Taxation, Globalization and the
Welfare State
Sven Steinmo
University of Colorado
Former Social Democratic
Chancellor of Germany,
Helmut Schmidt
• “The welfare state is such a good
idea”… (but given globalization)
“there will be a need to reduce the
burden of social services, reduce
taxation and find new ways to be
competitive in the global economy.”
Source: Yergin and Stanislaw, “The Commanding Heights”, 2001
“Race to the Bottom?”
Taxation as a percent GDP 1975-2000
Cont i nued T ax gr owt h
43
41
39
37
35
33
31
29
27
25
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
OE CD A ver age
1986
1987
1988
E ur opean A ver ge
1989
1990
1991
1992
1993
1994
1995
1996
Average Growth and Tax Burdens in the OECD
1995-99
IRE
9
Growth = -0.04Avg. Tax Burden + 4.74
2
R = 0.024
Average GDP Growth
8
7
6
LUX
5
FIN
AUS
4
US
ICE
SPN
PRT
3
NLD
NOR
CAN
GRC
NZ
UK
BEL
AUT FR
ITA
2
JPN
1
25
DEU
SWZ
30
SWE
DEN
35
40
45
Average Tax Burden
Source: OECD, Revenue Statistics of Member Countries. Available online: www.sourceoecd.org
50
55
Cutting Taxes at the Top:
Personal Income Tax
Rates, 1976-1997
Country
Australia
Austria
Canada1
Finland1
France
Germany
Ireland
Italy
Japan1
Netherlands 1
New Zealand
Norway1
Sweden1
United Kingdom
United States1
Unweighted
Average
1976
1997
reduction 1997 - 1976
65
62
43
51
60
56
77
72
75
72
60
48
57
83
70
47
50
31
39
57
53*
48
51
50
50*
33
23
25
40
39
-17
-12
-14
-12
-3
-3
-25
-22
-25
-12
-27
-35
-37
-43
-39
63.4
42.4
21.7
Sweden: High Taxes and High
Growth?
Tax Burdens and Growth Rates:
Tax % GDP
GROWTH RATES (increase over previous year as % GDP)
2000
2000
2001
2002
2003
2004
SWEDEN
53.5
3.6
1.2
1.7
2.5
2.8
GERMANY
37.5
2.9
0.6
0.4
1.5
2.5
JAPAN
28.5
2.6
-0.3
-0.7
0.8
0.9
U.S.A.
28.5
3.8
.3
2.3
2.6
3.6
Source: OECD Economic Outlook, 2002, No.72
Why no Race to the Bottom?
• The welfare state is an insurance system (fiscal
churning). All insurance is redistributive and
can be economically efficient.
• Taxation finances public spending on
infrastructure, education etc. which can be
social investment.
• Capital flows where it will make a profit, not to
where its costs are lowest.
• Individual mobility is in fact very limited (corporate
relocation of an executive averages 1/3 million dollars today).
• Taxes are a small part of costs.
• Voters oppose cuts in public spending.
Lesson From the Swedish Case
• Knut Rexed, (special advisor to the Prime Minister):
• “There will be increased competition
between countries due to
internationalization. But it won’t be the
country with the lowest tax rates that wins.
It will be the countries which have the
most efficient use of resources that wins.”
Looking into the future of
advanced Welfare States
Why No Convergence?
1. Demography
2. Political Commitment
3. Public Trust
Demography
Net Migration 1998
(Percent of Total Population)
0.25
0.24
0.20
0.17
0.15
0.10
0.06
0.05
0.00
-0.04
-0.05
Germany
Japan
US
Source: Trends in International Migration 2000, 2000 World Development Indicators and Statistical Yearbook of the INS 2000
Note: Data for US net migration based on emigration estimates of the UN and Euoropean Commision - see Appendix 2
Sweden
Percentage Voters By Age
USA, 2002
Percentage of Voters by Age
18-24
65+
25-44
45-64
65+
45-64
25-44
18-24
Policy Patterns and Political
Commitment
Political Choices t1
Æ
Political Challenges t2
1997 Social Welfare Expenditures
(% of GDP)
35.0
33.7
30.0
27.8
25.0
20.0
15.0
14.8
16.5
10.0
5.0
0.0
Japan
US
Germany
Sweden
Source: OECD Social Expenditures Database - Common Programmes - Public and M andatory Private Programmes (2001) Available online: www.sourceoecd.org
Government as Employer
Percent of Total Employment
Government Employment
35
30
25
20
15
10
5
0
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000
Germ any
Japan
Sour ce: Assembled f r om OECD St at si t ci al Compen dium 1st ed. 19 9 9
Not e: OECD Aver age Con st r uct ed f r om High- I n come OECD st at es excludin g Lux.
Sw eden
US
OECD Avg
Private Social Benefits Expenditures
(% of Total Social Benefits Expenditures)
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
0.0
Germany
Source: " The Growing Role of Privat e Benefit s" OECD Working Papers Vol 6 no 51
Sweden
United States
Explaining the Reagan Democrats
The Effect of Redistribution on 1/2 Median Income Families of Four
(1995 US Dollars and PPPs)
30000
27539
26229
25000
22483
20000
18301 19001
17618
15000
10000
5000
0
Germany 1994
Market Earnings
Source: Compiled from Luxembourg Income Study
Note: For a full discussion of methods and definitions see Appendix 3
Sweden 1995
US 1997
Earnings After Redistribution
Political Trust?
Attitudes towards public spending in Sweden, 1981-1997
“Taxes go to different purposes. Do you think that the amount of tax money that goes to
the purposes named below should be increased, held the same, or reduced?”
Percent who would increase expenditures (+)
Percent who would reduce expenditures (-)
1992
1997
(+) 52.7
(-) 4.4
(+)76.9
(-) 2.1
Support for the elderly
(+) 60.3
(-) 1.7
(+) 69.5
(-) 1.7
Housing support
(+) 31.8
(-) 14.5
(+) 41.0
(-) 11.0
Social help (welfare)
(+) 13.2
(-) 26.3
(+) 20.9
(-) 20.9
Research and higher education
(+) 37.6
(-) 7.3
(+) 34.4
(-) 7.5
Public schools
(+) 37.6
(-) 7.3
(+) 70.4
(-) 1.0
Employment policy measures
(+) 61.7
(-) 7.0
(+) 46.7
(-) 19.5
State and local government administration
(+) 2.5
(-) 71.0
(+) 2.8
(-) 68.0
Health care
(number of respondents)
1500
1300
Source: Svallfors, S. (1999). Mellan risk och tilltro: Opinionsstödet för kollektiv
välfärdspolitik (Between risk and confidence: Opinion support for collective welfare
policy. Umeå, Sweden, Umeå University, page 16.
Political Trust
Trust in
politics*
Interest
in
politics
Japan
USA
Germany
27
31
69
49
69
63
*Respondents answering “the people” rather than “big interests” run politics.
Source: Susan Pharr, in Pharr and Putnam. “Disaffected Democracies”, (2000), p. 175