P1: GCV CY231/Kato 0 521824524 June 28, 2003 1:39 ii This page intentionally left blank P1: GCV CY231/Kato 0 521824524 June 28, 2003 1:39 Regressive Taxation and the Welfare State Government size has attracted much scholarly attention. Political economists have considered large public expenditures a product of leftist rule and an ex- pression of a stronger representation of labor interest. Although the size of the government has become the most important policy difference between the left and the right in postwar politics, the formation of the government’s funding base has not been explored. Junko Kato finds that the differentiation of tax rev- enue structure is path-dependent upon the shift to regressive taxation. Since the 1980s, the institutionalization of effective revenue raising by regressive taxes during periods of high growth has ensured resistance to welfare state back- lash during budget deficits and consolidated the diversification of state funding capacity among industrial democracies. The book challenges the conventional wisdom that progressive taxation goes hand in hand with large public expen- ditures in mature welfare states and qualifies the partisan-centered explanation that dominates the welfare state literature. Junko Kato is Professor in Political Science at the University of Tokyo. She is the author of The Problem of Bureaucratic Rationality (1994). i P1: GCV CY231/Kato 0 521824524 June 28, 2003 1:39 ii P1: GCV CY231/Kato 0 521824524 June 28, 2003 1:39 Cambridge Studies in Comparative Politics General Editor Margaret Levi University of Washington, Seattle Assistant General Editor Stephen Hanson University of Washington, Seattle Associate Editors Robert H. Bates Harvard University Peter Hall Harvard University Peter Lange Duke University Helen Milner Columbia University Frances Rosenbluth Yale University Susan Stokes University of Chicago Sidney Tarrow Cornell University Other Books in the Series Lisa Baldez, Why Women Protest Stefano Bartolini, The Political Mobilization of the European Left, 1860–1980: The Class Cleavage Mark Beissinger, Nationalist Mobilization and the Collapse of the Soviet State Nancy Bermeo, ed., Unemployment in the New Europe Carles Boix, Political Parties, Growth and Equality: Conservative and Social Democratic Economic Strategies in the World Economy Catherine Boone, Merchant Capital and the Roots of State Power in Senegal, 1930–1985 Catherine Boone, Political Topographies of the African State: Territorial Authority and Institutional Choice Michael Bratton and Nicolas van de Walle, Democratic Experiments in Africa: Regime Transitions in Comparative Perspective Valerie Bunce, Leaving Socialism and Leaving the State: The End of Yugoslavia, the Soviet Union and Czechoslovakia Ruth Berins Collier, Paths Toward Democracy: The Working Class and Elites in Western Europe and South America Continued on the page following the index. iii P1: GCV CY231/Kato 0 521824524 June 28, 2003 1:39 iv P1: GCV CY231/Kato 0 521824524 June 28, 2003 1:39 Regressive Taxation and the Welfare State PATH DEPENDENCE AND POLICY DIFFUSION JUNKO KATO University of Tokyo v Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge , United Kingdom First published in print format isbn-13 978-0-521-82452-1 hardback isbn-13 978-0-511-07073-0 eBook (EBL) © Junko Kato 2003 2003 Information on this title: www.cambrid g e.or g /9780521824521 This book is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. isbn-10 0-511-07073-X eBook (EBL) isbn-10 0-521-82452-4 hardback Cambridge University Press has no responsibility for the persistence or accuracy of s for external or third-party internet websites referred to in this book, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Published in the United States of America by Cambridge University Press, New York www.cambridge.org - - - - P1: GCV CY231/Kato 0 521824524 June 28, 2003 1:39 Contents Preface page ix 1 ARGUMENT: PATH DEPENDENCY AND THE DIFFUSION OF A REGRESSIVE TAX 1 The Funding Base of the Welfare State and a Progressive Tax: A Cross-National Variation 3 Policy Diffusion as a Case of Path Dependency 18 Quantitative Evidence: Qualifying the Effects of Globalization and Government Partisanship 34 Conclusion 51 2 EUROPEAN VARIATION: SWEDEN, THE UNITED KINGDOM, AND FRANCE 53 Variation in Welfare and Taxation 53 Sweden: A Mature Welfare State with Regressive Taxation 58 The United Kingdom: The Ambiguous Impact of Neoconservative Rule 77 France: Resistance to Welfare State Backlash and Regressive Taxation 94 Conclusion 110 3 CONTRASTING PAIRED COMPARISONS IN OCEANIA AND NORTH AMERICA 113 Divergence and Convergence in the United States and Canada 113 The End of Parallels? Comparing New Zealand and Australia 133 Conclusion 156 vii P1: GCV CY231/Kato 0 521824524 June 28, 2003 1:39 Contents 4 ANOTHER PATTERN OF PATH DEPENDENCE: A COMPARISON BETWEEN JAPAN AND THE NEWLY DEVELOPING ECONOMIES 160 The Diffusion of the ValueAdded Tax into Newly Developing Economies 160 Japan: Strong Opposition to Revenue Raising in a Small Welfare State 170 South Korea: The Funding Capacity of a Strong State 186 Conclusion 192 5 THE POLITICAL FOUNDATION OF FINANCING THE WELFARE STATE: A COMPARATIVE VIEW 194 Hypotheses Examined: The Coexistence of Regressive Taxation and the Welfare State 194 An Alternative Way to Development: A Path Away from the Divergence? 199 Appendix: List of Variables Used for Statistical Analyses 217 Bibliography 223 Index 245 viii [...]... tax and welfare explains a new fourth category (the radical welfare state) of Australia, New Zealand, and the United Kingdom, which the “three-world” classification does not explain well,12 but France, Canada, Austria, and Finland 8 9 10 11 12 6 More specifically, the classifications are (1) social democratic welfare states, such as Denmark, Finland, the Netherlands, Norway, and Sweden, based on the principle... and/ or cut public expenditures.4 Similar to the current financial intricacy, historically, several contingencies and complicated interactions simultaneously caused the development of the welfare state and the construction of the tax state. 5 Welfare state development went hand in hand with the development of the tax state owing to the increasing financial needs of the government for redistribution Despite... part of the welfare state in the 1950s and 1960s During this process, the conventional view emerged wherein the contemporary welfare state was said to have expanded to raise revenue from progressive income taxation promoted by left-party governments This view has implicitly and explicitly influenced the comparative perspective of the welfare state For example, Esping-Andersen’s (1990) “three-world” and. .. among welfare states (Figure 1.1) Tackling this puzzle head on, this study sheds new light on the funding base of the welfare state Available financial sources serve to restore the public confidence in the welfare state that was severely challenged in the 1980s, whereas financial scarcity makes welfare state backlash inevitable The divergent funding capacity of the welfare state is path-dependent upon the. .. regards taxation as another measure for redistribution, one exclusive focus is a progressive income tax that applies discriminatory tax rates to redistribute income The importance of the funding capacity of the welfare state is overshadowed by an overwhelming concern for redistribution through welfare programs and taxation On the other hand, when one considers taxation important for financing the welfare state, ... Belgium, the Netherlands, France, and West Germany achieved and were likely to maintain a high level of welfare provision owing not to a domestic corporatist arrangement but rather to the use of a less visible taxation such as indirect taxes on consumption Conversely, Denmark, Finland, the United States, the United Kingdom, Switzerland, Canada, and Australia did not and were not expected to cope with the. .. assumption about the relationship between progressive taxation and the welfare state in general More specifically, it is left to another study whether regressive financing is peculiar to the Swedish social democratic institutions or is more generally observed in large welfare states (i.e., independently of political institutions) How has the regressive tax been adopted and diffused across countries, and why... 2003 9:2 Path Dependency and Tax Diffusion classification – social democratic, conservative, and liberal welfare states8 – focuses on the extent of labor’s “decommodification”9 – the states’ protection of labor from market rule The concept of decommodification relies on the experience of the Scandinavian social democratic welfare state, where the historic compromise between labor and capital first attempted... distinct timing of the shift from one country to another The research began in the mid-1990s when the cross-national variation of welfare states was apparently preserved despite a welfare state backlash and globalization More mature welfare states with a larger public sector appear to have resisted the welfare retrenchment more successfully than welfare states with a ix P1: GCV CY231/Kato 0 521824524 June... persuasively and neatly their tax policy-making and tax revenue structure The Swedish case here is also a “crucial case” (Eckstein 1975) Sweden, a typical example of a mature welfare state, relies on regressive taxation in addition to a progressive income tax that has been regarded as the most auspicious way to finance the welfare state The strong institutional focus, however, does not aim to confirm or refute the . the welfare state and the construction of the tax state. 5 Welfare state development went hand in hand with the development of the tax state owing to the increasing financial needs of the government. income. The importance of the funding capacity of the welfare state is overshadowed by an overwhelming concern for redistribution through welfare programs and taxation. On the other hand, when. 53 Sweden: A Mature Welfare State with Regressive Taxation 58 The United Kingdom: The Ambiguous Impact of Neoconservative Rule 77 France: Resistance to Welfare State Backlash and Regressive Taxation 94 Conclusion