How Employers and Conservatives Shaped the Modern Tax State

Abstract

Coordinated, left-leaning nations with large public welfare states paradoxically rely on comparatively regressive tax systems, whereas liberal countries with more limited welfare states have historically embraced more progressive tax systems. While scholars agree that large welfare states demand broad and therefore regressive taxation, the origins of these diverse revenue systems remain underexplored. We trace the divergence of modern revenue systems to electoral and industrial relations institutions established in the late 19th and early 20th centuries. In countries with strongly-organized employers’ associations and multiparty rule, political elites were able to assemble broad cross-class coalitions that allowed them to build expansive tax regimes that funded generous welfare states. In contrast, countries with majoritarian, two-party competition and associated weak industrial relations systems had a challenging time building cross-class coalitions for revenue initiatives. We support our argument with quantitative data from 1900 to 2000 showing that multiparty governance and strong employer organization led to less progressive and more broad-based tax systems. Qualitative case studies of the United States and Denmark further document the importance of the right at critical junctures. These findings contribute significantly to our understanding of the origins of national tax regimes, and to the early emergence of distinct capitalist economies. 1