The Stationary State : Explaining the Stagnation of Tax Revenues in the Advanced Industrial Democracies

Total tax revenues in percentage of GDP have remained stable or decreased in most advanced industrial democracies since the late 1980s, with the notable exceptions of Finland or the Southern European countries. At the same time, structural pressures, like ageing, unemployment and changing family structure increase demand for more expenditure, which should put an upward pressure on tax revenues. This article proposes two explanations of this stagnation of tax revenues across countries, regardless of tax levels. First, I argue that tax competition forces political parties to shift the tax burden away from mobile factors and increase taxation of less mobile factors like wages and consumption. However, most voters prefer taxation on mobile factors rather than taxation on immobile factors, whose incidence on their real income is more direct. This poses a more significant problem for left-wing parties, that have to tax their own supporters in order to increase spending, than for right-wing parties, who prefer lower taxes. At the same time, partisan differences are reduced because most countries have changed their budget process during the last decades: ministries guarding the public purse now dominate spending ministries, which institutionalize budget restraint inside the state apparatus. I use a time series cross sectional model to predict year-to-year changes in total tax revenues. I show that while structural pressures are correlated with tax increases, right parties still decrease taxes more so than left parties increase them.