New institutionalism has emerged as one of the most prominent research agendas in the field of comparative politics, political economy and public policy. This paper examines the role institutional variation in political/economic regimes in shaping tax burdens in industrialized democracies. An institutionalist model for tax policy variation is tested across the OECD democracies. Countries are conceptualized and statistically modeled in terms of "majoritarian," "shifting coalition," and "dominant coalition" governments. Regression analysis and cluster analysis are used to statistically model cross-national tax burdens relative to the strength of labor organization and party dominance in parliament. We find political as well as economic "institutions" are important in explaining tax policy variation. Specifying the structure of political and economic institutions helps us to explain the very size of the state in modern capitalist democracies. This essay, then, does more than suggest that institutions matter. It specifies and demonstrates which matter and how much they matter.

New institutionalism has emerged as one of the most prominent research agendas in the field of comparative politics, political economy, and public policy. The central analytic point shared by both major analytical traditions within new institutionalism -- historical institutionalists and rational choice institutionalists -- is that institutions provide the strategic context in which political actors make policy choices. Institutional contexts, they suggest, frames actors' strategic choices and thereby shape public policy. New institutionalist scholars have thus offered explanations for both variation in policy outcomes in several countries and, more recently, policy continuity and change within countries (Hall 1986; Hattam 1993; Immergut 1992; Levi 1988; March & Olsen 1992; North 1990; Shepsle 1986; Skowronek 1982; Steinmo, Thelen & Longstreth 1992; Tsebelis 1990; Weaver & Rockman 1992; Weir 1992). But precisely because these studies offer such nuanced and sophisticated understandings of unique institutions in particular historical contexts it is reasonable to question their theoretic reach. A cynic could argue, for example, that these scholars post-hoc reconstruct institutional explanations for idiosyncratic differences in policy outcomes. In short, policy outcomes vary in every country as do political institutions.

This article tests for the impact of institutional variation on tax outcomes acrosss OECD nations. Our evidence suggests that variations in both politicl and economic institutions significantly affeect the share of GDP taken by the state in OECD nations.
 
 

There are three different general explanations for variations in tax burdens across modern capitalist democracies. These explanations are related and can be intertwined, but for the purposes of this analysis, we shall treat then as distinct arguments.

First, and perhaps most obvious explanation is that varying levels of taxation are related to macro-economic structures. It is reasonable to expect that richer countries could "afford" to tax their economies more heavily than poorer counties. Similarly, faster growing countries may have higher (or for that matter, lower) tax burdens than slower growing countries. Surprisingly, these macro-economic explanations -- population of a county, import/exports as a percent of GDP, wealth measured by per capita GDP, growth measured by change in GDP -- provide little or weak explanations for variation in tax burdens. Richer or larger countries, for example, do not have higher tax revenues than poorer or smaller ones.⁽¹⁾

The second explanation is that variation in tax policy in democratic states is a product of variation in public attitudes or voter preferences towards taxation in these states. But as numerous scholars have noted, there are vexing problems in measuring and comparing public opinion cross-nationally (Couglin 1980, 1982; Hansen 1983; Lewis 1978). Public opinion polls rarely ask the same question and/or wording, context, and order generally differ across countries as well as over time. Even when these technical difficulties are overcome, there are serious problems about whether the same words evoked the same meaning in different cultural and language contexts.

Having noted these problems, it is interesting to note that there does seem to be a rather remarkable consistency in public attitudes towards taxation in all advanced democracies: people hate taxes. Numerous studies in different OECD democracies indicate that citizens feel their tax burdens are "too high" (cf. Couglin 1980, 1982; Hansen 1983; Lewis 1978; Laurine 1986; Peters 1991; Rose and Karran 1983; Taylor-Gooby 1987). There appears to be wide consensus that the rich and corporations do not pay enough taxes, that the poor and middle classes pay too much in taxes and taxes in general are "too high." At the same time, however, there is equally strong cross national evidence that the public does not believe in cutting taxes if that means cutting back in services provided by the government (cf. Couglin 1980, 1982; Hansen 1983; Lewis 1978; Taylor-Gooby 1987). Anthony Downs's (1960) seminal essay, "Why the Government's Budget is Too Small in a Democracy," helps us explain the dynamics here. Most public spending is a public good, and the benefits from spending are either assumed or taken for granted by voters. Taxes, especially direct taxation, in contrast are directly perceived (and indeed felt with each paycheck).⁽²⁾

A more satisfying approach to studying public preferences is to use electoral outcomes as a proxy measure for public preferences. The logic here is that in countries where left parties win a large share of the vote, citizens are presumably more "pro-state" and less anti-tax than in countries where conservative parties win a larger share of the public vote. Several scholars have found some support for the hypothesis that public preferences measured by the proxy left party control of government explain variations in tax burdens.⁽³⁾ The result is that citizens/voters generally feel that the specific taxes they pay are out of line with the specific benefits they receive. When we add Anthony Downs' observation that taxes often go to public spending programs that individual voters/citizens may give low priority or even be outright hostile to,⁽⁴⁾ it should be unsurprising that taxes are widely resisted and resented in all countries and at all times.

The third explanation for variations in tax burdens across countries is what has been called an "institutionalist" explanation. The basic logic of this hypothesis agues that different institutional structures set the rules of the political or policy game in different ways. Institutional rules provide different incentives to political actors, yielding different power resources and interests. Different institutions shape the context in which individuals and groups define their interests, and thus, institutions shape the strategic choices of policy actors (Hall 1986; Hattam 1993; Immergut 1992; Levi 1988; March & Olsen 1992; North 1990; Shepsle 1986; Skowronek 1982; Steinmo, Thelen & Longstreth 1992; Tsebelis 1990).

There is widespread agreement among scholars of taxation that states want to expand their resources but are limited by public resistance to tax increases. Levi (1988:3) tells us: "Rulers are predatory in the sense that they are revenue maximizers" (See also, Bates 1989; Brennan and Buchanan 1980; Downs 1957; Hansen 1983; North 1991; Mitchell 1980; Steinmo 1993). In essence these scholars argue that variation in tax policies is explained as a product of variations in the institutional structures through which revenue maximizing elites must work. At the most general level, if a nation's institutional structure facilitates a high degree of autonomy with respect to taxation policy there will be a tendency to have higher taxes than in a country in which elites are more constrained by public opinion.

A weakness of the institutional literature, to date, is that scholars of revenue politics present plausible analytic models which may help us understand some of the basic dynamics of revenue politics. They tend, however, to demonstrate their models through a mix of highly disparate case and historical examples. Though rational choice analyses begin with a highly deductive model, their substantive analyses tend to be interpretive histories in which they blend their stories into often rigid theoretical models. The problem with this, in our view, is that the case study approach offered by these scholars provides an unsatisfactory assessment of the general "institutionalist" analytic model.

Others, whom we will call "economic institutionalists" have shown that countries with highly concentrated large unions, strong union confederations and national collective bargaining have distinctive spending policy outcomes. Economic institutionalists tend to focus on the positive policy impacts and stabilizing effects of corporatism on macro economic performance (Alvarez, et. al. 1991; Bruno & Sachs 1985; Cameron 1984; Crepaz 1992; Crouch 1985; Gourevitch 1986; Lehner 1988; Schmidt 1982; Scharpf 1984) or economic growth (Hicks 1988; Hicks & Patterson 1989, Lange and Garrett 1985). Others contend that "corporatist" systems tend to have lower levels of strike activities than countries with pluralist systems of interest representation (Cameron 1984; Humphries 1990; Korpi & Shalev 1979). Though they do not always spell out the micro-foundations of their models, these analysts have shown, for example, that corporatist countries are more effective at achieving positive macroeconomic results such as lower inflation rates, lower unemployment rates, and higher economic growth rates than their pluralist counterparts.

With respect to tax policies, economic institutionalists such as Garrett and Lange (1985) suggest that the integration of labor into the bargaining process is related to higher social welfare expenditures and increased policies of redistribution. In countries where business and labor interests are highly organized and integrated into the governmental decision process, tax policy choices are made with the consent of labor and business interests and follow a cohesive, comprehensive strategy for raising revenues and providing governmental services. A highly organized structure of labor and business interests provide a conducive environment for elites from each arena to bargain with governmental officials over economic goals and social welfare policies.⁽⁵⁾

In contrast, where interests are organized into groups which are narrow in focus, numerous, and external to the decision-making process, policy makers must respond to a much wider variety of demands and interests. In this context, policy choices tend to be more piecemeal and have shorter time horizons. The logic of these arguments is both compelling and appears to provide some broader empirical tests of the arguments presented by the rational choice institutionalists discussed above.

But clearly economic institutions are only one set of structures shaping macroeconomic policy choices. Given this logic, one would expect the structure of political institutions to shape economic policy choices in individual countries, much as the structure of economic institutions appears to do. Unfortunately, "economic institutionalists" have not pressed their analyses in this direction. We suggest that the failure of these scholars to account for variation in political institutions helps explain their sometimes unimpressive statistical findings, particularly in the area of fiscal policy.

Lijphart and Crepaz (1991) move in the right direction by incorporating political institutions (consensus vs. majoritarian democracies) with systems of interest group representation (corporatism vs. pluralism). They contend that the economic institutions of corporatism are an element of consensus democracies and create a new scale of consensus democracies incorporating the concept of corporatism. More recently Crepaz (1994) has pushed this research farther and finds that political institutions measured by consensus/majoritarian democracies account for much of the variation in macro-economic policies, such as unemployment and inflation in industrialized democracies. This work does not explore the impact of political or economic institutions on fiscal policies, such as taxation and spending.

Steinmo (1993) provides a model that explicitly attempts to integrate political and economic institutional explanations for variation in taxation policies in Britain, Sweden and the United States. He uses an historical institutionalist framework to argue that both the structure of a nation's economic institutions (such as labor organization) as well as political institutions (such as constitutional/ electoral structures) shape the strategic choices of those involved in tax policy making. He argues that differing political and economic institutions in the three countries he examines to present tax policy makers and interest groups with differing incentive structures with respect to tax policy compromises. These institutional contexts, then, ultimately shape different policy outcomes.

Specifically, Steinmo shows that fragmentation of political authority (due to federalism and the division of authority within national political institutions) and the low degree of economic concentration in the United States explains the highly particularistic, relatively progressive,⁽⁶⁾

and very low revenue yielding tax system found in this country. Taken together, these political and economic institutions lead actors to fight for policies which are in their short-term self interest, resist any tax increases even in the form of hidden taxes, and to seek out specific exemptions and 'loopholes' - even as these same groups demand the expansion of public programs.

In Sweden's case, the high degree of economic concentration on the one hand, and the stable non-majoritarian political institutions on the other, explain how and why Swedish authorities have been able to develop the very stable, relatively regressive and extremely high revenue tax systems found in this corporatist country. Because economic interest groups are highly concentrated and because of Sweden's uniquely stable electoral system, policy makers and interest groups have been able to develop tax policies which levy very heavy burdens on the average citizen but which protect the country's capital interests from onerous (i.e. uncompetitive) taxes. This system produces huge tax revenues which can then be spent on redistributive social welfare programs, but does not overburden Sweden's corporate enterprises.

In Britain, a moderate degree of economic concentration combined with the highly unstable political institutions (due to the centralized single member first-past-the-post electoral system) creates a distinctive political calculus for both governments and interest groups. This institutional structure results in a highly unstable tax structure, but one which in the end collects a sufficient amount of revenue from a wide variety of tax sources.

As interesting as this argument may be, it is in many ways unsatisfactory for precisely the same reasons that the rational choice institutionalist analyses we discussed above were found wanting. Steinmo's work suggests it has implications beyond the three cases he examines but he offers little in the way of proof. Once again, the cynic could argue that there is infinite variation in both tax and institutional structures. Thus, perhaps this kind of historical institutionalism offers a new way of looking at history, but it does not necessarily offer much to explain outcomes outside the specific cases examined in the particular histories.

The present research aims to apply this theory of tax policy variation to the remaining industrialized democracies. We expect economic and political structures to shape fiscal policies, by setting the parameters of policy-making decision arena.

Ordinary Least Squared (OLS) regression is used to analyze a number of scholarly explanations for variations in tax burdens in industrialized democracies. The literature on macro-economic policy outcomes stresses the importance of economic institutions, such as corporatism. We also assess the impact of varying political structures on tax burdens. The dependent variable is measured by total tax revenue as a percentage of Gross Domestic Product (GDP) in OECD democracies for two time periods, 1980 and 1990 (OECD Economic Indicators, 1993).

A. Measures of Economic Institutions

Previous research has shown that labor organization provides a useful explanation for macro-economic policy outcomes (Cameron 1984; Garrett and Lange 1989; Hicks and Swank 1992; Western 1993). A common measure of the structure of economic institutions is "corporatism." We rely on a measure developed by Lijphart and Crepaz (1991) who create a composite measure of corporatism based on measures from twelve neo-corporatist scholars (1950s-1070s). The authors standardize the values of each measure and use the average for each country to create a composite measure of corporatism. Unfortunately, from our point of view, these measures of corporatism combine a number of factors, including left-party control of government, in addition to the structure of labor organization.⁽⁷⁾

Our definition of institutions includes both political and economic structures, but does not include measures of partisan control of government. We see left versus right party control of government not as measures of institutions, but of public preference. In contrast to previous research (Hicks and Swank 1992), we attempt to define institutions and measures of institutional structures more precisely in order to more accurately test for their effects on tax policy outcomes. Since our aim is to measure how institutions - both economic and political - affect tax burdens, we use simple, direct measures of institutions (percent of the workforce unionized, union centralization, party dominance in government), rather than composite indexes that include variables measuring electoral/partisan and institutional features (Crepaz and Liphart 1991, Hicks and Swank 1992).

Economic institutions can also be measured by the degree to which labor is centralized, hierarchically organized and incorporated into the decision-making process. We use Cameron's (1984) formulation to measure labor's institutional power.⁽⁸⁾

This measure of labor organization not only analyzes union membership, but other characteristics of union structures and labor activities which are important elements of a country's economic institutional context. The features measured by Cameron for the OECD democracies include: 1) union membership,

2) organizational unity of labor movement, 3) confederation power in collective bargaining, and 4) the scope of collective bargaining.^.(9)

Corporatist countries are expected to have a high percentage of the work force unionized, industry and economy-wide bargaining, while pluralist countries are expected to have lower union membership and decentralized collective bargaining.

Measures of the degree of corporatism in industrial democracies are useful, but they are also limited. Lijphart and Crepaz (1991) find that while there is "little disagreement among scholars on the placement of the countries at the ends of the scale: corporatist Austria, Norway and Sweden, and pluralist Canada and the United States. In the middle of the scale there is more disagreement - Switzerland, France, Italy and especially Japan are controversial" (239). The level of disagreement found among these studies reveals that they are each missing an important set of variables that would more accurately specify their models. We suggest the missing variable shaping policy is the structure of political institutions.

B. Measures of Political Institutions

While there is an enormous variety of political institutional structures to be found in the democratic world today we group them into three categories. These categories are related to - but not precisely the same as - the basic electoral rules used for electing national political officials. As is well known, different electoral rules have enormous implications for the strength of governments, the longevity of these governments, even whether majority or minority governments are likely to form. But, again, given the enormous variation in the electoral rules affecting election outcomes, we choose to study the effects of the different electoral rules rather than attempt to measure the precise relationship between electoral rules and governing outcomes.

We see three types of "governing outcomes" relevant. We call these 1) Majoritarian Polities, 2) Dominant Coalition Polities, and 3) Shifting Coalition Polities. Majoritarian polities are systems in which the electoral rules extant in a country tend to lead to governments in which a party consistently controls more than 50% of seats in parliament and thus can more or less effectively control the legislative agenda. There can be major shifts in these systems when the dominant party is "thrown out" by the electorate, but between elections control over the policy agenda tends to be relatively stable. Dominant coalition polities are systems in which one party tends to control close to 50% of seats in the legislature, but rarely achieves a majority. Governments in these cases can often dominate the policy agenda, but due to a lack of an absolute majority in the legislature (or legislatures), these parties must generally form coalition governments with other smaller parties. These coalitions tend to be quite stable. Shifting Coalition Polities are systems in which there is rarely a single party that is substantially more powerful than other political parties. The largest political party rarely wins more than one-third of parliamentary seats. Here there tend to be several parties who vie for leadership. Governments in these systems tend to be relatively unstable.

It is important to recognize that these basic electoral outcomes result more from institutional differences between countries than from differences in public preferences. There are a host of electoral/constitutional differences which affect these electoral outcomes which are far too complex and varied to go into adequately here. For example, there are a wide variety of proportional representation electoral systems, different electoral minimum, different regional distributions, etc. To understand our point here, one need only consider the electoral implication if the US switched to a proportional representation electoral system. We would not wish to predict any specific electoral outcome changes resulting from such an institutional change, but we are willing to predict that neither of the two currently dominant political parties would be able to win a majority of seats in either house of Congress. This institutional change, in short, would affect voter's strategic choices and affect the structure of power in Washington, whether or not it affected voters actual policy preferences.

We believe that our measure of party dominance can be conceptualized as an institutional incentive toward compromise. When political and economic interests have an high incentive to compromise it is easier to hold together long-term political coalitions. The consequence of a high incentive to long-term stable compromise is higher spending. The consequence of higher spending is higher taxes.

In dominant coalition governments with proportional electoral systems there is a high incentive to compromise over taxation and spending. Moreover, when the dominant party knows they cannot win absolute control of the machinery of government or dominate their opponents, there is an "institutional" incentive to engage in long-term compromises with economic coalition partners. These coalitions between social/political/economic interests increase the likelihood that higher spending is paid for by higher taxation.

When political and economic interests have high incentives to defect from compromise, it is more difficult to construct and hold together the political coalitions necessary to raise taxes. Thus, in countries where no single party dominates (Shifting Coalition Polities), social/political/ economic interests will attempt to extract particularistic benefits, such as tax reductions or increased spending. Because party control of government is a multi-player game, in which no party has enough power to sanction defectors (as in dominant party regimes), there is an increased incentive to defect from compromise and shirk their share of the tax burden. The difficulty of holding coalitions together would lead us to expect lower tax burdens in multi-party political systems with shifting coalition governments.

In countries where one party can control government (Majoritarian Polities) there is an incentive for the party in power to shift tax burdens away from their supporters, even while raising spending. In these electoral systems, the party in control knows a relatively small shift in the popular vote can result in massive swings in who controls the offices of government. In this institutional context there are two complementary incentives holding tax levels down -- even in the face of demands for higher spending: the party in power has a lower incentive to compromise over taxation and spending because they can adopt policies without opposition or small party support. At the same time, groups or interests outside of government can reasonably expect that the next election might bring a new party to government; thus they have a low incentive to strike long-term coalitional deals with the current party in power. In sum, there is very little incentive for the government to buy off with spending groups not in power, and there is also a strong incentive for groups in and out of power to believe they can have the spending they want and not pay the taxes needed to finance this spending. The result is lower taxation and spending.

An institutionalist interpretation would thus predict that Dominant Coalition Polities will have the electoral stability to engage in long-term tax commitments resulting in higher tax burdens, while shifting coalition governments will tend to engage in short-term tax policy negotiations leading to more moderate tax burdens. Finally, in countries where the dominant party controls over fifty percent of the seats in parliament -- Majoritarian Polities -- we would expect that political and economic interests would demand short term public policies, leading to lower overall taxation.

A. Bivariate Relationships

A series of bivariate regression models are used to assess the impact of economic and political institutions on overall tax burdens. Figures 1and 2 show the impact of the Lijphart/Crepaz (1991) measure of corporatist economic institutions on total tax burdens in seventeen OECD democracies in 1980 and 1990. The measure of corporatism accounts for roughly forty percent of the variation in tax burdens across industrialized democracies. The scatterplots indicate corporatist countries with strong labor organization tend to have higher tax burdens, while non-corporatist, or pluralistic countries have lower levels of taxation. This relationship between economic institutions and tax burdens is consistent for both 1980 and 1990. Analysis (not shown) using union membership and union centralization as the independent variables yielded similar results. But the structure of economic institutions provides only half of the picture.

Using linear regression, we regress overall taxation (in both 1980 and 1990) on the Lijphart and Crepaz's (1991) index of consensus democracies; the models accounts for less than 15 percent of the variation in taxation across our seventeen OECD democracies. But theory and practice suggest there is a stronger, if more complex, relationship between political institutions and tax policy.

Figures 3 and 4 suggest that the relationship between party dominance in parliament and levels of taxation is more complex than a simple linear relationship. While one might predict a straight forward relationship (i.e., countries with a large collection of small political parties might have a tendency to "bargain up" taxes in order to buy off voters) we find instead a curvilinear relationship. These data indicate instead that countries that have one dominant party (defined as a political party that gets 44%-49.9% of seats in parliament, but less than a majority in parliament), tend to have higher taxes than either countries where one party has a majority in parliament or countries in which no party is dominate. In general, then, majoritarian governments are associated with lower overall tax burdens. But as the percentage of seats won by the dominant party in parliament decreased, tax burdens were also lower. Shifting coalition governments, where the dominant party controls on average under 43 percent (country mean) of the seats in parliament, are clustered in the lower left and right-hand quadrant of the graphs. Thus countries where the dominant party clearly controls a majority of the seats and in countries where the dominant party controls only a small minority of seats in parliament, are associated with lower tax burdens.

Tax burdens tended be the highest in dominant coalition governments -- Norway, Sweden, Austria -- concentrated in the upper middle section of Figure 3 and 4. This suggests that when the dominant party consistently controls just under fifty percent of the seats in parliament there is an increased institutional incentive to compromise over spending, leading to higher taxation.

To measure this non-linear relationship, a second order polynomial curve fit is used to estimate the impact of "party dominance" (percentage of seats won by the dominant party in parliament, 1968-1988) on total taxation. In models using 1990 and 1980 tax burdens, the structure of political institutions accounts for between 33 and 45 percent of the variation in levels of taxation across countries. This is roughly the same explained variance as accounted for by structure of economic institutions (cf. Figure 1). The curvilinear relationship indicates a greater impact of party dominance on taxation at the tails of the curve, in "majoritarian" or "dominant" coalition governments.

Both models suggest that tax burdens are lowest in majoritarian governments (lower right quadrant of graph) where the dominant party in parliament controls over fifty percent of the seats. Tax burdens are moderate in shifting coalition governments (left half of graph), in which the dominant party controls less than 45 percent the seats in parliament. In dominant coalition governments (center top segment of graph), such as Norway and Sweden, tax burdens are the highest.

Certainly these figures indicate that there is much more to predicting tax outcomes than simply knowing the percentage of seats won by various parties in parliament. But we are impressed by the fact that there does seem to be such a clear relationship and that it is not the classical linear relationship one might at first expect. If it is not the expected relationship, how can we explain these outcomes?

The logic of the political institutional approach suggests that the structure of a nation's political institutions shape or frame the decision making matrix faced by policy makers and activists. In this case, we suggest that we are seeing precisely this type of framing. In countries where a single party controls a majority of seats in parliament (Majoritarian governments), there are fewer incentives to buy off political allies with large increases in public spending targeted at these groups. Indeed, the incentive may well be to instead cut taxes for your own supporters, if you can hold spending within acceptable fiscal limits. In countries where a single party can dominate the parliamentary process (Dominant Coalition governments) the institutionally framed incentives may be quite different. In these cases, dominant party elites can effectively "cut deals" with coalition parties over taxes and spending. Because the dominant party is dominant, the coalition parties can have a reasonable expectation that if they agree to passing tax increases they (or their consitutents) will specifically benefit from the increases in public spending. The institutional incentives are quite different in shifting coalition governments, however. In these cases, the largest political party may realistically be toppled from office. Deals struck that increase taxes on your constituents under one government may actually produce revenues that benefit other parties' constituencies under later governments. In short, one might have expected palities with lots of small political parties to engage in tax and spend bidding wars, and thus to have the highest average tax burdents: We instead find that there is a smaller incentive to compromise over tax issues in these countries and therefore they have lower average tax burdens than countries with dominant coalition governments.

B. Combining Political and Economic Explanations

The non-linear relationship between taxation and political institutions illustrated in Figures 3 and 4 can be depicted in a linear model by including both the unaltered and squared estimates for party dominance in parliament. This allows us to use Ordinary Least Squared (OLS) regression to assess the combined impact of political and economic institutions on varying levels of taxation. Table 1 (Models A1 and B1) indicates the relationship between taxation and party control of parliament is indeed a polynomial curve, changing directions (or signs) in relation to varying levels of taxation. The coefficient for party dominance in parliament is positively related to higher levels of taxation, while the squared coefficient for party dominance is inversely related to higher taxation.

Table 1 also controls for the impact of economic institutions . Economic institutions are measured by: 1) the percent of the total work force unionized, 2) union centralization, and 3) confederation powers in collective bargaining 1965-1980 (Cameron 1986). The indicators of labor organization are highly correlated, so each equation includes only one of the three measures.⁽¹⁰⁾ In each model, as the strength of the labor movement increased -- higher percent of the work force unionized, more centralized labor unions, or greater powers in collective bargaining -- so did overall tax burdens. These findings suggest that economic and political structures had a combined impact on varying levels of taxation in both 1980 and 1990. The models in Table 1 account for nearly fifty percent of the cross-national variation in tax burdens, using only three parameter estimates.

Controlling for economic institutions further clarifies the relationship between political institutions and levels of taxation. Models A2 and A4 (Table 1) indicate that both political and economic institutions are statistically significant in explaining tax burdens in 1990, while only the parameter estimates for economic institutions (Model B2 and B4) are significant using 1980 data.

So, why do some governments tax their citizens more heavily than others? Our findings suggest levels of taxation are powefully influenced by both the structure of economic institutions (labor organization) and political institutions (party/electoral structures). We do not suggest that the structure of a country's political and/or economic institutions determine the level of taxation to be found in a country. Clearly a number of variables are important -- only some of which are "testable" in a statistical analysis such as this one. Still, our analysis clearly indicates that differences in economic institutions correlates with differences in tax burdens: Highly centralized labor organization is associated with higher overall tax burdens, while decentralized labor organization, was associated with lower levels of taxation. Similarly, the structure of a country's political institutions also appears to have important implications for the size of that country's tax burden. We did not find (nor did we expect) a straight linear relationship between electoral structures and tax burdens. Instead we found a curvelinear the relationship between political institutions and tax burdens. In countries where the dominant party clearly controls a clear majority of the seats and in countries where the dominant party controls only a small minority of seats in parliament, taxes tend to be lower than in "dominant coalition governments" where the party in power consistently controls just under fifty percent of the seats in parliament. In this political context, there is the greatest institutional incentive to compromise increasing spending and overall taxation.

It has become nearly passé to argue that institutions matter. Virtually all political scientists readily agree to this rather innocuous statement. But tough questions remain: How do they matter? What kinds of institutions matter? Do they matter in similar ways in different contexts? Indeed, is the concept of "institutions" analytically useful given their infinite variations? Once again, the cynic could argue that both rational choice and historical institutionalists can tell an infinite number of illustrating stories, but are less successful at empirically testing these arguments across a wide variety of cases and or time periods.

We believe that his paper moves us in this direction. To be sure, this study is limited. We test the argument only within the family of OECD nations within a relatively short time period. The historical institutionalist may find this analysis dissatisfying because it attempts to reduce the enormous complexity of different country's political and economic institutions into discrete, measurable variables. The behaviorist may find this exercise dissatisfying because our interpretation of the data may extend beyond the breadth of our models. There is truth in each of these criticism -- even while they argue in exactly opposite directions. But rather than simply throw out historical analysis as "simple story telling" or discount cross-national statistical analysis as "mindless number crunching," this essay bridges these literatures.

This essay, then, does more than suggest that institutions matter. It specifies and demonstrates which matter and how much they matter. Clearly, the structure of political and economic institutions do not explain everything (cf. Steinmo and Thelen, 1992). When examined together, however, they do provide a powerful explanation for the very size of the state in modern capitalist democracies.

Model A1 Model A2 Model A3 Model A4

Won by Dominant Party (1.15) (.90) (1.10) (1.06)

Percent of Seats² -.04*** -.02** -.03** -.03**

(.01) (.01) (.01) (.01)

Percent of Workforce .26***

Unionized (.08)

Union Centralization .10

(.06)

Confederation Power in .12**

Collective Bargaining (.06)

(Constant) -8.19 -1.62 -11.52 -6.72

(22.84) (17.78) (21.86) (20.66)

Adjusted R² .32 .59 .38 .44

Standard Error 5.98 4.62 5.70 5.41

N = 17.00 17.00 17.00 17.00

F = 4.68*** 8.69*** 4.24*** 5.17***

Model B1 Model B2 Model B3 Model B4

Won by Dominant Party (1.16) (1.01) (1.04) (1.01)

Percent of Seats² -.03** -.02 -.03** -.02

(.01) (.01) (.01) (.01)

Percent of Workforce .24***

Unionized (.09)

Union Centralization .12**

(.06)

Confederation Power in .14***

Collective Bargaining (.06)

(Constant) -2.12 4.02 -6.34 -.38

(23.20) (19.14) (20.91) (19.82)

Adjusted R² .26 .50 .41 .46

Standard Error 6.07 4.98 5.45 5.18

N = 17.00 17.00 17.00 17.00

F = 3.85** 6.43*** 4.66*** 5.59***

**p < .05; ***p < .01 (two tailed).

Appendix A

Party Dominance --

% of seats won % of votes won Electoral bias --

dominant party dominant party Proportional vs. Country 1968-1988 1968-1988 Plurality Systems

Switzerland 26.00 24.09 1.91

Finland 27.14 25.14 2.00

Netherlands 31.04 29.71 1.33

Denmark 34.77 33.83 0.94

Italy 40.26 37.16 3.10

Germany 42.21 41.21 1.00

France 43.87 32.04 11.83

Sweden 45.26 44.04 1.21

Norway 45.71 41.71 4.00

Austria 49.57 48.40 1.17

Ireland 49.69 46.20 3.49

Australia 52.83 45.67 7.16

Japan 53.54 46.29 7.26

United Kingdom 54.34 42.89 11.46

Canada 55.11 43.51 11.60

United States 60.83 53.96 6.87

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New institutionalism has emerged as one of the most prominent research agendas in the field of comparative politics, political economy and public policy. This paper examines the role institutional variation in political/economic regimes in shaping tax burdens in industrialized democracies. An institutionalist model for tax policy variation is tested across the OECD democracies. Countries are conceptualized and statistically modeled in terms of "majoritarian," "shifting coalition," and "dominant coalition" governments. Regression analysis and cluster analysis are used to statistically model cross-national tax burdens relative to the strength of labor organization and party dominance in parliament. We find political, as well as economic "institutions" are important in explaining tax policy variation. Specifying the structure of political and economic institutions helps us to explain the very size of the state in modern capitalist democracies. This essay, then, does more than suggest that institutions matter. It specifies and demonstrates which matter and how much they matter.
 
 

1. ¹While there are modest correlations between certain macro-economic variables and particular tax revenues, these piece-meal explanations are not statistically significant in explaining variation in overall tax structure. For example Katzenstein has shown, import sensitive countries have particularly low corporate taxes. Analysis indicates that the Pearson (r) correlation between imports as a percent of GDP and total taxation as percent of GDP in 1980 was .48 and .40 in 1990. The correlation between exports as a percent of GDP and total taxation in 1980 was .51 and .45 in 1990. Finally, the correlation between size of a county -- Gross Domestic Product (GDP) -- and total tax burdens in 1980 was .47 and .38 in 1990.

2.

² Consumption taxes can be more transparent, or less hidden, as can property or wealth taxes. There is considerable variation in the implementation and administration of these so-called "hidden taxes." Studies indicate that citizens are aware of these burdens and often over-estimate their real costs (Lewis 1978).

3. See, for example, Cameron's measure of the degree to which leftist or social democratic parties have dominated government for eighteen countries. Data were collected from 1965 to 1982 on the proportion of seats in parliament held by governing leftist parties (to represent left control of government). The Pearson (r) correlation between left party dominance and total tax burdens as a percent of GDP in 1980 was .55 and .51 in 1990. Using OLS regression, a bivariate regression model with left party dominance as the independent variable and tax burdens as the dependent variable yielded an adjusted R² of .26 using 1980 data and .21 using 1990. In both cases, the unstandardized regression coefficients for left party dominance were statistically significant at the .05 level. (See also Hicks and Swank 1992 and Garrett and Lange 1989).

4. While a left-leaning voter may favor increased spending on social welfare programs, she is likely to feel that taxes on defense is "wasted" or worse. For a conservative voter the reverse would, of course, be true.

5. ⁵Union concentration is used as a correlate of business and union concentration. Countries with concentrated unions also have concentrated business confederations.

6. ⁶The US has one of the most progressive tax structures found in the modern world in part due to its heavy reliance on progressive taxes as sources of revenue. This does not necessarily suggest that the American tax code (given the huge amount of tax expenditures) is as progressive as many would like it to be.

7. ⁷ Hicks and Swank (1992) suggest that electoral factors and institutions (economic and political) shape social welfare spending in contemporary capitalist democracies. Combining variables measuring political institutions, economic institutions, partisan factors and policy capacities they create three indexes of dimensions of political institutions: left corporatism, state centralization, and a bureaucratic traditionalism dimension. Their analysis indicates that nations ranking relatively high on each of these indexes are associated with high levels of welfare effort. Thus relatively neocorporatist, centralized, , and traditionalist bureaucratic governments are associated with increased welfare spending. Their research suggests that partisan and nonpartisan facets of democratic politics shape contemporary social welfare effort.

The authors, however, define political institutions broadly, by including partisan factors and interest associations, as well as political organizations and economic structures: "Political institutions are broadly construed to connote a very wide range of elements that extends beyond the formal organizations of the state to encompass political parties and interest associations and, among such association, even principally economic organizations

(e.g. unions) that serve important interest group functions."

8. ⁸ Research by Western (1993) and Garrett and Lange (1989) also provide measures of labor organization. Western provides union density for eighteen OECD democracies for five data points (1950, 1960, 1970, 1980, 1985). While they provide a five year improvement over Cameron's data, which runs through 1980, their index is not as detailed a measure of union organization. Garrett and Lange (1989) also use data from 1960 through 1980 in their analysis.

9. ⁹ Union membership is measured by the average percent of the total work force unionized from 1965 to 1980. The unity of labor movements is measured by an ordinal measure of union centralization. Countries are ranked depending on the number of union confederations vis a vis unions. A low number of confederations with many unions affiliated receive the highest ranks; countries with many confederations and unions are ranked lowest.

Confederation power in collective bargaining is measured by ranking countries from 0 to 1.0 to capture the amount of power wielded by a confederation over its affiliated unions. In this index, four factors are considered: a) if unions are consulted by the confederation before collective bargaining takes places; b) whether the confederation has a role in collective bargaining; c) whether the confederation can reject a settlement reached through collective bargaining; and d) the confederation's control of strike funds.

The scope of collective bargaining is measured by a seven point scale ranking countries between 0 and 1.0. This scale varies from very restricted collective bargaining, to decentralized bargaining at unions, to partial centralization of bargaining (involving several employers or regions) to partial industry-side bargaining, to industry-side bargaining and finally to bargaining which is both industry and economy wide.

10. We have also employed a pooled model that combines the separate years in a single analysis. A pooled model reveals that the 1980 and 1990 models do not differ significantly. It also confirms the cross-sectional results presented separately for each year. Even with adjustments for serial correlation and heteroscedasticity, the coefficients for both political and economic variables remain significant in the pooled model. Alternative time-series models in which time one variables predict the change in tax burdens over the ten year time period prove less helpful because the ranking of the nations on the dependent variable changes little. We are more interested in the long-term, accumulated impact of institutional structures reflected in the cross-sectional results than in the short-term change between 1980 and 1990. The authors would like to specifically thank Fred Pampell for help with this model.

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