Financing the Welfare State or Enabling Market Integration? the Introduction of the Value Added Tax in Europe Revisited

An important literature in comparative political economy investigates why countries with a big welfare state tax consumption much more heavily than countries with a small welfare state. This correlation has typically been interpreted in one of two ways: either as showing that the increase of consumption taxes has caused the growth of the welfare state, or, more often, that the growth of the welfare state has required the increase of consumption taxes.

In this paper, we question this welfare state centered perspective on the politics of consumption taxation by looking at the introduction of the Value Added Tax in the European Community in 1967. This reform meant the breakthrough of this form of consumption taxation, which today has been adopted by all OECD member states except for the US. In contrast to the welfare state centered literature, we argue that political struggles about this crucial tax reform did not center on a conflict between supporters and opponents of an expansion of the welfare state. Instead, this tax was mainly seen as a tool to foster market integration in Europe by reducing barriers to trade. As we show, the main conflict was thus between supporters and opponents of greater market integration in Europe.