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Political Institutions and Tax Policy in the United States, Sweden, and Britain

Published online by Cambridge University Press:  13 June 2011

Sven Steinmo
Sven Steinmo
Affiliation:
University of California
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Abstract

This essay addresses the question, “Why do different democracies pursue different public policies?” through an examination of taxation policy in the United States, Sweden, and Britain. The essay demonstrates how the different decision-making structures found in these three democracies (characterized as pluralist, corporatist, and party government systems, respectively) bias each polity toward different types of policy outcomes. The key argument is that institutional structures are the context in which political actors must necessarily define their policy preferences and determine their strategic objectives. Institutional structures thus provide a central link between individual choice behavior and macro policy outcomes.

Type
Research Article
Information
World Politics , Volume 41 , Issue 4 , July 1989 , pp. 500 - 535
Copyright
Copyright © Trustees of Princeton University 1989

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References

1 Pluralists, of course, suggested this explanation several decades ago, but it is continually being reviewed in new versions. Corporatists, for example, generally accept the principle that groups will fight for their short-term self-interest, but argue that the pluralist characterization of the bargaining process is inaccurate. See Wilson, Frank, “Interest Groups and Politics in Western Europe: The Neo-Corporatist Approach,” Comparative Politics 16, No. 1 (1983)CrossRefGoogle Scholar. Power Resource theorists use the same basic characterization of politics as the pursuit of economic self-interest and argue that various democracies pursue different public policies because different groups (now parties) possess different “power resources” with which to fight for their constituency's self-interest. See Castles, Francis, “The Impact of Parties on Public Expenditure,” in Castles, , ed., The Impact of Parties: Politics and Policies in Democratic Capitalist States (Beverly Hills: Sage, 1982)Google Scholar. See also Korpi, Walter, The Democratic Class Struggle (London: Routledge, Kegan Paul, 1980)Google Scholar.

2 For perhaps the best recent articulation of the value (or in his words “idea”) thesis, see Anthony King's three-part article, “Ideas, Institutions and Policies of Governments: A Comparative Analysis,” Parts I, II, and III, British Journal of Political Science 3, Nos. 3 and 4 (1973).

3 See, for example, Nordlinger, Eric, On the Autonomy of the Democratic State (Cambridge: Harvard University Press, 1981)Google Scholar; Katzenstein, Peter, Between Power and Plenty (Madison: University of Wisconsin Press, 1978)Google Scholar; Evans, Peter, Rueschemeyer, Dietrich, and Skocpol, Theda, Bringing the State Back In (Cambridge: Cambridge University Press, 1985)CrossRefGoogle Scholar; Hall, Peter, Governing the Economy: The Politics of State Intervention in Britain and France (Cambridge: Polity Press, 1986)Google Scholar.

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5 See especially Schattschneider, E. E., The Semi-Sovereign People (New York: Holt, Reinhart, 1960)Google Scholar.

6 Hall (fn. 3), 23.

7 See Gershenkron, Alexander, Economic Backwardness in Historical Perspective (Cambridge: Harvard University Press, 1962)Google Scholar, for the basic line of argument here.

8 Hall, , “Patterns of Economic Policy: An Organizational Approach,” in Held, David, ed., States and Societies (Oxford: Martin Robertson, 1983), 370Google Scholar.

9 All data represent 1980 figures. See Organization for Economic Cooperation and Development (OECD) Long Term Trends in Tax Revenues of OECD Member Countries: 1955–1980 (Paris: OECD, 1981)Google Scholar. Sweden has no general property tax. The national wealth tax has been included in the above figures. The U.S. and U.K. had no general wealth taxes in 1980.

10 Michael Harrington, “Do Our Tax Laws Need a Shake-up?” Saturday Review, October 21, 1972. Close to two-thirds of taxpayers in the U.S. feel that the current tax system is “unfair”; H and R Block, The American Public and the Federal Income Tax System (Kansas City: H and R Block, 1986), 9Google Scholar.

11 Witte, , “The Distribution of Federal Tax Expenditures,” Policy Studies Journal 12 (September 1983)CrossRefGoogle Scholar.

12 The term “tax expenditures” refers to exemptions, deductions, tax limitation, reduced rates, credits, or other special measures in the tax code that effectively reduce the tax burden for some individuals, groups, or companies. Tax expenditures are often called “loopholes” in common parlance. The term “expenditure” has been used to remind us that each of these measures produces a loss of revenue to the treasury and as such constitutes expenditures by the government.

13 King and Fullerton designed a general equilibrium model with which to estimate the effective marginal tax rate on capital income. According to their estimates, the U.S. had the highest tax rate of the three countries I examine here. Though rates varied according to assumptions used, the overall marginal tax rates in 1980 were estimated to be: U.S., 37.2%; Sweden, 35.6%; and Britain, 3–7%. Fullerton, Don and King, Mervyn A., The Taxation of Income From Capital (Washington, DC: National Bureau for Economic Research, 1983)Google Scholar.

Since these estimates were made, significant changes to these tax systems have taken place (see below). Moreover, though the Fullerton and King findings largely support the arguments made here, we need to be somewhat careful with this type of econometric analysis. For a good overview of general equilibrium analysis and some of its limitations see Walley, John, “Lessons from General Equilibrium Models,” in Aaron, Henry, Galper, Harvey, and Pechman, Joseph, eds., Uneasy Compromise (Washington, DC: The Brookings Institution, 1988), 15–58Google Scholar.

14 See Lindencrona, Gustav, Mattsson, Nils, Stahl, Ingemar, and Broms, Jan, Enhetlig Inkomst Skatt [Integrated income tax] (Stockholm: SACO/SR, 1986)Google Scholar; or SOU: 1986:40, Utgiftsskatt [Expenditure tax] (Stockholm: SOU, 1986)Google Scholar.

15 The U.S. topped the OECD list in revenue collections (as a percentage of GNP in 1980) in property taxes (except for Britain); inheritance and gift taxes (except for Belgium); and finally, in corporate profits taxes (except for Norway, Canada, Australia, and Japan).

16 There is much controversy in the fiscal economics literature over where the actual burden of corporate taxation lies. It is a matter of considerable importance for designing reforms of the tax code whether one believes that consumers, workers, or capitalists bear the burden of this tax. But for a political scientist, who is principally interested in understanding why certain taxes have been chosen, the real incidence is of less significance than the perceived incidence on the part of legislators and voters. On this score there can be little doubt that both politicians and mass voters generally believe that corporate taxes are in the end paid by “the rich” who largely own the corporations.

17 See Arthur Anderson and Co., “Comparison of Individual Taxation of Long-Term and Short-Term Capital Gains on Portfolio Stock Investments in Seventeen Countries” (Paper prepared for the Securities Industry Association, Washington, DC, April 1987).

18 Britain has long had a Pay as You Earn (PAYE) system, in which the employer computes the taxes due for the employee with each pay check. Only in very unusual circumstances will an individual even fill out a tax return at year's end. Sweden has recently converted to a “no return” system, in which the average taxpayer simply signs a statement testifying that he or she has earned no income other than that reported by his or her employer(s). The individual's tax payment is then computed by the tax authorities at the end of the tax year.

19 See also Federalist Nos. 31, 32, and 33.

20 See for example Skowronek, Steven, Building the New American State (Cambridge: Cambridge University Press, 1982)CrossRefGoogle Scholar.

21 See Korpi, Walter and Shalev, Michael, “Strikes, Industrial Relations and Class Conflict in Capitalist Societies,” British Journal of Sociology 30 (June 1979), 164–87CrossRefGoogle Scholar. Theodore J. Lowi also presents a particularly relevant discussion of these variables in “Why Is There No Socialism in the United States? A Federal Analysis,” in Golembrewski, Robert and Wildavsky, Aaron, eds., The Costs of Federalism (New Brunswick, NJ: Transaction Books, 1984), 37–54Google Scholar, where he offers a compelling argument linking the absence of programmatic parties in the U.S. to federalism.

22 Margaret Weir and Theda Skocpol, “State Structure and the Possibilities for Keynesian Response to the Great Depression in Sweden, Britain and the United States,” in Evans et al. (fn. 3), 136.

23 The literature documenting this process is voluminous. See, e.g., Manley, John, The Politics of Finance (Boston: Little, Brown, 1970)Google Scholar and Witte, John, The Politics and Development of the Federal Income Tax (Madison: University of Wisconsin Press, 1985)Google Scholar.

24 Witte (fn. 23), 322–24.

25 See Steinmo, Sven, “So What's Wrong With Tax Expenditures? A Re-evaluation Based on Swedish Experience,” Journal of Public Budgeting and Finance 6 (Summer 1986)Google Scholar.

26 See King, Mervyn A., Public Policy and the Corporation (London: Chapman Hall, 1977)Google Scholar.

27 For a discussion of efficiency losses in the U.S. tax structure and a specific examination of effective rates by asset type, see Gravelle, Jane, Tax Reform Act of 1986: Effective Corporate Rates (Washington, DC: Congressional Research Service, 1987)Google Scholar. Gravelle finds that before the 1986 act effective tax rates by asset type ranged from 1% to 45%. After the reform they ranged from 12% to 40%.

28 State, local, and federal governments combined in the U.S. collect less revenue in consumption taxes than in any OECD nation (5.2% of GNP in 1985). The OECD average is 11.2%. General sales taxes contribute only 2% of GNP in the U.S., whereas the European Economic Community average is more than 6%.

29 Witte (fn. 23).

30 See, e.g., Hadenius, Axel, A Crisis of the Welfare State? Opinions about Taxes and Expenditure in Sweden (Stockholm: Almqvist and Wicksell, 1986)Google Scholar.

31 Interviews with author, May 1987.

32 See Downs, Anthony, “Why the Government Budget Is Too Small in a Democracy,” World Politics 12 (July 1960), 541–63CrossRefGoogle Scholar.

33 Quoted in Daley, Charles, Tax Cuts and Tax Reform: The Questfor Equity (Washington, DC: American Enterprise Institute, 1978), 20Google Scholar.

34 Corporate taxes are expected to rise from 8.2% of total federal revenue in 1986 to 11% by 1988. Thus the corporate tax share of total taxation will be close to the pre-Reagan levels (in 1980 the share was 12.5%). See Congressional Budget Office, Economic and Budget Outlook: Fiscal Years 1989–93 (Washington, DC: CBO, February 1988)Google Scholar. According to Fullerton and Karayannis' model, the marginal effective tax rate on capital income increased from 23.5% in 1981 (which was down from the rate before the Economic Recovery Tax Act of 37.3%) to 42.1% in 1986. See Don Fullerton and Marios Karayannis, “The Taxation of Income from Capital in the United States, 1980–1986” (Paper presented to the International Conference on the Cost of Capital, Cambridge, MA, 19–21 November 1987), Tables IV. 1, IV.2, and IV.6.

35 An incredible array of particular interests (from sports teams to certain Indian tribes to the Gallo wine-making family) received special tax favors in 1985 and 1986. For a general analysis of the effects of the 1986 tax reform on tax expenditures see Congressional Budget Office, Effects of Tax Reform on Tax Expenditures (Washington, DC: CBO, March 1988)Google Scholar.

36 Rose, Richard and Peters, Guy, Can Governments Go Bankrupt? (New York: Basic Books, 1978), 99CrossRefGoogle Scholar.

37 See Enrique Rodriguez and Sven Steinmo, “The Development of the American and the Swedish Tax Systems: A Comparison,” Interfax, 1986/3. Of all OECD countries, only Denmark, Norway, and Sweden have no reduced rates for basic necessities. Denmark, Germany, Ireland, Luxembourg, Norway, Sweden, and (currently) Britain have no special high VAT rates on luxury goods.

38 Aguilar and Gustafsson also find that, as measured by the Kakwanis index, Sweden has the least progressive income tax system of the eight they study. On the other hand, Sweden has the most progressive income distribution. See Renato Aguilar and Björn Gustafsson, “The Role of Public Sector Transfers and Income Taxes: An International Comparison” (Working Paper, Luxembourg Income Study, April 1987).

39 The Swedish social security tax is less regressive than the British and U.S. equivalents, however. While both the British and U.S. versions have a ceiling, the Swedes tax all earned income at the same rate, but capital income is exempt.

40 Lindencrona, Gustav, “Skatteformagaprincip och individuel beskattning” [The principle of ability to pay and individual taxation], in Lindencrona, , ed., Festskrift til Jan Heller [Festschrift for Jan Heller] (Stockholm: Norstedt, 1984)Google Scholar.

41 Sola, Eduardo fayos, “The Individual Income Tax and the Distribution of Its Burden: The Swedish Case” (Thesis, University of Stockholm International Graduate School, 1975), 152Google Scholar.

42 Stagnant wealth refers to wealth that is consumed or saved in nonproductive holdings such as jewelry, large estates, etc. See Steinmo (fn. 25).

43 See Kay, John and King, Mervyn A., The British Tax System, 3d ed. (Oxford: Oxford University Press, 1983)Google Scholar.

44 Sodersten, “The Taxation of Income from Capital in Sweden” (Paper prepared for the International Conference on the Cost of Capital, Cambridge, MA, 19–21 November 1987). One must remember, however, that the general equilibrium model calculates rates at equilibrium and therefore does not necessarily represent an accurate picture of rates paid currently by real corporations. See also Michael McKee, and Jacob Visser, “Marginal Tax Rates on Capital Formation in the OECD” (Paper presented at the same conference). McKee and Visser also conclude that marginal tax rates on capital income are substantially higher in the U.S. than in Sweden, but rates range very widely according to asset type and distributions. According to these authors, effective tax rates can range from 87.5% to minus 169.2% at average inflation in Sweden depending on the source of capital, distribution, and type of investment. In the U.S. the rates could range from 94.8% to minus 131.2% at average inflation.

45 Quoted in Steve Lohr, “Sweden: Home of Tax Reform, Arms Scandals and a Strong Defense,” New York Times, September 6, 1987.

46 See Normann, Göran and Södersten, Jan, Skattepolitik resursstyrning och inkomstutjämning (Tax policy, resource allocation and income leveling) (Stockholm: I.U.I., 1978), 184Google Scholar.

47 Proportional representation is a necessary but not sufficient prerequisite for the development of societal corporatism. A high degree of economic concentration seems also to be a prerequisite.

48 Quoted in Korpi (fn. 1), 48.

49 These policy ideas were originally suggested by economist Erik Lindhal, who advocated them in a Swedish government research report in the late 1920s. SOU: 1927:33, Promemorior rorande vissa beskattnings fragor av 1927 are skatte beredning [Memorandum concerning certain tax questions of the 1927 tax commission] (Stockholm: SOU, 1927)Google Scholar.

50 The information in this section was provided by Gunnar Strang (minister of finance from 1956 to 1976) in an interview with the author, May 1983.

51 James, S. and Nobes, C., The Economics of Taxation (London: Philip Allen, 1981), 135Google Scholar.

52 See Morrissey, Oliver and Steinmo, Sven, “The Influence of Party Competition on PostWar UK Tax Rates,” Politics and Policy 15, No. 4 (1987)CrossRefGoogle Scholar.

53 Rose, Richard and Karran, Terrence, Increasing Taxes? Stable Taxes or Both? The Dynamics of United Kingdom Tax Revenues Since 1948, Center For the Study of Public Policy Monograph No. 116 (Glasgow: CSPP, 1983), 37Google Scholar.

54 See King (fn. 26), 258–59.

55 The student of U.S. tax policy history may be unimpressed. In the U.S. there may be even more specific changes in tax provisions affecting various types of investments in particular industries, particular products, or particular companies in a single year. The difference, however, is that these changes in the British system were quite general and affected all industry—not just particular firms or types of industries as is common in the U.S. Specific changes were also made during these years in favor of particular industries in the U.K. But these were in fact fewer in number than the general changes listed above.

56 King (fn. 26), 5–6.

57 Dilnot, Andrew, Kay, John, and Morris, Nick, The Reform of Social Security (Oxford: Clarendon Press, 1984), 1Google Scholar.

58 See Morrissey and Steinmo (fn. 52). See also Robinson, Anne and Sandford, Cedric, Tax Policy Maying in the United Kingdom (London: Heineman, 1983)Google Scholar.

59 I use PDI statistics because they encompass a whole range of changes in the income tax, including tax rates, exemption levels, and personal deductions.

60 It should be noted here that the British figures must be viewed with some caution. Due to the profound secrecy with which British governments view tax information, no direct examinations of tax returns are possible as in the U.S. and Swedish cases. Joseph Pechman's data were derived by applying British taxes to the distribution of incomes found in the Brookings merge file (see Pechman, Joseph and Okner, Benjamin, Who Bears the Tax Burden? [Washington, DC: The Brookings Institution, 1974]Google Scholar). This is not an ideal approach, but it is the only study of total effective tax burdens in the U.K. available.

61 Kay and King (fn. 43), 18.

62 Finer, Sam, “Adversary Politics and Electoral Reform,” in Finer, , ed., Adversary Politics and Electoral Reform (London: Anthony Wigram, 1975), 6Google Scholar.

63 In fact only the topmost elite within the party and the Treasury have any say in tax policy formation. “Revenue changes are solely a tool of macro-economic management considered separately by the Treasury, and announced to the cabinet by the Chancellor in practice for information, not approval—just before the Budget is publicly presented in March or April”; Heclo, Hugh and Wildavsky, Aaron, The Private Government of Public Money, 2d ed. (London: Macmillan, 1981), 179–80CrossRefGoogle Scholar.

64 An example of this can be found as recently as 1984 when the Thatcher government announced on budget day that they would substantially restructure the corporate income tax system. Until that day in March no one outside a very small group of Treasury officials and the prime minister even knew that a reform of the corporate tax system was under consideration. Even the head of the Conservative Party's research department, Peter Cropper, did not know that a corporate tax reform was in the offing until he heard the budget speech on the radio that day.

65 T. Wilson, “The Economic Costs of the Adversary System,” in Finer, ed. (fn. 62), 112.

66 Rose, Richard and Karran, Terrence, Taxation By Political Inertia: Financing the Growth of Government in Britain (London: Allen and Unwin, 1987)Google Scholar.

67 ibid., 148.

68 See, for example, The Eleventh Report of the Expenditure Committee Session 1976–77, House of Commons Papers 535-I (London: HMSO, 1977)Google Scholar.

69 Cf. Anton, Thomas, Linde, Claes, and Mellbourn, Anders, “Bureaucrats in Politics: A Profile of the Swedish Administrative Elite,” Canadian Public Administration 16, No. 4 (1973), 638–39CrossRefGoogle Scholar.

70 In fact it is quite common for talented young officials to be promoted from the supposedly apolitical civil service directly into political positions within the Ministry of Finance.

71 See Heclo and Wildavsky (fn. 63) for a more detailed view of the administrative practices and culture of the British administrative class.

72 Since World War II, for example, there have been 17 chancellors of the exchequer. In Sweden there were only 3 ministers of finance in this same period.

73 Taverne, , “Looking Back,” Fiscal Studies 4, No. 3 (1983), 5CrossRefGoogle Scholar.

74 Chancellor Hugh Dalton encountered such opposition to his plan to increase marginal tax rates on the wealthy in 1947 that he was forced to write the proposal himself.

75 A plethora of evidence has been presented by fiscale conomists to demonstrate that effective tax burdens in the U.K. have been dramatically altered in the past decade. See the annual post-budget analysis of the government's tax reforms, published by the Institute for Fiscal Studies in their Fiscal Studies. The budget analysis articles are generally included in the second issue of each annual volume and are usually written by Andrew Dilnot et al. Unfortunately, however, no studies have summarized the effects of all revenue changes since 1978.

76 See Cedric Sandford, “Capital Taxes—Past, Present and Future,” Lloyds Bank Review, October 1983.

77 A complete discussion of this apparently unorthodox Conservative tax reform lies outside the scope of this essay. Two important features are worth noting, however. First, the types of companies whose effective tax rates increased the most were large, capital-intensive, manufacturing concerns—these corporations are also heavily unionized. Second, though retained profits taxes were increased, the taxation of distributed profits has been made less severe.

78 Financial Times, March 16, 1988.

79 Specifically, the government has proposed to abolish the existing property tax system (known as rates) and replace it by a head tax. No longer will local taxation be based on propertied wealth, but instead will be based on size of the household.

80 Quoted in the San Francisco Examiner, September 1, 1985, p. A-12.

81 Stewart, Michael, The Jekyll and Hyde Years: Politics and Economic Policy since 1964 (London: J. M. Dent and Sons, 1977), 241Google Scholar.

82 See, for example, Simon, Herbert A., “Human Nature and Politics: The Dialogue of Psychology with Political Science,” American Political Science Review 79 (June 1985), 293–304CrossRefGoogle Scholar.