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Title
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Emerging Trends in the Political Economy of Taxation
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Author
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Kiser, Edgar
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Karceski, Steven M.
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Research Area
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Social Institutions
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Topic
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Government Systems
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Abstract
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This essay briefly summarizes recent work and suggests future directions in the study of taxation. We analyze the determinants of total tax revenue, tax structure, tax administration, and the relationship between taxation and spending. In the section on total tax revenue, we look at the effects of democracy, debates a possible ceiling on total revenue, and whether less developed and Asian countries will catch up with revenue extraction in the developed west. The section on tax structure suggests that the era of progressive taxation may be ending and that taxes intended to serve social purposes, such as sin taxes and carbon taxes, are on the rise. Our discussion of tax administration focuses on the determinants of taxpayer compliance and whether less developed countries are developing centralized bureaucratic administrations. We conclude by looking at the relationship between taxation and spending, first exploring the increase in deficit spending and second looking at attempts by both sub‐state and supra‐state political units to get more control of taxation relative to national states.
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Identifier
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etrds0446
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extracted text
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Emerging Trends in the Political
Economy of Taxation
EDGAR KISER and STEVEN M. KARCESKI
Abstract
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This essay briefly summarizes recent work and suggests future directions in the
study of taxation. We analyze the determinants of total tax revenue, tax structure, tax
administration, and the relationship between taxation and spending. In the section
on total tax revenue, we look at the effects of democracy, debates a possible ceiling
on total revenue, and whether less developed and Asian countries will catch up
with revenue extraction in the developed west. The section on tax structure suggests
that the era of progressive taxation may be ending and that taxes intended to serve
social purposes, such as sin taxes and carbon taxes, are on the rise. Our discussion of
tax administration focuses on the determinants of taxpayer compliance and whether
less developed countries are developing centralized bureaucratic administrations.
We conclude by looking at the relationship between taxation and spending, first
exploring the increase in deficit spending and second looking at attempts by both
sub-state and supra-state political units to get more control of taxation relative to
national states.
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INTRODUCTION
In this essay, we attempt to summarize a few emerging trends and suggest
future directions for work on taxation. There are two recently published
reviews of the literature on taxation in sociology and political science
(Kiser & Karceski, 2017; Martin & Prasad, 2014), so it is not necessary for us
to do that here. Our focus is on the future of work in this area, not on the past
or even the present. Our interest is more prescriptive than descriptive—we
are interested less in what trends are emerging (although we will discuss
these to some extent) than on outlining the main topics that we think should
be the focus of future research.
The essay will be organized around the three major facets of taxation: determinants of total tax revenue (total revenue/gross domestic product (GDP)),
tax structure (who and what is taxed), and tax administration (including taxpayer compliance). Within each of these sections, we will separate developed
Emerging Trends in the Social and Behavioral Sciences.
Robert A. Scott and Marlis Buchmann (General Editors) with Stephen Kosslyn (Consulting Editor).
© 2018 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
and less developed states, because tax policies work very differently in these
two contexts. We will attempt to address these issues with a wide geographic
scope, but in an essay this short our coverage will fall short of representing
all states and all regions.
EXPLAINING TAX REVENUE
The ability of states to extract revenue has varied substantially over time and
across societies (Kiser & Karceski, 2017). This section will focus on a few main
trends in the contemporary world and ongoing debates about their causes:
(i) What is the relationship between democratic institutions and tax revenue?
(ii) Have levels of tax revenue in the developed world reached a ceiling? and
(iii) Will tax revenues in Asia, Latin America, and Africa increase to match
those in the developed West?
DEMOCRACY AND TAX REVENUE
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Research on the connection between democratic institutions and tax revenues remains inconclusive, but a few insights can be drawn from this
body of research (Kiser & Karceski, 2017). In contemporary states, most
taxes are paid into a general fund that is used to cover a wide variety of
expenses, making the contract linking tax payments to state services much
more difficult to monitor. In this context, democratic institutions facilitate
the making and enforcing of fiscal contracts, but democracy alone does not
ensure effective institutions. In fact, the relationship between democracy
and tax revenue in contemporary states is still unclear. Studies of the direct
association between democracy and tax revenues/GDP find mixed results.
Some of this can be explained by variation in democratic institutions:
electoral systems, veto players, party power, party stability, corporatism,
and election participation rates (Kiser & Karceski, 2017), but there is still
much to be studied. Because samples and measures vary across studies it is
difficult to compare the findings—additional research would be very useful.
The direction that future work on democracy and tax revenue should go
should include further disaggregation of democracy into its institutional
components.
HAVE TAX REVENUES IN THE DEVELOPED WORLD HIT A CEILING?
There are signs that tax revenue/GDP in developed democracies may be hitting a ceiling. Tax revenue/GDP in Organisation for Economic Co-operation
and Development (OECD) countries increased 6.7% between 1980 and 1990,
6.7% between 1990 and 2000, but declined 4.3% between 2000 and 2010
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(OECD, 2016). The highest revenue to GDP ratio was 49.5% in Sweden in
1987, only Denmark and France are currently above 45%, and very few countries are currently at or near their highs (OECD, 2016). Is this a temporary
downturn, or is the period of increasing tax revenues ending? Several factors
suggest the latter. The first is increasing labor mobility. The relationship
between population homogeneity and high taxation is well known (Eger
2009). The highest levels of taxation are found in the (until quite recently)
homogeneous Scandinavian social democracies, whereas the heterogeneous
population of the US has often been seen as one cause of its lower taxation
and smaller welfare state (Alesina & Glaeser, 2004). Increasing labor mobility
caused by globalization has made many more societies racially, ethnically,
and religiously heterogeneous, including Scandinavian social democracies.
Because people are more likely to pay taxes for other in-group members than
for members of other groups (Lieberman, 2003), increasing heterogeneity
leads to increasing opposition to high taxes to fund large welfare states
(Eger, 2009). The difficulty of maintaining a strong welfare state and an open
immigration policy simultaneously—called the progressive’s dilemma (Kulin,
Eger, & Hjerm, 2016) may well end the era of increasing taxation. Further
research on this topic is not only important to academics but will also have
significant implications for ongoing policy debates.
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WILL LDC TAX REVENUES CATCH UP WITH THE DEVELOPED WEST?
Modernization theory and its many variants have had a rocky intellectual
history, going from wide acceptance to universal dismissal, and now settling
somewhere in between. There are two interesting questions about taxation
that are relevant to the ongoing debates about its utility. One of the central
tenets of modernization theory is that less developed states will evolve to
look more similar to contemporary developed states. So should we expect tax
revenues in less developed states to increase over time until they eventually
catch up to those in developed states? Since 1990, the average tax revenue
share of GDP for low and middle income countries (as defined by the World
Bank) remained between 10.5% and a little over 13% with no indication of
a trend (The World Bank, 2018), while the average in the OECD has been
between 31.9% and 34% (OECD, 2016).
Tax increases in less developed states are likely to increase if GDP per capita
increases, following Wagner’s Law (the tendency for taxation and spending
to increase with GDP per capita). Another limit on increasing tax revenues in
less developed countries (LDCs) has weak administrative systems that have
made it difficult to collect revenue (Kiser & Sacks, 2011). It will be interesting
to see if economic growth and administrative capacity increase in LDCs, and,
if they do, if tax revenues increase as a result.
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WILL TAX REVENUE IN ASIA INCREASE TO MATCH THE WEST?
A related question is whether Asian states will ever match the tax revenues
collected in Europe. Tax revenues/GDP are lower among both developed
and less developed states in Asia than their counterparts at similar levels of
development (Tanzi & Zee, 2000, p. 303), leading to a debate about whether
Asian states are violating Wagner’s Law (Chang, 2002). The jury is still out,
but the fact that tax policy is focused primarily on growth coupled with a
low demand for welfare spending could well result in a lower ceiling on tax
revenue in Asia than in Europe. The main factor determining the level of tax
increase in the future is probably the demand for spending on welfare. The
demand for welfare spending could increase if the provision of welfare by
families and firms (such as lifetime employment policies in some economic
sectors in Japan) continues to decrease, and this would lead to an increase in
tax revenues in Asian states.
EXPLAINING TAX STRUCTURE
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What and who states tax is a central issue in the study of taxation, and there
are many interesting directions for future research in this area. This section
will focus on two of them: (i) Is the long period of increasingly progressive
taxation ending? and (ii) Are taxes oriented to addressing social problems
rather than just raising revenue increasing?
IS THE ERA OF PROGRESSIVE TAXATION ENDING?
There are increasing signs that the era of progressive taxation is ending.
Highly progressive income taxes began around World War I (WWI) and
peaked in the middle to late twentieth century, with average top marginal
rates in the developed world over 60% until the 1980s, but they have recently
dipped to under 40% (Scheve & Stasavage, 2016). This is occurring in spite of
increasing inequality,1 as Scheve and Stasavage (2016) show that inequality
alone does not prompt more progressive taxation. Progressivity has also
declined in the last couple of decades in Japan (Steinmo, 2010, pp. 135–138),
suggesting that this may be a global and not just western trend.
The trend toward declining progressivity is caused by several factors. First,
progressivity causes increasing administrative problems in the globalized
economy. Because of the increasing ease of moving and hiding money, the
rich have opportunities to avoid and evade taxes by moving assets across
national borders in ways that working-class taxpayers cannot, so countries
1. Piketty (2014) suggested that the decreasing top marginal tax rates actually contribute to growth in
inequality.
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relying more on taxing the rich will get less net tax revenue (Prasad, 2012,
p. 170). Tax fraud and illegal cross-border capital flows are by far the most
common and largest of all illegal transactions (Schneider, 2013, p. 699). Second, highly progressive tax systems promote and reinforce adversarial class
relations which result in lower revenue (Prasad, 2006), so states interested in
increasing their tax revenue will be forced to use more regressive taxes. Third,
and part of this adversarial fiscal culture, Martin (2013) has shown that policy
proposals to increase progressivity are sometimes met by resistance from the
rich and that these “rich people’s movements” can be successful in blocking progressivity. Finally, Scheve and Stasavage (2016) note that the causal
mechanism responsible for the initial rise of progressivity, mass conscription
for war, is unlikely to occur again in the era of drone warfare. Is the decline
of progressive taxation likely to continue? This should be a major focus of
research going forward.
IS TAXATION FOR SOCIAL PURPOSES INCREASING?
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In general, taxes are collected for the purpose of raising revenue, but a subset of tax policies has another distinct motivation. Taxes such as sugar taxes
or carbon taxes can be used to internalize negative externalities (often called
Pigovian taxes), and help correct present preference biases, self-control problems, and imperfect information, all which likely lead to undesirable levels of “bad” consumption (Brownell & Frieden, 2009; O’Donoghue & Rabin,
2003).
Empirical work on two well-established sin taxes, alcohol, and tobacco,
suggests this strategy is effective at reducing consumption, and might also
lead to positive social outcomes, especially in measures of health (Chaloupka,
Straif, & Leon, 2011; Wagenaar, Tobler, & Komro, 2010). While these sin taxes
are quite common, a more recent trend is taxing unhealthy food, notably sugary beverages. Since 2010, taxes on sugary products have emerged around
the world in the form of national- and city-level policies—such as France,
Hungary, Mexico, and Norway, as well as several US cities including Berkeley and Philadelphia. Additional countries are now planning to implement
similar policies, including UAE and the Philippines. Like the policies applied
to alcohol and tobacco, these new taxes should reduce consumption as soft
drinks and juices are price elastic (Andreyeva, Long, & Brownell, 2010). One
study already finds support for the effectiveness of the Berkeley tax (Falbe
et al., 2016), but we do not know what conditions lead to these adoptions
and what can explain variations in design in these nascent policies—these
are important topics for future research.
Environmental taxes place additional costs on environmental degradation
by making certain activities more expensive and incentivize shifting to
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cleaner alternatives (Baranzini, Goldemberg, & Speck, 2000). The most
substantial environmental taxes are carbon taxes. Carbon taxes primarily
apply to fuels and energy, priced proportional to carbon content. The first
carbon taxes were adopted in Finland, the Netherlands, Norway, Sweden,
and Denmark, and similar policies have continued to spring up around
Europe and the rest of world. Many of these policies have been introduced
as part of Environmental Tax Reforms, which include concurrent reductions
in other taxes such as those on labor or capital, making policies net revenue
neutral (Bosquet, 2000). Most existing carbon taxes include exemptions and
rebates for industry, agriculture, and transit (Ekins & Speck, 1999). While
this can make the policies more politically feasible (Harrison, 2010), it is
likely they also inhibit their carbon-reducing potential (Ciocirlan & Yandle,
2003). There is much debate over whether the policies are having an impact
(Nadel, 2016), and few studies have looked at the determinants of adoption
and policy design.
COLLECTING TAXES: TAX ADMINISTRATION AND TAX EVASION
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Even in the best modern bureaucratic administrative systems, tax evasion is
still a significant problem. For example, the “tax gap” (the percentage of total
tax obligations that are not paid) for the US income tax is about 14%, and over
half of the income of businesses is unreported (Slemrod, 2007, pp. 28, 45).
Between 1965 and 2010, tax evasion was by far the largest economic crime in
the US, averaging 5% of GDP (the total for all other crimes is 2%) (Schneider,
2013).
In the developed world, the ubiquity of centralized bureaucratic administration has decreased the utility of models like agency theory that focus on
organizational structure and incentives. There is very little variation on those
dimensions (the only notable exception is that some states are more prone to
clientelistic recruitment of agents instead of hiring on merit, and this does
have important consequences). In order to explain variations in the tax gap
in the developed world, we need to look more closely at the determinants
of voluntary and quasi-voluntary compliance by taxpayers (Frey & Torgler,
2007; Levi, 1988; Lieberman, 2003).
Studies of tax compliance in modern states consistently show that rational choice deterrence models based on the odds of getting caught and the
severity of punishment explain some of the variation (Slemrod, 2007, p. 43)
but predict far more tax evasion than actually occurs (Alm & Torgler, 2006).
This strongly suggests that voluntary and/or quasi-voluntary compliance
has important effects. For example, will people be more willing to pay taxes
if the state provides adequate public goods in exchange and if they think
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other taxpayers are paying their fair share (Levi, 1988)? Do increasing political divisions affect tax payments? Are people more likely to pay if their
favored party is in power and less likely when the opposition rules? To what
extent do general values of good citizenship affect propensities to pay (Robbins and Kiser, 2018)? Further research on these topics is necessary to explore
the micro foundations of tax compliance beyond rationality and deterrence.
WILL TAX ADMINISTRATION IN LDCs DEVELOP LIKE THE CENTRALIZED BUREAUCRACIES
OF THE DEVELOPED WEST?
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Problems with administration in less developed states are well known, and
Pepinsky, Pierskalla, and Sacks (2017) provide a detailed summary, so we
raise only one issue here. Tax administration has become so bad in some contemporary less developed states that they have partially privatized their tax
administration (this paragraph draws on Kiser & Baker, 1994 and Kiser &
Sacks, 2011). Although this is not a return to premodern tax farming (agents
are only partial residual claimants and are more highly regulated), it is a
move away from standard bureaucratic administration. African states illustrate this process. The centralized bureaucracies African states inherited from
colonial powers devolved into corrupt neopatrimonial bureaucracies riddled
by patronage relations that produced little revenue. This failure of centralized
bureaucratic administration (predictable in the context of poor communications, transportation and information processing in much of Africa) has
led many African states to partially privatize administrative systems (these
are usually called Semi-Autonomous Revenue Authorities). Because of the short
duration of experiments with partial privatization, it is very difficult to judge
the success of these reforms. However, it seems clear that they have produced
some improvement in efficiency, while also creating new problems, such as
over-taxation (Kiser and Baker (1994) for a discussion of partially privatized
tax administration in Asian states).
THE RELATIONSHIP BETWEEN TAXATION AND SPENDING
Tax revenue sets general, long-term constraints on spending, working via
what we call “rubber band” causation—spending can be stretched beyond
revenue, but only so far and only for so long, until it is pulled back, in one way
or another. We should be attempting to explain variations in the elasticity of
the rubber band throughout history—how tightly (and by what mechanisms)
is state spending tethered to total revenue? In other words, what determines
the amount and duration of deficit spending?
Deficit spending has become ubiquitous in states in the developed world, as
predicted decades ago by (O’Connor, 1978). However, the Marxist argument
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(O’Connor, 1978) makes about the causes of deficits is both too vague (he
points to features of the structure of advanced capitalism but does not specify
clear causal propositions) and lacks microfoundations. Work on deficits in the
future should certainly pay attention to features of economic structure, but
should also look at factors affecting the discount rates of rulers (Levi, 1988),
and in democratic states the discount rates of voters (since personal debt is
also increasing).
There are also interesting consequences of the accumulation of debt due to
persistent budget deficits. Perhaps the most important is its effect on state
legitimacy. Taxpayers generally view taxes as payments made in exchange
for public goods, thus they roughly compare the amount they pay to what
they get back, and judge the legitimacy of their state in part by whether or not
they are getting a fair deal for their money (Levi, 1988). From this perspective,
states that have a large debt/GDP ratio will also have consistent legitimacy
deficits. For example, if they have to use 10–15% of tax revenue to pay interest
on their debt, taxpayers will be getting 10–15% less in public goods than they
paid in taxes. This will delegitimize states and fuel the rise of anti-state and
anti-tax parties and social movements based on arguments that the state is
ineffective and inefficient. We are already seeing this process develop, and as
long as deficits continue to pile up state debt it is likely to continue.
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MOVING BEYOND A FOCUS ON STATES
Thus far, we have assumed that states are the proper unit of analysis for the
study of taxation. We will now move beyond that assumption and consider
factors at other levels of analysis. We first look at the dynamics of taxation in
nested political systems, both with the rise of supra-states (taking the EU as
an example) and the rise of sub-state independence movements (using Catalonia as an example). The section concludes with an exploration of regional
similarities in tax systems and processes that cut across multiple independent political units, using the high levels of tax evasion in two large regions
(postcommunist central Europe and southern Europe) as examples.
NESTED POLITICAL SYSTEMS
The rise of political units encompassing multiple states but allowing member
states to retain sovereignty (e.g., the EU) raises interesting issues for tax policy. The EU is currently a minimal state with very low levels of taxation. Its tax
revenue is slightly less than 1% of EU GDP, and it comes from a combination
of taxes on trade in and out of the EU, a small percentage of value-added tax
(VAT) taxes collected in EU member states, and contributions from member
states based on their gross national income (GNI) (European Commission,
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2014). Although there is currently no trend toward EU revenue increasing,
greater demands on it to provide public goods for all member states could
easily drive up revenue in the future. If that begins to happen, will it place
downward pressure on taxation in member states?
At the same time that supra-state political units are rising, so too are
sub-state regions seeking more autonomy and sometimes even independence, and this too has important implications for tax policy. Catalonia is
one example of this process. One of the most commonly cited reasons for
the Catalan independence movement is that the region gives more to the
central government in taxes than it gets back in state spending. Although
estimates of the extent of this “fiscal imbalance” vary (Mount, 2015; Terol,
2017), scholars agree that Catalonia is, in fact, paying more than it is getting
back. The interesting question is whether debates about fiscal imbalances
will become an emerging trend in the politics of taxation. It is often true
that richer regions of countries (like Catalonia) will have negative fiscal
balances with the central state and that poorer regions will have positive
fiscal balances. For example, in the United States, states like California,
New York, New Jersey, and Delaware have negative fiscal balances whereas
Mississippi, Alabama, and North and South Dakota have positive fiscal
balances. Will this soon become a major axis of conflict in US politics?
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EXPLAINING REGIONAL VARIATIONS
As we noted earlier, explaining increases in tax evasion should be a focus in
future research. One interesting question concerns clusters of states with high
rates of tax evasion. Tax evasion is particularly high in two separate regions
on Europe, each encompassing multiple independent states. These regional
variations force us to think beyond the internal dynamics of nation-states in
seeking explanations.
Post-communist countries were faced with “an acute crisis of state
capacity” after the transition (Ganev, 2005, p. 427) as a result of an “incapable
tax administration” (Easter, 2002, p. 621). One of the main problems was
hiring on the basis of clientelism rather than merit, increasing the expense
and decreasing the effectiveness of administration (Grzymala-Busse, 2007,
pp. 5–6). Differences in levels of corruption in postcommunist states were
mainly a function of party competition—when sufficient competition
existed, parties had incentives to create more effective administration
(Grzymala-Busse, 2007, pp. 10–12). However, in addition to these institutional effects, fiscal culture is also important. The long period of imposed
state socialism dramatically decreased the legitimacy of Eastern European
states, and led to development of habits of noncompliance that persisted
after the transition. Moreover, the knowledge that many other citizens were
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not paying their taxes undermined quasi-voluntary compliance further,
leading to a vicious circle of decreasing compliance (Kiser & Levi, 2015).
Future research should address the relationship between institutional and
cultural causes of high tax evasion in post-communist states.
The debates about high tax evasion in Southern Europe (Italy, Spain,
Portugal, and Greece) are in most respects similar. The Italian case is illustrative (this paragraph draws on Ginsborg, 2006). The tax evasion rate in Italy
is around 18–19%—roughly three times as much as most OECD countries.
The problem is especially severe in both the VAT and income taxes. The
main groups evading taxes in Italy are small businesses and people involved
in the informal economy. One of the main causes is institutional clientelistic
recruitment of officials. In addition to that, Italian political culture views
corruption of all types (including tax evasion) as both pervasive and morally
neutral, such that people not engaging in corrupt practices are viewed not
as moral but as suckers. The pervasiveness of this political culture makes tax
collection extremely difficult, as taxpayers pay little or no moral/reputation
cost for evasion (but see Zhang, Andrighetto, Ottone, Panzano, & Steinmo,
2015 for some interesting experimental findings that do not support this
cultural explanation). Again, the most interesting questions for future
research are about the complex interactions between political institutions
and culture.
CONCLUSION
The political economy of taxation is fertile ground for future research. There
are many interesting questions yet to be answered about the determinants
of total tax revenue, tax structure, and tax administration and compliance.
By highlighting a few of these questions, we hope to encourage research that
will address them, and raise some new ones as well.
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Retrieved from http://ecpr.eu/Filestore/PaperProposal/4d826b59-052d-423f8870-db757c2b50fe.pdf
Edgar Kiser is a comparative historical and political sociologist who studies
agency theory and the histories of taxation and state formation.
Steven M. Karceski is a political sociologist who studies how political institutions influence tax structure, with a particular interest in consumption and
carbon taxation.
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