Pathways to Modern Taxation: The Welfare State - Tax State Nexus

Today, the welfare state represents the largest item of the public budget in all economically advanced countries. In general, the bulk of revenues for welfare state financing comes from two main sources: either general tax revenues or social security contributions paid by employers and/or employees. Other sources only play a minor role. While tax revenue can be used for financing social spending, there is no direct relationship between taxes and the kind of benefits received by the individual, whereas social security contributions are a mode of finance, which directly links the revenue to the spending side. Curiously, the financing side of the welfare state has been widely neglected by comparative (welfare state) research and is still "somewhat of a black box of the welfare state" (Morel/Palme 2013), particularly beyond rich democracies. It is however, highly plausible that the revenue and the spending side of sovereign states are not independent from each other. Hence, it is the aim of this paper to shed light on how governments finance their welfare states, how this has changed over time and differs across countries and regions of the world. In the OECD revenues coming from social security contributions cover about 37 percent of public social expenditure on average. However, there is a striking cross-national variation. They play a major role in continental Europe and Japan, but they play a marginal role in the Antipodes and Denmark. All other countries rely on a financing mix for the welfare state. In this paper, we aim to map the co-evolution of the tax and the welfare state from a global and historical perspective. Specifically, we illustrate how social security legislation has been financed throughout the world since the 19th century. Are there common global pathways or do specific national patterns exist? For instance, are certain social policies more likely to be based on tax finance than others? Or do certain countries rely more on SSC than on tax financing? And how can we explain such differences? Using a global sample for the mode of finance of five classic social protection schemes old age, sickness, work injury, unemployment, and family), the paper aims to provide empirical evidence on the patterns of financing the welfare state around the world.