In the Interest of Labor: How Trade Unions Shape Tax Policy in Economically Advanced Democracies

Taxes determine workers’ earnings and fund social welfare programs. Why then do we know so little about trade unions’ role in tax reform? How do trade unions affect tax policy? In most political economy analyses of taxation, trade unions are either absent, altogether, or are assumed to be a part of a corporatist deal with employers’ organizations, whereby they agree to forgo their pro-egalitarian goals of progressive taxation for higher employment growth. Yet, trade unions can play an instrumental role in tax reform to the extent that first, they represent labor, and second, they can inform voters about the economic effects of tax reform. This paper sketches a theory of when and why trade unions politicize tax reform. We argue that trade unions’ tax preferences and strategy for politicization of reforms depends on who the unions represent- public, private or both sectors. Large private sector unions operating in the manufacturing sector traditionally pushing for progressive forms of taxation. The more the dominant unions shift to (sheltered) public and private services their preference change and they prefer less redistributive forms of taxation: either earmarked payroll taxes or general consumption taxes. The reason for this shift lies in these unions becoming increasingly inward oriented and less concerned about the effects for outsiders. Conflictive industrial relations also enhance this shift from preferring regressive to progressive forms of taxation. We use two forms of evidence to explore these claims. First we collect macro data for OECD countries to show that differences in union characteristics map into differences in the tax mix of these countries. Second, we collect qualitative data for three European countries (Germany, UK, Ireland) to probe unions’ motives across time more directly, looking at their positions in important instances of tax reforms.