Self-Defeating Strategies? a Trade-Off between Levels of Taxation and Progressivity

Several scholars have noted that no advanced industrial democracies maintain high levels of revenue collection and a progressive tax system: countries with higher tax levels rely on less progressive tax systems. Studies addressing the relationship between tax levels and progressivity are based on static, cross-sectional analysis. This article innovates by using an error correction model to present short term and long-term effects of changes in tax progressivity on total tax revenues in 22 advanced industrial democracies. I show that in the long term, but not in the short term, increases in tax progressivity are associated with larger decreases of total tax revenues during the period under analysis (1965-2013). The article also explores the causal mechanism linking tax revenues and tax progressivity. While previous studies have explained the incompatibility of high tax levels and progressivity by constraints posed by tax competition and bargains between labor and capital achieved in high-tax corporatist countries, this article tests a causal mechanism based on public opinion and political parties. I show that more progressive tax systems are associated with a public opinion less supportive of taxes on the rich, redistribution and more likely to elect right-wing parties, which tend to reduce tax levels the long term. Hence, progressivity’s impact on tax revenues goes via the increased likelihood of electing right-wing governments. This finding has important implications for redistributive politics: an inequality reduction strategy solely based on progressive taxation could be self-defeating because of its negative indirect impact on tax revenues.