Economic Stagnation and Tax Policy Preferences

• In Event: Public Opinion on Tax and Redistribution

Abstract

The stagnation of incomes for substantial parts of the population in recent decades is well known. The consensus in the literature is that income changes either has no effect on welfare policy preferences or that large income declines raises support for welfare policies. However, existing research usually focuses on the spending side rather than the revenue side of the welfare state. Focusing on tax preferences, we present the opposite argument: We expect that when real income growth is stagnant or declining, citizens become less willing to pay taxes, because tax increases would imply a reduction of their consumption levels. This argument builds on the idea developed by Pierson (1998; 2001) that in a context of “permanent austerity”, the slowdown of growth created substantial pressure on both the revenue and spending side of the welfare state.
We subject this argument to a test using survey data on individual tax preferences from both the United States and a broader set of advanced democracies. For the United States, we use longitudinal analysis of repeated cross-sections (1977-2018) and of a panel survey (2006 to 2014) from the General Social Survey (GSS). For the comparative analysis, we use International Social Survey Programme (ISSP) data from 20 OECD countries. We develop an innovative measure for objective income growth applied to cross sectional surveys by estimating life-cycle individual incomes by age after accounting for gender and education using the Luxembourg Income Study (LIS). In addition, we use a subjective measure of perceived change of one’s economic situation.
Our main finding is that willingness to pay taxes is higher when people’s economic situation improves in objective and subjective terms. This effect is mainly explained by differences between individuals, which are strongly driven by age and education, rather than changes within individuals in a panel setting. Overall, these findings provide an alternative perspective on the relationship between economic growth and the welfare state.

Authors

• David Weisstanner, University of Aarhus

• Olivier Jacques, University of Montreal, School of Public Health