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Taxation & Democracy

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by Sven Steinmo "The politics of taxation is one of the most important policy concerns in the modern industrial state; yet we know very little about it," author Sven Steinmo states at the opening of , a publication detailing the politics and development of tax systems of the United States, Great Britain and Sweden. The three nations discussed are prime examples of "industrial democracies," and Steinmo looks at each in comparative fashion, showing many differences but more abundantly the similarities between the three. In his introductory chapter, Steinmo discusses how taxes are looked upon by us. "Indeed, not only do we know little about tax policy, but what we think we know is often wrong." As an example, he states that it is commonly assumed that the U.S. and Great Britain have had much more progressive tax systems than "socialist" Sweden, where the system leans much more to the regressive side. In addition, it is widely misconstrued what taxes are actually used for; it is usually thought of that taxes are simply a means to generate revenue and redistributing wealth. Within the hundreds of goals of taxation are "raising revenue, redistributing income, encouraging savings, stimulating growth, penalizing consumption, directing investment, and rewarding certain values while penalizing others. . .indeed, taxation is a major instrument, if not the major instrument through which governments try to affect the private sector," as the author explains. Steinmo offers three explanations as to give insight into the "wide divergences" between the public policies of different nations and cultures. The first is the interests explanation that argues that "policy outcomes vary because the distribution of power among political interests differs from one polity to another." The interests theory also assumes that groups will always primarily pursue their self-interests and try to displace the burden of tax away from themselves. However, the explanation of why these public policies vary does not explain taxation policy, and tends to treat self-interest as a given. The second explanation provided is the values explanation, which looks into the fact that different publics want different public policies. A major weakness of this explanation is that because political values are very broad and vague, they don't specifically translate into policy alternatives. "In sum, the values explanation fails to link general ideas to specific policies," Steinmo states. Thirdly, the state explanation looks at the role of the state and how it effects the role of public policies in different societies. This explanation provides little in helping understand why "state actors have certain preferences and why these preferences vary. . . in sum, values, interests, and state-centered theories fail to explain how preferences and interests are, on the one hand, shaped and, on the other hand, translated into specific policy choices." Next, Steinmo offers a sociological view by looking at the institutional level and how the institutions profoundly affect how interest groups, politicians and bureaucrats develop their own policy preferences. This approach focuses on the environmental context of policy choices over time and demonstrates how specific policy outcomes are derived within different economic and political structural contexts. Steinmo states that the institutional foundations that the three nations are based upon are of the most critical importance to the decision-making structures. Since the U.S., Sweden and Britain are representative democracies, they are presented with the dilemma of linking the wishes, desires and preferences of those who they represent with the decisions of the "political elite," even when the public may be ignorant to the facts and the government must enact policies out of absolute necessities. This is a key variable in understanding why the nations have developed such contrary policies regarding taxation. The characters of all the countries' systems of taxation and public revenue are a result of their own institutional structures. With Constitutions of most countries either being either vague or unwritten, every country has had to adapt to the realities of governing and to the increasing complexities of modern government. Although each country carries out these adaptations in different fashion, Steinmo states that the nations all want similar things: "Politicians want to be reelected, bureaucrats want to manage a stable and efficient tax policy, and interest groups want to promote the well-being of their constituents. But how these general desires get translated into specific policy preferences and specific political strategies depends on the rules of the game; and the rules of the game are written by the institutions through which the game is played." Indeed, to understand why these policies are enacted, it first must be understood the broader social, economic, and political settings in which they are embedded. In the chapters that follow, Steinmo characterizes the systems and highlights the basic, most consistent differences between them. Steinmo opens the second chapter with the objective to "fill some of the gaps in our knowledge about tax policy and tax policy development generally." There are basically five taxes - personal income, corporate profits, general consumption, property and social security charges - that contribute to 79.5 percent of all government revenues in OECD (Organization for Economic Cooperation and Development) nations. However, most of these taxes did not even exist a hundred years ago. Governments have tended to develop and change their systems of taxation at approxiamately the same times and in similar ways throughout the course of the twentieth century. Although they may dependent on the same types of taxes, the rely on different percentages of each tax levied for revenue. For instance, figure 2.1 shows that a higher percentage of Sweden's tax revenue comes from income tax compared to the income tax of the U.K and U.S. Over the past hundred years, the ways in which governments raise money for public spending have been radically transformed. Progressive income taxes, social security taxes, corporate profits taxes, and VATs (Value Added Taxes, such as added taxes to gasoline) have become the norm, whereas they were unheard of nearly a century ago. All of these new sources of tax revenue can be attributed to common political ideas, social forces, economic needs, and technological advances which are commonplace in nearly all modernized economic systems. The commonalities between these states, according to Steinmo, are subject to explanation by two dilemmas. The first is the that the "democratic capitalism is caught between the desire for greater social and economic equity and the apparent need for a degree of economic inequality." The second is the common wants of citizens for increased public spending coinciding with their hate of taxes. This dilemma "puts public officials in a difficult political position; to accomodate citizen preferences on one side of the budget, they must go against what citizens want on the other side of the budget." The result of this is a move toward more broad-based taxes and taxes whose revenues grow automatically - that is, taxes that everyone pays and grow and simultaneously grow with the development of the economy. However, citizens prefer taxes that someone else pays, and the main target for that is the rich and large corporations. While this seems an obvious "solution" to the problem, it does not offer a sufficient remedy. According to Steinmo, if all incomes over $1 million were taxed 100 percent, it would only raise approxiamately 8.4 percent of the total receipts of what the government usually receives. Therefore, that idea is thrown straight out the window and gives more validity to the idea of the aforementioned automatically growing taxes. Another proposed idea is a simple "head tax," or a single amount paid by each citizen. Although a simple head tax of $5,000 in the U.S. for each citizen would generate mass revenue in upwards of $1.25 trillion, many would consider the tax "grossly unfair." When former English Prime Minister Margaret Thatcher proposed such an idea, it "evoked a massive revolt that substantially contributed to her eventual ouster." An additional recent trend in taxation is for tax policymakers to develop and rely on taxes that can either be hidden or grow on their own. The most reliable source of this are personal income taxes due to the growth of tax revenues at a greater rate that than the growth of incomes, or what Steinmo refers to as bracket creep: "Bracket creep ensures that once income tax rates are set, revenues to the state will expand dramatically faster than the GNP even if policymakers simply sit back and wait." As far as hidden taxes are concerned, the most popular is the social security tax. Although it is not subject to the bracket creep rule, many employees don't know that a portion of their wages are being paid directly to the government by their employers. As with income taxes, citizens have a tendency to view social security taxes as more than other kinds of taxes; there is a feeling of getting something back with this type of taxation. While there has been a tendency of growth of social security and income taxes in OECD nations, selective consumption and property taxes have seen ...

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Keywords: taxes democracy, taxation and democracy pdf, how is tax policy and democracy related, paying taxes in democracy is considered

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