United They Stand, Divided They Fall? Labor Heterogeneity and the Taxation of Low Wages

The taxation of low wages shows a tremendous variation over countries. Over time, the increasing importance of value-added taxes and social security contributions has worsened the situation for low-wage earners. This paper sheds light on the decisive and divisive role of labor in the politics of tax-based redistribution at the lower end of the income spectrum. The classic view of left-labor power needs to be complemented by an approach that deals with insiders as lobby groups. Taxes affect the distribution of jobs. Under certain conditions, this makes it difficult for unions to lobby for tax progressivity, particularly at the lower end of the wage scale. Unions under stronger pressure, in more regulated labour markets, and with a stronger focus on sector specific needs are more likely to fall into this trap. The article uses two sorts of empirical evidence to prove this: First, an analysis of pooled aggregate data for OECD countries shows that insider institutions indeed make tax progressivity decline.  Second, a comparative case study of post-war UK and Germany shows that the causal mechanism behind the macro-aggregates is consistent with the theoretical expectation, The processes and motives of insider politics made the tax burden for poor workers increase in Germany, but decrease in the UK. The findings contribute to recent discussions on the insidership and dualisation in advanced economies and the political economy of taxation in more general.