencreate a bias in favor firms investors profitable assets. It has longbeentheaim and/or withlargeinventories depreciable to promote successful of thegovernment and to encourage corporations them tostabilize their investment Normann and Sddersten have patterns. that for for industrial shown, examined beexample, fifty-one companies
tax rates and inventory size were negatween i963 and i968 effective
rates correlated. werepositively correlated to tively Moreover, expansion bothprofitability and inventory to theefcorrelated size,and inversely tax rate.Finally, and perhaps mostsurprisingly, fective profit ratesand effective taxrates wereinversely related.46
A. King, The British 43See John Tax System, Kay and Mervyn 3d ed. (Oxford:OxfordUniversity Press,i983). 44 Sdersten, "The Taxation of Income fromCapital in Sweden" (Paper preparedforthe International Conferenceon the Cost of Capital, Cambridge,MA, I9-2i November i987). One mustremember, however, thatthegeneralequilibriummodel calculatesratesat equilibriumand therefore does not necessarily represent an accuratepictureof ratespaid currently byreal corporations. See also Michael McKee, and Jacob Visser,"MarginalTax Rateson Capital Formationin the OECD" (Paper presentedat the same conference). McKee and Visser also conclude thatmarginaltax rateson capital income are substantially higherin the U.S. than in Sweden, but ratesrange verywidely accordingto asset typeand distributions. Actax ratescan rangefrom87.5% to minus i69.2% at average cordingto theseauthors, effective inflation in Sweden dependingon the sourceof capital,distribution, and typeof investment. at average inflation. In the U.S. theratescould rangefrom94.8% to minus I3I.2% Arms Scandals and a Strong 45Quoted in Steve Lohr, "Sweden: Home of Tax Reform, Defense,"New YorkTimes,September 6, i987. 46 See Goran Normann and JanS6dersten, Skattepolitik ochinkomstutjdmning resursstyrning (Tax policy,resource allocationand incomeleveling)(Stockholm:I.U.I., I978), i84.
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In sum, the Swedish tax systemencouragesthe concentration of economic power while it discourages the conspicuous display of wealth. redistributes not production. Sweden, in effect, consumption, of effective tax burdens forSweden, then The particulardistribution (see Figure i) is the consequence of a political-economic logic designed to promote stability,economic efficiency, high investment,and growth while concomitantly the world's mostgenerouswelfarestate. financing
CORPORATISM AND TAX POLICY MAKING
The somewhat counterintuitive structure of the Swedish tax system cannot be explained by a strangely inegalitarian politicalculture,nor by the presence of popular attitudesfavoringcapitalistsand corporations. Nor does it make sense to describethe Swedish politicalsystem as one in which capitalistinterests have been politically while working-class strong interests have been weak. Instead, Sweden has developed a remarkably coherentpolicy-makingsystemin which representatives of labor, busiand bargainon a broad arrayof politiness, and the statecome together cal-economicpolicies.The "corporatist" structure providesthecontextin which thesegroupsdefinetheirtax policygoals and has encouragedthem to selecttax policyobjectivesthatwould be quite impossiblein a less stable, or less centralized,institutional setting. The decision-making models observed in Britain and the United of electoralrepresentation in thesecounStatesare linked to thestructure in Sweden thedevelopmentof corporatist tries.Similarly, institutions depended upon a particular constitutional format,namely, proportional was finally representation.47 By the time universalsuffrage introducedin Sweden (i9i8), it was clear to the rulingconservative bureaucraticelite that a single-member-district, winner-take-allelecfirst-past-the-post, toral systemwould doom them to electoralinsignificance. Proportional small group representation, then,was seen as a way forthisnumerically to retain some degree of power in the face of obviouslyhostile and increasingly organized middle- and working-class interests. framesthe structure of politicalconflict Proportionalrepresentation in Sweden in two ways. First, it is largelyresponsibleforthe remarkable of Swedish nationalgovernments. stability Second, it has forcedthe dominant politicalparty, the Social Democrats,to rule eitheras a minority or in a coalition government, even thoughin the thirteen national elections
47 Proportionalrepresentation is a necessary but not sufficient prerequisite forthe develA high degree of economicconcentration opmentof societalcorporatism. seems also to be a prerequisite.
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between I932 and I973 theyreceivedbetween4I.7 percentto 50.3 percent of the popular vote. They achieved majoritystatusin the Riksdag (Parliament)on onlytwo occasionsin thisperiod.These popular vote figures fromthoseof the BritishLabour Partyduring differ do not substantially the same period. The Labour Party,however,has been completelyshut formore thanhalftheyearssince World War II. out of government factsfundamentally shape Swedish tax policy These basic structural contextin which labor, decisionmaking because theyare theinstitutional have definedtheirpolicypreferences and strabusiness,and stateofficials tegic objectives.As farback as the I930s, the Social Democrats realized would preventthem fromgaining the susthat the electoral structure to implementmostof the redistained majorityin the Riksdag necessary and partyplattributive tax policiessuggestedin theircampaign rhetoric forthemto findnew mechanisms be necessary forms.It would therefore forachievingtheirgeneral objectivesof gettingreelectedand improving the standardof livingof theirconstituents. and financeministerfrom I932 to Ernst Wigforss,partytheoretician positionin the followingway: I949, put the party's thismeans,on the one hand,thatthose without euphemisms Expressed oftheprivate do or smaller sectors economy who havepoweroverlarger in govon theassumption that thecurrent tendencies actions notbasetheir thata political are a transitory changewill take ernment phenomenon, a discussion that basedon thepossibility a future nearenough placewithin and compromises becomesunnecessary. accommodations of concessions, therepresentatives ofpolitical power On theother hand,italso meansthat forprivate of maintaining favorable conditions enteradmitthenecessity further ado to areaswherethey are notprepared without prisein all those ofpublicoperations.48 withsomeform enterprise replace private in Sweden is not fragmented, as in theUnited States, Because authority decision-makingpower is not diffused,and the governmenthas the fromthe policyprocess. power to include or exclude groupsand interests has no majorityin the Riksdag, it is forced But because the government outsidetheelite and designpoliciesthatinterests to seek out compromises can of the Social Democratic Partycan live with.Thus, the government process. dominate,but not predominatein, the policy-making of Swedish Due to the highlyconcentrated and centralizedstructure businessand labor,whichare consequencesofSweden's late development have had and of specificpartypolicies,Social Democratic governments the luxuryof being able to consult with a verysmall group of interest in theirattempts to attain theirgeneral policy objectives. group officials
48
Quoted in Korpi (fn. I), 48.
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Elites of these large, hierarchically structured, noncompetitive interest groups could thenbe incorporated intoand givenexclusiveaccess to state policymaking. As a result,Swedish tax policymakersare neitheras distanced fromtechnicalexpertise outsidethegovernment as are the British, nor as swamped by the multitudeof different interests that plague the U.S. legislator. This process provides a forumin which all sides are able to compromise on specific issues because a wide set of issuesof concernto them are integrated.The technical expertsattemptto find technicalsolutionsto particularproblems-solutions that will not impinge negativelyon the interests of theothermembersof thetripartite coalition.This deliberative decision-makingstructurefacilitates long-range planning and encourages technicalexpertsto become policy initiators. I will cite but two examples. In the late 1930S big industry, represented by the Swedish EmployersFederation (SAF), asked the government to implementa seriesof tax breaks thatwould discriminate in favorof large and successfulcompanies (and therebydiscriminateagainst small, new, or less profitable The Social Democratic government companies).49 grantedthe request(in the formof InvestmentReserves,InventoryReserves,and ioo percent first-year in exchange for a survey of private depreciation write-offs) businessinvestment plans and tacitapproval of a major expansionof the insuranceprogram,which was to be administered unemployment by the centrallabor union confederation both sides agreed to (LO). Additionally, a new formatforthe resolutionof labor disputes,thus reducingthe occurrenceof strikesand lockouts. the MinisterofFinance Gunnar String was In thelate I950s, similarly, convinced by two economistsfrom the Lo researchdepartmentthat if Sweden was to continuethe expansion of the welfarestate,new sources of revenuewould be needed given increasedoppositionto heavierincome and thevoters.50 taxes frombothindustry They advocated the implementationof a national sales tax. Such a tax, however,was vehemently opof Social Democratic voters.But posed by thelabor unions and a majority aftera year of negotiationswith labor union leaders, however, String thathe would quickly gained theirapproval forthenew tax bypromising expand social spending and in particularinitiatea massive program of Labor union members and Social Demopublic housing construction.
49These policyideas were originally Erik Lindhal, who advocated suggested byeconomist themin a Swedish government researchreportin thelate I920S. SOU: I927:33, Promemorior rorande vissabeskattningsfragor av 1927 areskatte beredning [Memorandumconcerning certain tax questionsof the I927 tax commission] (Stockholm:SOU, I927). offinance 5? The information in thissection was providedbyGunnarStrdng from (minister
I956 to I976)
in an interview with the author, May i983.
POLITICAL
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523
cratic voters still largely oppose the sales tax, but theydo not have the multiplicity of access points necessaryto translatethis opposition into a veto. Each of the examples above aptlyillustrates some of the main dynamics of Swedish tax policydevelopment.In the contextof the highlystable electoraloutcomes in Sweden, all groups must calculate theirobjectives as ifthe Social Democrats will be in power fora considerabletime. Thus both business and labor interests are willing to cooperate in ways that would be anathema in eitherthe United States or Britain. At the same time, the Social Democrats know that theytoo must compromisegiven theirnear-perpetualminority status.The resultis a broadly government lucrativetax system thatcarefully based, financially generatesmaximum revenues while impinging on Sweden's capacity for economic growth and profitgeneration as littleas possible. Efficiency and revenue-yield considerations as a whole. permeatethe system In sum, the distribution of tax burdensdescribedabove is not a contradictionin the Swedish context. The specific taxpolicypreferences of business, labor, and Social Democratic elites appear perfectly rational when we consider the institutional contextin which these preferences are derived.Again, the Swedish case yieldsyetanotherexample in which policy choices are not simplyconstrainedin different ways by different institutional contexts;instead,policy in preferences different institutional setdiffer tings.Political institutions provide the boundaries withinwhich rational actors form their preferences, thus theyare integralto the verypreferences themselves.
TAXATION IN BRITAIN
of Britishtaxes and the lack of coherencebetweenvarThe instability ious partsof the revenuestructure are the major hallmarksof the British tax system.Not only are various revenuesourceschanged with dizzying but changes in one tax are generallywholly unrelated to the frequency, structure of problems of otherpartsof the tax system.Indeed, the fiscal incoherenceof the Britishtax system and the speed withwhich it changes make it very difficult to describe. As Jamesand Nobes have observed, "one of the mostnoticeablecharacteristics of the Britishtax system is that it is under continualchange. Writingabout it is verymuch like trying to hit a moving target."5' But instability and incoherenceare verydifficult characteristics to ver5' S. Jamesand C. Nobes, The Economics of Taxation(London: Philip Allen, i98i), I35.
524
WORLD POLITICS
ifyempiricallywithouta detailed examinationof the entiretax structure. Clearly there is no space for such an examinationhere. While thereare certainly dozens of Britishtax expertsand fiscaleconomistswho have deof the Britishtax system,this does not definitively cried the instability prove thattheirtax systemis worse offin thisrespectthan the American, for example. Afterall, Congress is forevermanipulatingexistingtaxes ofparticular constituencies. The and adjustingthetax code forthebenefit difference is thatin Britainmajor changes in specific taxesare quite comon both the distribution mon and can have fairly of the profoundeffects tax burden by income class52 and upon gross revenue totals.In theirdetailed statisticalanalysis of the dynamicsof the Britishrevenue system, Rose and Karran findthat"thereis no similarity betweenaggregatepatternsand specifictaxes,no collectivehomogeneity, nor is thereabsolute or relativestability. ... When taxes are compared with each other,virtually every test shows that the collectivepatternis heterogeneous,not homogeneous. The most striking featureof taxes in Britainis the extent to which theydiffer."53 Without going into great detail, some specificexamples of the nature and frequency of the many tax changes made in particular revenue sources in Britaincan be instructive. Capital gains taxation,forexample, was not introduceduntil i965 but was then"reformed"in I972 and again in I977 and i982. The corporateprofits tax was first introducedin i965, in and major revisionswere introduced i972, I976, and i983. The VAT was introducedin 1973 (replacingthe purchase tax in the same year) and has been "reformed"fourtimes since then.The SelectiveEmploymentTax was created in i966 and removed in I973. And the Capital TransferTax was introducedin I976 and reformed to the pointof irrelevancein i980. The treatment of the corporatesectorsince World War II provides a particularlygood example of the turbulenceof Britishtaxation policy. Until i965 corporateincome was taxed under the individual income tax code at the standard,or basic, rate.(This ratewas changed fivetimesbetween I945 and i964.) But in addition to this tax, companies were retaxes on distributed and retainedprofits. quired to pay additional profits Retained profittax rates were changed eight times between I947 and tax rateswere also changed eighttimesin these i964. Distributedprofits
52 See Oliver Morrissey and Sven Steinmo,"The Influence of PartyCompetitionon PostWar UK Tax Rates,"Politics and Policy I5, No. 4 (i987). 53 RichardRose and TerrenceKarran,Increasing Taxes?StableTaxesorBoth?TheDynamics of UnitedKingdomTax RevenuesSince 1948, Center For the Study of Public Policy Monograph No. ii6 (Glasgow: CSPP, i983), 37.
POLITICAL
INSTITUTIONS
& TAX POLICY
525
inthesameeight seventeen years (butnotnecessarily years). Finally, until as a deduction I95I, profits taxeswereallowable against income taxes.54 in nominal Butin addition to thechanges taxrates, British companies tax policy were also subjected to numerous alterations thatdirectly afVariousgovernments and decreased introduced, repealed, increased, a wide variety of investment initialallowances, allowances, and direct for investment. totheHansardSociety, grants According thirty-eight difweremadein these various forms ofinvestment ferent changes subsidies between I945 and I972.55 In i965 a separate income corporate tax(somewhat similar to thesysin Swedenand theUnitedStates)was introduced temsin effect bythe thehistory ofcorporate Labourgovernment. taxMervyn Kingdescribed ationin thefollowing way:
in theuseoftaxation toinfluence The UK experience behavior corporation is unique.Four majorreforms taxsystem [nowsix]ofthecorporate have takenplacesincethewar,themostrecent being1973 [subsequently 1976 havebeenaltered at frequent and i984] and taxrates intervals. A good ilofthisis afforded lustration Ameribytheexcitement generated amongst in thei960's bytheinvestment taxcredit and theattempts can economists to assessitseffects. A British economist wouldhaveshrugged thisoff as a to thechanges he had witnessed meretrifle, overtheyears.56 compared fectedthe tax treatment of capital investment between I945 and i964.
in i984, theConservative introduced another Finally, government maofthetaxes on corporations that reduced joroverhaul substantially many of theinvestment write-offs availableto British companies. Thus, surtheConservatives increased effective for taxrates prisingly, substantially British increased thetaxyieldof companies and,moreover, substantially thisrevenue source (seeFigure2). The taxes mentioned aboveare notuniquein Britain. The characterifiscal taxsystem as unstable, and lacking zationoftheBritish inefficient, coherence couldgo on. Dilnotand hiscoauthors, for inexample, bluntly examination troduced their of theBritish socialsecurity as "ansystem otherBritish failure" due to the complexinteraction of payments and
55 The student In theU.S. theremaybe even ofU.S. tax policyhistory maybe unimpressed. in particular various typesof investments more specific changes in tax provisionsaffecting or particular industries, particular howproducts, companiesin a singleyear.The difference, werequite generaland affected all industryever,is thatthesechangesin theBritish system or typesof industries as is commonin theU.S. Specificchangeswere firms not just particular in the U.K. But thesewere in industries also made duringtheseyearsin favorof particular factfewerin numberthanthegeneralchangeslistedabove. 56 King (fn.26), 5-6.
54See King (fn.26), 258-59.
526
WORLD POLITICS
They show,forexand their inefficiency.57 theirincoherence, benefits, of socialseinteraction and ill-planned ample,thatdue to thecomplex paymarginal manylow-paidworkers and incometax in Britain curity wage nominal as their This meansthat in excessof ioo percent. taxrates of thehistories Similarly, must decrease. ofliving their standard increases and capitalgainstaxation have also deathtaxes, taxation, consumption and instable.58 tobe tumultuous revenue sources shownthese taxrates sinceWorldWar II haschanged every government Virtually social security, and death. investment, incomefromsavings, affecting have been introduced, conexpanded, Additionally, specialprovisions investfor broadconstituencies bymeansofsurtaxes, or repealed tracted, Child Relief, deductions, reducedrates, housekeepers' mentsurcharges, tonamebut Personal and Old Age Relief, Relief, EarnedIncomeCredit, a few. the personaldisposableincome(PDI) of severalincome have affected We see,forexample, that taxchanges made thisperiod.59 during groups classby reducedthePDI ofthosein the?ioo,oooincome bybothparties itsubentered Each timetheLabourParty however, office, 28.9percent. taxes for this decreasing PDi). ButLaincome group(thus raised stantially counteracted bour'sactionswerelargely by Torytax policiesthatsubincome taxesfor thisand all income groups. reduced stantially in whichno clearpattern Lookingback to Figure i we see a picture What is mostnoit could be seenas somewhat proportional. byothers depending is thattax ratescan go up or downas incomerises, ticeable is notthechoiceof any particular upon theincomelevel.This pattern ofdifferent thelayering policy preferences Rather itreflects government. in turn.The result is as they each takeoffice governments bydifferent state oftheBritish taxsyssummarized byKay and King: "The present and ad hocmeasures, ofa series ofunsystematic many temis theproduct
(Oxford:ClarofSocial Security The Reform Kay, and Nick Morris, 57Andrew Dilnot,John endon Press, i984), I. and Steinmo(fn.52). See also Anne Robinsonand Cedric Sandford,Tax 58 See Morrissey Kingdom(London: Heineman, i983). PolicyMakingin theUnited 59 I use PDI statistics because theyencompassa whole rangeof changesin the income tax, levels,and personaldeductions. includingtax rates,exemption mustbe viewed withsome caution.Due figures It should be noted here thatthe British no directexview tax information, governments withwhich British to the profoundsecrecy Pechman'sdata are possibleas in theU.S. and Swedishcases. Joseph aminationsof tax returns of incomesfoundin the Brookings taxesto the distribution were derivedby applyingBritish Pechmanand BenjaminOkner, WhoBearstheTax Burden?[Washingmergefile(see Joseph This is not an ideal approach,but it is the only 1974]). ton,DC: The BrookingsInstitution, tax burdensin theU.K. available. studyof totaleffective
60
Table 4 shows how income tax policies made between I946 and
I975
could be consideredregressive, emerges.60 By some measures the system
POLITICAL
INSTITUTIONS TABLE 4
& TAX POLICY
527
CHANGE IN PDI
BY PARTY IN POWER, SINGLE PERSON,
U.K.,
I946-I975
INCOME
?2,000
Labour Conservative Total 3.0% 20.7 23.7
Earned ?5,000
- 12.0% 56.2 44.2
?10,000
-25.9% 88.5 62.6
Investment ?20,000 ?100,000

-55.0% 83.0 28.0 - 139.5% 110.6 -28.9
and Steinmo Source: Morrissey (fn. 52). in disposable income 1946baselevel, Note: Table givescumulative from change i.e.,total in disposable income relative to thebaseyeartaking in office all theyears of each change into consideration. party
undertakenforexcellentreasons-for administrative convenienceor to activities-but whose overallefencouragedeservinggroupsand worthy fecthas been to deprivethe system of any consistent rationaleor coherent
structure.''6i
PARTY GOVERNMENT AND TAX POLICY
It is the Britishconstitutional structure that provides the framework forunderstanding thecountry's particulartax policyoutcomes.With her winner-take-all,single-memberdistrictelections, in the context of a Britain has developed a political highly centralized political structure, process oftencharacterizedby the term "partygovernment."Finer has aptlydescribed partygovernmentin the followingway: "Our systemis one of alternating singlepartygovernments."62 Power is more centralizedin partygovernment than it is in eitherpluralismor corporatism because theelectoralstructure on which partygovernment is based generallyinsuresthatone partywill have exclusiveconThe electoralsystemproduces a majorityfor trol over the government. one partyin Parliamenteven when thatpartyhas receivedsubstantially less than a majorityof votes fromthe electorate.It also makes it excepdifficult forthirdpartiesto competesuccessfully. tionally Finally,the institution of strongpartydisciplineunder partygovernment further centralizespower in the hands of centralgovernment elites in general and All parliamentary the prime ministerspecifically. systemsrelyon party and in cases all this to discipline, yieldsgreatpower thoseat thetop of the
Kay and King (fn.43), i8. Finer, "AdversaryPoliticsand Electoral Reform,"in Finer, ed., Adversary Politics and Electoral Reform (London: Anthony Wigram,i975), 6.
61
62 Sam
528
WORLD POLITICS
It is perhaps an exaggerationto call the BritishParliamenta hierarchy. rubberstamp,but in comparisonto the United States,at least,thischaracterizationdoes not seem too widelyoffthe mark. features of British These basic structural party government fundamenand strategic tallyframethe policypreferences choices of all participants in the policy-making process.Whereas the fragmentation of politicalauin the United States facilitates thority particularistic interest group politics,and the potentialstalemateof Sweden's electoralstructure encourages compromise, the centralizationof national political authorityin Britainallows governments to act on theirelectoralplatforms no matter to the opposition'sinterests. how ill-conceivedor antagonistic once elected, have exclusive First, governments, decision-makingauthority. Though governments can, and sometimes do, consultwithinterests outside the partywhen formulating policies theyare in no way required to do this,for theyare virtually guaranteed passage of the final legislationno matterwhich groups approve or disapprove.63 Because the does not have to consultextensively, it seldom does. Indeed, government it is oftenargued thatthe government rarelyconsultswith its own party major policyinitiatives.64 membersbeforeinitiating excluded from the Second, because the opposition is fundamentally policy-making processit is rarelyin touch with the details of currenttax and problemsthatwill repolicyand is rarelyaware of thecomplications sult fromfurther changes. Instead,having spentthe last severalyearsarhas done is eitherincomthe current guing thateverything government that it will petentor pernicious,the oppositionpromisesits constituents reversetheseevils as soon as it wins the nextelection."The hot competitionof partypoliticshas fostered the desireto introducepartydifferences to assess posand has affordedlittleincentiveto analyze basic objectives, in sibilities and costs the formof sacrificed alternatives."65 When a new governmenttakes office,then, it is under pressure to
63 In fact onlythetopmost elitewithintheparty and theTreasuryhave anysayin tax policy formation. "Revenue changes are solelya tool of macro-economic managementconsidered separately by the Treasury,and announced to the cabinetby the Chancellor in practicefor information, not approval-just beforethe Budget is publicly in March or April"; presented Hugh Heclo and Aaron Wildavsky, ThePrivate Government ofPublicMoney, 2d ed. (London: Macmillan, 198I), I79-80. 64 An example of thiscan be foundas recently as i984 when theThatchergovernment announced on budget day thattheywould substantially restructure the corporateincome tax Until thatday in March no one outsidea verysmall group of Treasuryofficials system. and the primeminister even knew thata reform of thecorporate tax system was under consideration.Even the head of theConservative Party'sresearch department, PeterCropper,did not know thata corporatetax reform was in the offing untilhe heard the budgetspeech on the radio thatday. 65 T. Wilson, "The Economic Costs of the Adversary in Finer,ed. (fn.62), I I2. System,"
529
thatit is different and better than,thegovernment demonstrate from, itsredistributive that itreplaced. Labourmust demonstrate commitment willindeed"squeezetherichuntil (that they their pipssqueak")and the Tories mustshow how theywill unleashmarket forces and undo the harmto capitalinflicted bythelastLabourgovernment. Buttaxsystems and seriousreform takessubstantial are complicated affairs, analysis. Suchanalysis takestime. Time,unfortunately, is in short supply for govwhilecampaigning ernments thathavemade strong for policy promises election. becomesthe government it has the legislative When the opposition The government is pressed powerto act out itsmandate. to fulfill the made in theheatofthecampaign evenwhenbetter promises they judgIn bothU.S. pluralism movein other directions. mentwouldhavethem must their and Swedishcorporatism governments compromise ideology and policy becausethey needthevotes toachieve platforms simply legisIn theBritish thegovernment controls lative success. party model, always If thegovernment does comproa majority of thevotesin Parliament. theparty and also bythe itis quickly attacked bothbythose within mise, a "U-turn." In short, theBritish for taken electoral opposition having syswithstrong to act on their incentives tempresents British governments evenwhenthese weremadewithlittle campaign promises commitments was paidtotheir effects on the and though analysis scarcely anyattention taxsystem as a whole. hereevokesan interesting The very logicof myargument puzzle. If British are less constrained forces governments by opposition political whatexplains thanSwedishor U.S. governments, thelackofcoherence in theBritish tax system as a whole?Presumably, British governments rewrite theentire taxcodeand thereby makeitevenmore couldsimply thantheSwedishor U.S. systems. The answer coherent to thispuzzle is Karran's in partanswered in Roseand recent book,Taxation ByPolitical In thisinteresting ofthepolitical Inertia.66 and economic analysis dynamauthors remind whileBritish icsofBritish fiscal these us that policy govthantheir ernments Swedishand maybe lessconstrained byParliament thatBritish thisdoes not suggest are U.S. counterparts, governments in their choices. There are very inunconstrained wholly policy strong in any polity to continue to use the revenue inherited centives system of the tax from pastgovernments. Moreover, large-scale restructuring ofresources involves and system hugeinvestments (political, intellectual, benefits of such restructuring whereasthe political financial), may be
66 the Growth RichardRose and Terrence Karran, TaxationBy PoliticalInertia:Financing of Government in Britain(London: Allen and Unwin, i987).
530
WORLD POLITICS
quite marginal if not negative.Most governments, most of the time,are faced with farmore immediateproblemsthan thatof an incoherent tax Their reluctanceto tackle the monumentaltask of rationalizstructure. is perhapsfurther ing the tax system exacerbatedby the factthatsome of the government'sown tax policies may prove to be somewhat less than rational.In sum,fromthepoliticians'pointofview thecostsoutweighthe of trulyrestructuring theentiretax system. it could be arbenefits Better, to use taxationas a symbolicissue in which magued, to "fringetune,"67 jor changes are made in specific leave the technicalistaxes,and, finally, sues to the bureaucrats. ofbureaucrats But,of course,the policyperspectives are also shaped by environmentin which theylive. Whereas in both the the institutional United Statesand Sweden, Treasuryor Ministry ofFinance officials have taken quite activistpositionswith respectto reforming and rationalizing Britishofficials have developed a culture theirrespectivetax structures, of agnosticism.This reticence activelyto pursue a reform programis not a product of ignorance or even apathy on the part of Britishofficials.68 Instead, they live in a quite unique institutional environment that disIn Sweden, in courages policyactivismand encouragespolicyneutrality. decades of politicalstability and single-party dominance have particular, This engendered the developmentof a veryactiveadministrative class.69 in part,by the perpetualminority activistpositionhas been fostered, staIn thiscontext, tus of Social Democratic governments. ambitiousbureaucratswith workable ideas have been strongly encouraged by theirpolitical masters.70Similarly, in the deadlock of U.S. government by talentedfiscalpolicyexpertshave oftenbeen broughtintothe committee, Treasury or the JointTax Committee to help politiciansfind technical solutionsforprofoundly complex tax policyissues.Again, in thiscontext the systemrewardsinnovativeand talentedofficials and theirideas. In Britain the situationis quite different. Under partygovernmenta new election can bring in new politicalmasterswho have radicallydifin government. ferentpolicy views fromthose currently The ambitious Britishofficial who pursuesreform initiatives could well findhis ideas are perceivedto be on thewrongside ofthepoliticalfencecome thenextelec67 68
Ibid., I48.
See, for example, The EleventhReportof the Expenditure Committee Session I976-77, House of Commons Papers 535-I (London: HMSO, I977). 69 Cf. Thomas Anton, in Politics:A ProClaes Linde, and AndersMellbourn, "Bureaucrats fileof the Swedish Administrative Elite," Canadian Public Administration i6, No. 4 (I973),
7? In factit is quite common fortalented youngofficials to be promotedfromthe supposintopoliticalpositions of Finance. edly apoliticalcivilservicedirectly withinthe Ministry
638-39.
531
extent)the United States as well.72 Dick Taverne describesthisas one of
therational behavior for as a grouphasbeen tion. In this officials context, a low This tends to those officials whofoltokeep profile. system reward oftheir notthosewho haveambitious low thedictates political masters, own.7' reform ideasoftheir Finally,because the hands thathold the reinsof government can from one yearto thenext, it is rareforministers changeso dramatically in sucha wayas todevelop their official advisers togettoknowand trust in Swedenand (buttoa somewhat thecloserelationships common lesser
necessarilyget the whole-heartedsupportof the technicalexpertswho must translatethe general policy aims into specificlanguage.74On the means thatotherwisepolitically otherhand, thismutual skepticism neuoftenmay not achieve the polititraladministrative or technicalreforms theminto legislation. cal supportnecessaryto translate
TAX POLICY MAKING UNDER THATCHER
he facedwhenin theTreasury fortheLabourgovthemajorproblems in i964. "Indeed,the[Inland]Revenueproved ernment thattookoffice thatall solutions other itself expert at showing thantheir own wereutThis does notmean that and totally misconceived."73 terly unworkable thenewgovernment's willnotbe passed, proposals justthat they do not
Few will be surprised bythefactthattheBritish tax system has become substantiallymore regressivein the nearly ten years since Margaret Thatcher's governmentcame into office.75 Since I979 the Conservatives have substantially increasedconsumptiontaxes,radicallydecreased marincome tax rates (especiallyforthose with verylarge ginal and effective and, surprisingly neutereddeath and gifttaxes76 incomes),substantially to many, reformedthe corporatetax systemso that it actually places a heaviertax burden on some typesof corporations and generallyproduces
practices 71See Heclo and Wildavsky(fn.63) fora moredetailedview of theadministrative class. administrative and cultureof the British 72 Since World War II, forexample,therehave been I7 chancellors of the exchequer. In of finance in thissame period. Sweden therewere only3 ministers 73 Taverne,"Looking Back," Fiscal Studies 4, No. 3 (i983), 5. 74ChancellorHugh Dalton encountered such oppositionto his plan to increasemarginal tax rateson the wealthyin I947 thathe was forcedto writethe proposalhimself. to demonstrate thateffecbyfiscaleconomists 75A plethora of evidencehas been presented alteredin thepastdecade. See theannual tivetax burdensin theU.K. have been dramatically tax reforms, publishedby the Institute forFiscal post-budget analysisof the government's are generally FiscalStudies. The budgetanalysisarticles includedin thesecond Studiesin their by Andrew Dilnot et al. Unfortunately, issue of each annual volume and are usuallywritten of all revenuechangessince I978. no studieshave summarizedtheeffects however, 76 See Cedric Sandford, "Capital Taxes-Past, Presentand Future,"LloydsBank Review, October i983.
532
WORLD POLITICS
predictthisoutcome ten or even fiveyearsago. Thus, as discussedabove, Inland Revenue civil servantshave had everyreason to keep theirheads low. The many significant tax reforms thathave occurredin the past ten yearshave mostlynot been the productof an activist administrative class eager to rationalize its tax system.Instead, these reformshave been pushed by an aggressive political partyeager to impose its ideological stamp on the system. One cannot close this sectionwithoutmentionof the most recenttax reformto be pushed by the Thatcher government-the Poll Tax.79This
In thetaxreform thanthesystem itreplaced.77 morerevenue in proposed thei988 budget, Chancellor NigelLawsonfurther reduced radically personalincometaxratesforthevery thatthismovewas wealthy, arguing made necessary oftheU.S. taxrate.But,interestingly, bythereduction whereas themarginal ratecutsfortherichwerecompensated forin the ofmany U.S. casebytheelimination tax important expenditures favoring in Britain oftaxrates thewealthy, thereduction for high-income earners was notcomplemented byanysuchreduction. The Financial one Times, ofBritain's conservative leading headlined this version newspapers, oftax in twoarticles, reform "Dramatic GainsFor theRich," and "An End To Old Fashioned Egalitarianism."78 Thus, the decade of Thatcherism has had important effects on the British taxsystem. Mostwouldagreethat taxpolicy is morecoherent today than it was ten yearsago-even if theydislikethe direction of change.But it would be incorrect to suggest thattheBritish taxsystem has becomea modelof rationality, evenifregressive. It is indeedintertheConservative esting to notethat has notbeenable to regovernment form evenin itsown image.The reasons thesystem thoroughly forthis are complex, butare consistent withtheanalysis of how party government affects the actionsand perspectives of bureaucratic actors.To ofa national taxsystem undergo majorrestructuring requires competent technical and long-range The incentive analysis structure facplanning. ing theBritish InlandRevenuedoes notencourage thedevelopment of either. One mustremember thatthough we now know thatThatcher won twoelections after herinitial no one couldreasonably I979 victory,
77A completediscussion of thisapparently unorthodox Conservative tax reform liesoutside the scope of thisessay.Two important features are worthnoting, however.First,thetypesof tax ratesincreasedthe most were large,capital-intensive, companies whose effective manufacturing concerns-these corporations are also heavilyunionized. Second, thoughretained profits taxeswere increased, the taxation of distributed has been made less severe. profits 78 Financial Times, March i6, I988. 79Specifically, the government has proposed to abolish the existingproperty tax system (known as rates)and replaceit bya head tax. No longerwill local taxationbe based on propertiedwealth,but insteadwill be based on size of the household.
533
movewas so radical, blatantly class-based, and obviously regressive that it nearly evokeda constitutional with the crisis, House of Lords at first to yielditsrubber refusing stamp. The government prevailed, however, and is now working outthedetails ofa modern version ofa taxthatwas abolished evenbefore theworking classachieved theright to vote. It perhaps goeswithout saying that theLabourParty has promised to repealthistax (as wellas reverse thevastmajority ofThatcher government taxpolicies) ifand whenitregains Thisanalysis power. suggests not only thattheywill indeedact on thesepromises, but also thatthese changes will pull theBritish taxsystem further intoa maze of incoherence.
TAX POLICY MAKING AND ITS INSTITUTIONAL CONTEXT
I havetried to showhowand whythestructure ofdecision in making has three democratic the in these outcomes governments shaped specific oneofthemost and controversial arenas ofpublic important policy-taxation.Myargument has emphasized theconstitutional/electoral foundationsof thesemoderndecision-making institutions and demonstrated cometodefine their that these institutions shapehowgroups policy preferences and strategic Political institutions are thecontext in objectives. and bureaucrats come to define theirpolicy whichgroups, politicians, preferences. In theUnitedStates, sinceno one can control theprocess becauseof theconstitutional ofpublic fragmentation whose influauthority, groups in a party encewouldbe nonexistent or corporatist government regime canexact benefits from taxlegislators. highly particularistic Diffusing poas eliminating litical poweris notthesamething it.Congressman Dave a Republican from forwriters Durenberger, Minnesota, puttheproblem on U.S. taxpolicy thathe very muchlikedtheReasuccinctly. Arguing we had a realchanceat tax gan tax reform plan,he said,"If I thought reform that wouldreduce thedeficit, reduce and reform taxes the payroll incometax,thenI would voteagainst and specialinterest myregional theplanwouldnotovercome Butbecausehe felt that theobstagroups." clesputin itswaybyvested interest he added,"I'll votemycongroups '8 I seemostofmycolleagues thesameway.' stituency. voting The structure in British of thepolitical esprocess party government tablishes a quitedifferent environment for makers. Whilethey are policy lessvulnerable to theparticularistic ofspecific demands interest groups, aremoreresponsible for outtheir Morethey acting campaign promises.
loQuoted in theSan Francisco Examiner, Septemberi, i985, p. A-I2.
534
WORLD POLITICS
over,because theyhave exclusivedecision-making authority, theyare not forced into compromisingtheir policy ambitions as U.S. and Swedish policymakers routinely are. Americanand Swedish policymakersdo not compromise because theylike to, or because theyare culturallypredisposed to consensusbuilding; theycompromiseover public policybecause politicalrealitiesgive themno choice. In partygovernment, policymakers have a choice of whetheror not to compromise, and theyexerciseit only when it suits them. Because the opposition is so totallyexcluded from the information and expertiseof the policy-makingprocess,they can often declare themselvesin favor of policies that have substantial practicalproblems.But once elected theyare committed. Thus: Both Labour and Conservative parties, while in opposition, have sucto condemn cumbedto thetemptation a largeproportion of thegovernment's and havepromised to reverse policies when manyofthesepolicies (Emphasis added.)8"
they themselvestook office.The resulthas been a fatal lack of continuity.
Continuityis a key word forunderstanding tax policymaking in corof proportional poratistSweden. The system has virtually representation assured stable minorityor coalition governments.Lacking governing successiveSocial Democraticgovernments have been forcedto majorities, reach out to non-socialists and forgecompromisesand build coalitions. have been forcedto accept the inevitability Likewise non-socialists of Social Democratic political dominance and have thus adopted comparativelyconciliatory positions.Over time,business,labor,and government eliteshave come to understandeach other'sneeds-the government and the unions want revenueforsocial spending,businesswantsa decentrate of returnon capital-and have been able to constructtax policies that broadlyaccommodate all threemajor interests. Few policy-making elitesin eitherthe United Statesor Britainwould deny that capitalistsrequire a profitincentiveto make them invest,or thatinvestment is necessary forjobs and growth.But in the heat of political battle,ideologicallycharged rhetoric can oftensteerpolicymakers in less consideratedirections.
CONCLUSION
The argumentthatpoliticalinstitutions are important in shaping politics(and by implicationpolicyoutcomes)is,ofcourse,notnew. Aristotle,

" Michael Stewart,TheJekyll and EconomicPolicysince1964 (Lonand Hyde Years:Politics don: J.M. Dent and Sons, I977), 24I.
535
JamesMadison, de Tocqueville and E. E. Schattschneider are but a few of institutional of thosewho have long sinceargued theimportance structo thisbody of literature ture. This essay has attemptedto contribute by demonstrating exactlyhow institutions help shape policy outcomes in a particularly important arena of politicallife.I have triedto do more than institutional structuresbias polities toward some show that different and away fromothers.By arguingthatinstitutions typesof interests provide the contextin which politicalactorsmake theirpoliticalchoices and thisanalysistakes a step toward a better definetheirpolicypreferences, understandingof the linkage between macrocomparativepolitics and of indipublic policyon the one hand and our increasingunderstanding vidual human behavioron the other. I have not argued here that group interests and political values (or to public policymaking.On thecontrary, ideas) are irrelevant myanalysis concernedwith both. But as I argued in the opening sections is centrally or policypreferof thispaper, we cannot simplyassume certaininterests in whichpeople make thesechoices. ences withoutexaminingthecontext the institutional contextin which genwithoutunderstanding Similarly, intospecific eral politicalvalues are translated policiesno one can hope to predictwhat thesepolicies may be. This essay,then,has verybroad implicationsforthe analysisof individual decision making as well as for the studyof the modern welfare state.First,althoughmyargumentmightsuggestthatinstitutional strucvariables thatfilter turesare intervening politicaldemands and thereby help shape policy outcomes,I maintain that the analysiscan be pushed To do thiswe must link what we have observedin thisstudyto further. Simon has shown in his discuswhat we know about human rationality. sions of bounded rationalitythat the boundaries on rational decision making (intellectual ability, time,information, environment, etc.) are not on optimal decision making. Instead, these boundaries just constraints are integralto the verydecision-makingprocess itself.We do not have that are somehow constrained; fixed,economicallyderived preferences in which we make instead,what we want is a part of the environment Political are these decisions.A2 institutions, then, part of our preference in making political choices. structure because theyare a criticalreferent To abstract politicalchoices (in theshortrun) and generalpoliticalvalues contextis to ignore an abso(in the longer run) fromtheirinstitutional of the source of thesepreflutelyessentialvariable in our understanding erences.
See, forexample,HerbertA. Simon,"Human Nature and Politics:The Dialogue ofPsychologywithPoliticalScience,"American PoliticalScienceReview79 (Junei985), 293-304.
82

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essayaddresses one of the broadest and mostcomplexissues

don: Routledge, Kegan Paul,

& TAX POLICY

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POLITICAL INSTITUTIONS & TAX POLICY

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in American politicalhistory, Federalistio, JamesMadison wrote:

& TAX POLICY

In both Britainand Sweden central oppose thistypeof taxationas well.30

long run. An example will help illustratethis point. In

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Interviews withauthor,May i987.

& TAX POLICY

TABLE 3 ESTIMATED CHANGE IN U.S. TAX BURDENS IN i988 BY INCOME BRACKETS

POLITICAL INSTITUTIONS & TAX POLICY

& TAX POLICY

Quoted in Korpi (fn. I), 48.

in an interview with the author, May i983.

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& TAX POLICY

54See King (fn.26), 258-59.

could be consideredregressive, emerges.60 By some measures the system

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BY PARTY IN POWER, SINGLE PERSON,

Investment ?20,000 ?100,000

POLITICAL INSTITUTIONS & TAX POLICY

POLITICAL INSTITUTIONS & TAX POLICY

extent)the United States as well.72 Dick Taverne describesthisas one of

POLITICAL INSTITUTIONS & TAX POLICY

they themselvestook office.The resulthas been a fatal lack of continuity.

The argumentthatpoliticalinstitutions are important in shaping politics(and by implicationpolicyoutcomes)is,ofcourse,notnew. Aristotle,

POLITICAL INSTITUTIONS & TAX POLICY

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