The Political Origins and Economic Consequences of Taxing Low Wages
Chapter 4: Political Economy Applied to Tax Mixes
In Chapter 2 we saw that the relative importance of income taxes from country to country, and that there is also a switch away from income taxes in most countries. In Chapter 3 I argued that this trend against progressivity was not to the benefit of employment. There is evidence that the switch away from income taxation hurt employees with low wages more than others. If policy-makers are pure social planners, they should have reversed this trend. The question arises when governments have the capacity to reform their tax systems and why they want to do this. The prime task of this chapter lies in delineating the political motives for labour taxation in more detail by paying attention to the key political conflicts and the institutional rules that govern these conflicts. The chapter is organized as follows: I will start with a general conceptualization of the research question within the framework of political economy. I will use the standard concepts of political economy: preferences, restrictions, institutions. In the second section, these distinctions will guide a survey of the literature on the determinants of the tax mix. I will relate different claims to each other and gauge their theoretical consistency and empirical validity. In the third section I will develop an argument that complements and refines some of the previous findings. In particular I will defend the position that while the overall intuition about the politics of progressivity is correct, i.e. left parties favour it more than right parties, institutionalized insider...
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