Using novel historical data, Per F. Andersson demonstrates that left-wing governments tax more regressively in proportional representation systems and more progressively in majoritarian ones. He illustrates how political risk shapes the strategies of key actors and helps explain the divergence in tax policy using the examples of Swedish and British tax policy after 1945.
We like to believe that our political choices matter, that it makes a difference whether the government is run by the right or the left. Yet researchers have found that the link between partisanship and policy is surprisingly weak, and some even find that left-wing governments are associated with heavier taxation of the poor.
In a new study, I argue that whether the left taxes regressively or progressively depends on the institutional context, not – as has been the common explanation – on constraints from unions or rising expenditures. Drawing on a unique, cross-country database of historical tax revenues and archival material from the UK and Sweden, I find that it is the electoral system that affects how left-wing governments make tax policy.
The cross-country analysis reveals that the left relies more on consumption tax in proportional representation (PR) systems and more on income tax in majoritarian systems. The figure below shows the average share of government revenue from consumption and income taxes in a sample of 24 democratic left-wing governments from 1900 to 2012 (the dataset can be accessed here.)
Figure 1: Tax shares in majoritarian and proportional representation systems
Source: Andersson and Brambor (2019)
The same pattern appears when looking at the introduction of taxes: historically, there were only five instances of a personal income tax (which is generally progressive) being introduced by a left-wing head of government, and all of those occurred in majoritarian countries. In contrast, among the six left-wing introductions of a general sales tax (the precursor of value-added tax, VAT), four were in PR systems. The pattern is the same for VAT, where six out of the eight left-wing introductions occurred under PR.
What’s behind this difference in left-wing tax policy? I argue that the left uses different strategies for redistribution. One is to use progressive taxation to reduce inequality, another is to focus on revenue maximisation and redistribute through generous transfers. The second strategy has more potential for reducing inequality but is riskier politically since it involves compensating for the regressive impact of tax policy with progressive spending.
Where political power is concentrated – as in majoritarian systems – the risks associated with losing office are greater, and the left chooses the less effective but safer strategy of progressive taxation of income. In systems with greater opposition influence – as in PR systems – the risk of combining high-yield regressive taxes with progressive spending is lower since compensatory spending can be protected.
Broad-based consumption taxes – such as VAT – are efficient, generate a lot of revenue, and are harder to avoid. However, since the poor consume a larger share of their income, they are disproportionately hurt by these taxes. As such, consumption taxation presents left-wing governments with a dilemma: it is a formidable tool for expanding the welfare state, but at the same time it hurts the very groups the left seeks to help.
In the post-war era, the left in Britain and Sweden faced exactly this dilemma. Both the Swedish Social Democrats and the British Labour Party recognised that reducing inequality could be achieved by combining an efficient, high-revenue tax system with targeted spending programmes. For instance, prominent Labour politician Anthony Crosland held that socialist taxes should not exclude high-yielding consumption taxes. Similarly, key individuals within the Swedish labour movement argued that judging indirect taxes only on their incidence and not on what the revenue was used for was like throwing the baby out with the bathwater. So, not only did both parties seek to reduce inequality, but they also agreed that a broad-based consumption tax could help reach that goal.
Why did the left implement this idea in Sweden but not in Britain? How left-wing governments deal with this dilemma depends on political institutions. The British electoral system ensured that Labour could win a record number of votes, yet still be short of a majority in parliament. For instance, in 1951, Labour won 48.8% of the vote, but this resulted in 295 seats. The Conservatives’ 48% of the vote resulted in 321 seats. Labour could never be certain about its future power; even if it gained votes, it could still be defeated. Moreover, defeat meant losing to a unified right-wing party which would be able to dictate policy without any opposition influence. In other words, when Labour set tax policy, it did so knowing that the future was uncertain.
This uncertainty affected the way key actors on the British left thought about tax policy. The Trade Union Congress, for instance, was worried about the future compensation for a regressive consumption tax. It was not willing to risk supporting a tax that would hurt the poor, while being unable to control how that revenue was spent. This insecurity and volatility associated with the winner-takes-all system made Labour prefer a safer – but less efficient – tax strategy. Labour’s fear turned out to be true: when the Tories introduced VAT in 1973, they did so without compensatory spending.
In Sweden, the more predictable political system made it possible to reform the tax system and compensate the poor at the same time. The Social Democrats introduced an efficient consumption tax – despite opposition from trade unions – confident that they were able to ensure compensatory welfare spending in the future. This confidence stemmed from a proportional electoral system ensuring predictable results and substantial opposition influence. Moreover, a fragmented right reduced the risks associated with losing power, and further increased opposition leverage. The strategy of combining consumption tax with an expansion of welfare programmes was successful, both in fighting poverty and in winning votes; after the reform, the Social Democrats were able to push down the poverty rate while also gaining seats in the following election.
The puzzling relationship between ideology and tax policy is not so puzzling once political institutions are taken into account. Left-wing governments choose different strategies for redistribution depending on the political environment. This idea is consistent with the experiences of Britain and Sweden in the decades after the Second World War, and also with quantitative evidence from a global historical sample.
For more information, see the author’s accompanying paper at Comparative Politics. A free version of the paper is available here.
Note: This article first appeared at our sister site, British Politics and Policy at LSE. It gives the views of the author, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: Amol Tyagi on Unsplash
Not sure that this tells us much ….
..unless the intention is a tactical guide for leftist Parties.
Surely the main conclusion is…
…..socialist / collectivists always tax everyone more ?
And along the way they build costly government machinery – as they identify and broaden, with ever more “victims” who require support….
….. hoping to increase their voter-base with ever more “dependants” – whether benefit recipients or government employees.
If anyone calling themselves “liberal” was seriously concerned about “inequality” rather than achieving power by bribing people with their own money…..
…surely they would tackle the forest of “monopolies” ?
Surely it is such monopolies that transfer the vast majority of wealth to the few – esp. from the poorest.
By “monopolies”, I mean:
– Intellectual Property – Copyright, Patents etc
– “Sole Importer”
– Professional Qualifications : Regulations that actually prevent competition from new entrants – rather then merely inform customers of a persons Qualification – or lack thereof.
– Tariffs to protect a handful of domestic producers while costing millions of the poorest.
Example 1
Why was Tesco prevented from importing Levi Jeans from (IIRC) South Africa to Europe – and selling them more cheaply ?
Example 2
Why is Apple allowed to prevent its component suppliers from selling spares directly to Consumers ?
Or Independent electronic repair shops ?
A well-known blogger has demonstrated how Apple either claims that a device is unrepairable (despite the blogger showing a simple repair)… or pricing spares with such a massive mark-up it is intended to divert the customer to buying a new product.
(Nor exactly environmentally friendly either)
Surely there is lot there for re-distributionists to consider ?
“Surely the main conclusion is…
…..socialist / collectivists always tax everyone more ?”
The research has nothing to do with that, it’s saying that left-wing parties choose different types of taxes depending on the electoral system.
And I was pointing out that focusing on whether a leftist Party favours tax on income or consumption is a distraction.
Socialist Parties almost always tax people more.
But if you insist……
Maybe the report highlights that, under PR, Socialist Parties are likely to be in coalition – so they have to disguise their tax-gouging via consumption taxes – because their coalition Parties do not want to be associated with more transparent direct taxes.
The sad truth is though…..
Re-distributionist Parties still end up taxing the poorer half – esp. if, because of PR, they apply consumption taxes.
If only leftist Parties would realise (accept) that reducing costs for poorer people was morally better than taking more money from others.
We’ve established that you personally don’t like left-wing policies, but that still has no relevance to the research. You’ve said the research is a “distraction” simply because it doesn’t tie in with the rather simplistic normative argument you want to have about left-wing policies being terrible and (presumably) academia being full of left-wingers.
You’re entitled to your opinions, but this is a descriptive piece of research that tells us something new about how left-wing parties behave. It isn’t a normative study and the author has said nothing about their politics. You’d be as well shouting your opinions at a cloud for all the good it’s going to do in this case.
Of course sympathy (or resistance) to “left wing policies” is relevant to a critique.
Surely that goes to the heart of objectivity – or at least the intent of the research ?
(Don’t leftists often cite “links” to whatever they disapprove of…?)
Surely you cannot disagree that this article reads as tactical advice ?
i.e. When Coalitions are likely, disguise the tax and spend philosophy with taxes on spending (e.g. VAT, Duties)
Also, (and sorry I missed this)
The italicised header mentions “regressive” and “progressive” tax policies.
Yet again the “left” is defining policies using words laden with emotion – one negative, the other positive.
Why are taxes on spending “regressive” ?
The last time I looked at the data, the wealthiest two deciles paid more in spending taxes than the bottom 5 deciles.
The very poorest may pay little or no VAT. (Basic necessities are often VAT-free.)
And why is tax on income “progressive” ?
Especially if the marginal rates increase with income.
How is that “fair” or “equitable” ?
The idea that explaining the behaviour of left-wing parties amounts to tactical advice for them is really quite bizarre – right-wing parties also have a stake in knowing how left-wing parties behave, as do people who pay taxes and want to make an informed choice at the ballot box.
The only thing that matters about this research is whether it’s accurate or not. The unstated political opinions of the author are neither here nor there and obsessively trying to uncover them by microanalysing word choice isn’t going to go anywhere sensible.
Very careful of not saying much…Left use taxes to govern and right wing use private capital investments . That is the diference !