Hypotheses Examined: The Coexistence of Regressive Taxation and the Welfare State

The development of a welfare state and the resistance to welfare retrenchment are path-dependent upon the expansion of the state's funding capacity. The quantitative analysis in Chapter 1 and case studies in Chapters 2 through 4 confirm that the size of a welfare state is strongly associated with the institutionalization of a regressive tax to raise revenue more effectively. This point is illuminated by the postwar history of tax policies across industrial democracies. Immediately after World War II, comprehensive income taxes started to be diffused across countries, but the income tax base was eroded by political pressure, and progressive rates became excessively high. Gradually, a flat-rate regressive tax on a broad base of consumption has become a more important revenue source. Among regressive taxes, except social security contributions, the value-added tax, a representative form of a flat-rate tax on general consumption, has come to be used widely to raise more revenue. As reviewed in detail in Chapter 1, high-tax countries have added the revenue from enhanced regressive taxation while preserving their income tax revenue. As a result, the revenue reliance shift from progressive income tax to regressive consumption taxes reflects the expansion of a state's funding capacity. The strong revenue-raising machine that was institutionalized before the early 1970s has subsequently developed a large public sector and resisted the welfare state backlash since the 1980s.