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Tax regressivity and the welfare state (number one in a series of enthralling blogpost titles)

- May 2, 2009

One under-appreciated fact of comparative political economy is that the US tax system, for its many faults, is significantly more progressive than the tax systems of ‘continental’ and ‘social democratic’ welfare regimes in Europe. Monica Prasad and Yingying Den find “general support for this”:http://ser.oxfordjournals.org/cgi/reprint/mwp005?ijkey=65cyoW8oR1QgGoI&keytype=ref (PDF) from the Luxembourg Income Study.

bq. Our study supports the general picture that the USA has more progressive taxes than the continental or social democratic countries. The comparative tax picture maps onto the ‘worlds of welfare’ typology, but it is the social democratic states that have the most regressive taxes and the liberal USA that has the most progressive taxes.

More generally, the authors find a broad inverse relationship between tax progressivity and welfare state efforts – the more progressive a country’s taxation system, the less likely that it has an active welfare state, and vice-versa. The causal argument goes that countries with regressive tax systems have found it easier to maintain welfare states against the pressures of globalization, because their tax base rests on a relatively immobile asset – labour. What is interesting though, is that the UK (which one might have thought to be somewhere between the US system and the continental European position, and closer to the former than the latter, is an outlier with _more_ regressive taxes than either standard continental (e.g. France, Germany) or social democratic (e.g. Sweden, Norway) welfare states. The authors suggest that this is a result of Thatcher’s policy of shifting the tax burden away from income to VAT, and speculate that it might fund welfare state expansion in future years. Their argument is that consumption taxes, like taxes on labour, are likely to be relatively unaffected by globalization. Equally interesting (and poorly understood) is that most types of taxes (e.g. income taxes, property taxes etc) are not _inherently_ progressive or regressive (the exception being consumption taxes, which they find to be universally regressive across their sample); also their criticisms of the comparative aspects of Picketty and Saez’s arguments about regressivity.