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2017 | OriginalPaper | Chapter

3. Inequality in Landownership, Democracy, and Progressive Taxation: Evidence from Historical Data

Authors : Pantelis Kammas, Maria Poulima

Published in: Taxation in Crisis

Publisher: Springer International Publishing

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Abstract

This chapter mainly investigates the relationship between inequality in landownership and progressive taxation and, moreover, examines whether this relationship is affected by the political institutions within a country. Building on a dataset of 20 countries, located principally in North America and Western Europe, over a period of two centuries, our analysis suggests that preindustrial inequality in the distribution of landownership exerted a negative and statistically significant impact on progressive taxation. In particular, countries which are characterized by larger concentration of land—and, consequently, powerful landed elites—did not implement redistributive tax. This relationship remains robust across a number of alternative specifications and, most importantly, alternative political regimes. In other words, our empirical findings suggest that it is the de facto power of agents (that comes from the distribution of the economic resources) and not the de jure power (which is mainly driven by the political institutions) that determines the implementation of a redistributive tax policy.

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This is because franchise extension shifts the median voter towards the poorer segments of the society.

Specifically, Aidt et al. (2010) provide evidence of a U-shaped relationship between spending on urban amenities and extension of local voting franchise in a panel of municipal boroughs in England and Wales. This non-linear relationship is attributed to a retrenchment effect that comes as a result of enfranchisement of the middle class. Likewise, Aidt and Jensen (2013) suggest that franchise extension exhibits a U-shaped association with revenue per capita and a positive association with spending per capita in a panel of European countries over the period 1820–1913. Moreover, Aidt and Jensen (2009b) conclude that the impact of franchise extension on the composition of taxation in nine Western economies during the period 1860–1938 is conditional on the state of the tax-collection technology. Thus, a large strand of the relevant literature concludes that the relationship under investigation is not straightforward, and variations in institutional details in time and space may crucially affect the consequences of democracy on fiscal policy.

This type of study implicitly assumes that political power always coincides with the de jure political power and, therefore, concludes that the median voter is the decisive agent for any political outcome (see the Appendix in Acemoglu and Robinson 2006, for more details on this).

Galor et al. (2009), using a dataset of US states in the twentieth century, conclude that inequality in landownership affected adversely the emergence of human capital-promoting institutions (public schooling and child labor regulation) and, thus, the pace and nature of the transition from an agriculture to an industrial economy. Similarly, Cinnirella and Hornung (2016) provide evidence of a negative association between large ownership concentration and the expansion of mass education in nineteenth-century Prussia. Finally, Ziblatt (2008) demonstrates that land-holding inequality did affect negatively the prospect of democratization in Prussia, whereas income inequality did not have any significant effect.

Stigler (1971), Peltzman (1976) and Becker (1983) emphasize economic and demographic variables such as interest group size, group cohesion, and the technology of tax collection as basic determinants of public policies via their effects on both the public interest and the political success of special-interest groups. To their view, conflicts over policy are mediated by the political leader (whether democratically elected or not), but it is the economic and demographic factors that lead policy decisions.

In contrast, Muligan et al. (2004) and Kammas and Sarantides (2016) provide evidence that autocratic regimes redistribute more through taxes.

Scheve and Stasavage (2010, 2016) define as “mass warfare” any interstate war that at least 2% of the population was serving in the military. A more strict definition comprises interstate wars that at least 5% of the population was serving in the military.

This is because the overall tax burden does not depend solely on the statutory tax rate, but also on what is defined—by the tax legislation—as tax base. Therefore, we are in need of some more sophisticated tax measures that would take into account changes in the tax base (i.e. changes in allowances, deductions, etc.). For these reasons, a large number of empirical studies exploring issues related to the tax structure rely on effective tax rates rather than statutory tax rates [for more details on the methodology of effective tax rates, see Mendoza et al. (1994) and Volkerink and de Haan (2001)].

In particular, they show that statutory top marginal tax rate is highly correlated with the effective income tax rate on incomes—in the top 0.01% of income distributions—for most of North America and Western European countries.

For detailed definitions and summary statistics of the control variables, see the Appendix.

Based on a large number of simulations, Judson and Owen (1999) suggest that Nickell bias (Nickell 1981) decreases as the number of time periods increases and becomes negligible in panels with more than 20 time periods.

For more details about these variables, see Sect. 3.3.2.

According to Mokyr (1990), the power of the landed elites mitigated substantially in most Western European countries after the second phase of Industrial Revolution and especially after 1930. However, since implemented fiscal policy is affected by fiscal commitments and institutions—that exhibit a high degree of persistence—the power of the landed elites in the past may exert significant influence on contemporaneous fiscal policy.

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Title: Inequality in Landownership, Democracy, and Progressive Taxation: Evidence from Historical Data
Authors: Pantelis Kammas
Maria Poulima
Publisher: Springer International Publishing
Book: Taxation in Crisis
Print ISBN: 978-3-319-65309-9

Electronic ISBN: 978-3-319-65310-5

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-3-319-65310-5_3