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Worlds of Taxation pp 17–48Cite as

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How Employers and Conservatives Shaped the Modern Tax State

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Abstract

Coordinated nations with large welfare states rely on comparatively regressive “mass tax” systems, whereas liberal countries with limited welfare states historically embraced more progressive “class tax” systems. This chapter explores the origins of these paradoxical strategies. It suggests that “mass” and “class” tax strategies come from different models of revenue policymaking, organized around the logic of state-building versus crisis mobilization. A state-building model, which produces the mass tax, transpires in countries with strong political institutions for consensual policymaking, and includes support by business and the right, whereas a crisis-mobilization model, which produces the class tax, occurs in countries with few institutions for consensual policymaking. This argument is supported with quantitative data from 1900 to 2000 and case studies of the United States and Denmark.

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Notes

  1. 1.

    Okun, Equality and Efficiency.

  2. 2.

    Steinmo, Taxation and Democracy; Wilensky , Rich Democracies; Kato, Regressive Taxation; Lindert, Growing Public; Cusack and Beramendi, “Taxing Work”; Ganghof , “Tax Mixes”; Beramendi and Rueda, “Social Democracy Constrained”; Prasad and Deng, “Taxation and the Worlds.”

  3. 3.

    For a similar summary of the puzzle focused more on the question of social spending, see Korpi and Palme, “The Paradox of Redistribution.”

  4. 4.

    Aidt and Jensen , “Tax Structure, Size of Government”; Flores-Macias and Kreps, “Political Parties at War”; Scheve and Stasavage “Conscription of Mass Wealth,” Taxing the Rich.

  5. 5.

    Ganghof, “Tax Mixes”; Kato, Regressive Taxation.

  6. 6.

    Cusack, Iversen , and Soskice, “Economic Interests and the Origins”; Martin and Swank, Political Construction of Business Interests.

  7. 7.

    Perhaps most prominently, see Piketty, Capital in the Twenty-First Century. For the consensus on the left for taxing the wealthy as a means of reducing inequality during the 2016 presidential campaign in the United States, see Cohen, “What Could Raising Taxes on the 1% Do?”

  8. 8.

    This data comes from the OECD Income Distribution and Poverty Database. Tax progressivity is measured as the difference between the concentration coefficient of income after transfers but before taxes and the concentration coefficient of income after both taxes and transfers. The definition of taxes includes household taxes and employee social security contributions and is generally from the mid-2000s. Data accessible from https://doi.org/10.1787/421784425386. Despite drawbacks with the OECD measure, studies using different data support this finding. Kenworthy , Social Democratic America; Prasad and Deng, “Taxation and the Worlds.”

  9. 9.

    Wilensky , Rich Democracies.

  10. 10.

    Brownlee, “Wilson and Financing the Modern State”; Prasad, Land of Too Much.

  11. 11.

    Bensel, Sectionalism; Hays, “Globalization and Capital Taxation”; Rodrik, Trade, Social Insurance; Swank and Steinmo, “New Political Economy of Taxation.”

  12. 12.

    Flores-Macias and Kreps, “Political Parties at War”; Tilly “Warmaking and Statemaking.”

  13. 13.

    Scheve and Stasavage, “Conscription of Wealth,” Taxing the Rich.

  14. 14.

    Acemoglu and Robinson, Economic Origins; Peters, Politics of Taxation; but Aidt and Jensen “Tax Structure.”

  15. 15.

    Korpi, Democratic Class Struggle, but Korpi and Palme, “Paradox of Redistribution.”

  16. 16.

    Cusack and Beramendi “Taxing Work”; Ganghof , “Tax Mixes”; Kato, Regressive Taxation; Lindert, Growing Public; Prasad and Deng, “Taxation and the Worlds”; Steinmo, Taxation and Democracy.

  17. 17.

    Beramendi and Rueda, “Social Democracy Constrained.”

  18. 18.

    Streeck, Social Institutions, 265–84; Martin and Swank, “Does the Organization of Capital Matter?,” Political Construction of Business; Lindert, Growing Public.

  19. 19.

    Martin and Swank, Political Construction of Business.

  20. 20.

    Piketty and Saez, “How Progressive”; Scheve and Stasavage, “Conscription of Wealth.”

  21. 21.

    Scheve and Stasavage, “Conscription of Wealth.”

  22. 22.

    Data from Flora et al., State, Economy, and Society, as compiled by Seebohm, “Development of the tax structure.”

  23. 23.

    Compiled by Martin and Swank, Political Construction of Business.

  24. 24.

    This measure comes from Martin and Swank, “Does the Organization of Capitalism Matter?” and Lijphart, Patterns of Democracy. The effective number of political parties as a continuous variable comes from Mackie and Rose, International Almanac.

  25. 25.

    Data from Bolt and Zanden, First Update of the Maddison Project.

  26. 26.

    Data from Mitchell, International Historical Statistics.

  27. 27.

    Data from Mackie and Rose, International Almanac.

  28. 28.

    Data from Mitchell, International Historical Statistics.

  29. 29.

    Data from Scheve and Stasavage “Conscription of Mass Wealth.”

  30. 30.

    Data from Flora et al., State, Economy, and Society, as compiled by Seebohm, “Development of the tax structure.”

  31. 31.

    Federalism may also shape the demand for redistributive taxes. Obinger, Leibfried, and Castles, Federalism.

  32. 32.

    Scheve and Stasavage, “Conscription of Wealth,” Taxing the Rich.

  33. 33.

    This section draws from material also discussed in Martin, “Labor Market Coordination”; and Martin, Shifting the Burden.

  34. 34.

    Udfærdiget gennem Finansministeriet, Lov om Indkomst-og Formueskat til Staten 1922, Rigsdagstidenden for 1921–1922: Folket. Tid. Sp. 2503; Johansen, Indkomstskatter, 160–1; Martin “Labor Market Coordination.”

  35. 35.

    Glydendals, Skatter.

  36. 36.

    Hyldtoft, Danmarks Økonomiske Historie, 184–5.

  37. 37.

    Johansen, Indkomstskatter, 21–37.

  38. 38.

    The Right Party (later the Conservative Folk Party representing industrialists) and Liberal Party ( representing wealthy farmers) anchored the right, and the Social Democrats and Radical Liberals anchored the left. Fearing a loss of power to a labor-farmer coalition, the Right Party helped to form the Federation of Danish Employers (DA) in 1895. Industrial relations became much more cooperative and employers subsequently became crucial to the evolution of the welfare state. Martin and Swank, Political Construction.

  39. 39.

    Hansen, Økonomist vækst, 310; Glydendals, Skatter.

  40. 40.

    Johansen, Indkomstskatter, 135–6, trans. by Martin.

  41. 41.

    Giltner, “Success of Collaboration,” 501; Gersmann, Therkildsen, and Meyer, Fra Importregulering.

  42. 42.

    “Efter skatteforliget på rigsdagen”; “Eengangsskatten.”

  43. 43.

    “En Henvendelse Vedrørende Forslaget til Skatteudskrivningsloven.”

  44. 44.

    Gersmann, Therkildsen, and Meyer, Fra Importregulering; “Direkte Eller Indirekte Skatter.”

  45. 45.

    Kauffeldt, Det Konservative Folkepartis, 115; Fink, DA i Danmark, 59–60.

  46. 46.

    “Meroms og skattereform,” 14–5; Folketingsårbog, Lov om almindelig omsætningsafgift, 77–9.

  47. 47.

    See Martin, “Labor Market Coordination”; Brownlee, “Wilson and Financing,” “American Way,” Federal Taxation in America; Morgan and Prasad, “Federal Taxation”; Thorndike, “Unfair Advantage.”

  48. 48.

    Brownlee, “Wilson and Financing,” 195–8; Robinson, “Federal Corporation Tax,” 693–4; Baack and Ray,” Special Interests,” 609, 614.

  49. 49.

    Bensel, Sectionalism and American Political Development.

  50. 50.

    Martin and Swank, Political Construction.

  51. 51.

    Brownlee, “Wilson and Financing,” 173–81; Journal of Political Economy, “Washington Notes,” 1001; Morgan and Prasad, “Federal Taxation in America”; Mehrotra, “More Mighty Than the Waves of the Sea,” 178; Baack and Ray, “Special Interests,” 609, 614.

  52. 52.

    Hickey, “Taxation,” 11; Nation’s Business, “State Income Tax,” 1.

  53. 53.

    Nation’s Business, “Business Call on Mr. Coolridge,” 46.

  54. 54.

    Prasad, Land of Too Much, 107.

  55. 55.

    Thorndike, “Unfair Advantage,” 29–38.

  56. 56.

    Osgood, “Federal Revenue Policies,” 53–4.

  57. 57.

    On class and business backlash to progressive taxation, see especially Martin, Rich People’s Movements.

  58. 58.

    Heller to JFK 11/28/1961.

  59. 59.

    CQ Press 1962, 478.

  60. 60.

    CQ Press 1964, 518; Mooney, “U.S. Chamber,” 1, 47.

  61. 61.

    Heller to JFK, 11/10/1962.

  62. 62.

    Martin, Shifting the Burden.

  63. 63.

    Mettler, The Submerged State.

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Author information

Authors and Affiliations

  1. Columbia University, New York, NY, USA

    Alexander Hertel-Fernandez

  2. Boston University, Boston, MA, USA

    Cathie Jo Martin

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  1. Alexander Hertel-Fernandez
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Editor information

Editors and Affiliations

  1. ETH Zurich Institute of History, Zürich, Switzerland

    Gisela Huerlimann

  2. University of California, Santa Barbara, Santa Barbara, CA, USA

    W. Elliot Brownlee

  3. Keio University, Tokyo, Japan

    Eisaku Ide

Technical Appendix

Technical Appendix

Data Sources for Top Income Tax Rates

For top marginal income tax rates, we started with data from Scheve and Stasavage (2010). These data covered top rates in the United States, the United Kingdom , the Netherlands, Canada, Sweden, and France. We obtained data for Australia and New Zealand from the dataset compiled by Atkinson and Leigh (2010). Data for Denmark was provided by Jakob Engholt Søgaard (from Atkinson and Søgaard 2013). We obtained top rates for Italy from Facundo Alvaredo and Elena Pisano (2010). Data for Belgium’s circa 1930 top rate came from Harvard Widener Library’s League of Nations Documents (Public Finance Volume, 1929–1935), as did the circa 1920 and 1930 top rates for West Germany and Norway. Data for Belgium’s circa 1950 observation was provided by the Belgium Ministry of Finance to the authors. Data for West Germany’s circa 1950 top rate was provided to the authors by the German Ministry of Finance. Data for all countries after 1960 are from Piketty, Saez, and Stantcheva 2014.

Table 5 Summary statistics for main analysis
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Hertel-Fernandez, A., Martin, C.J. (2018). How Employers and Conservatives Shaped the Modern Tax State. In: Huerlimann, G., Brownlee, W., Ide, E. (eds) Worlds of Taxation. Palgrave Studies in the History of Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-90263-0_2

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