Partisanship and the Nexus Between Regressive Taxation and the Welfare State

Regressive consumption taxes, chiefly the value-added tax (VAT), have become closely associated with welfare state resilience. Such taxes are said to aid policymakers in rich democracies facing the dual structural constraints of sticky welfare commitments and mobile capital. While existing accounts tend to emphasize these constraints, we reiterate the role of partisan governance in shaping the ‘regressive tax-welfare nexus’. We argue that existing functionalist dynamics hold for left-leaning governments who disproportionately devote proceeds to welfare. In contrast, non-left governments might choose to raise regressive taxes without upholding welfare generosity. To probe this theory, we run panel data analyses covering 20 OECD countries over three decades. Results indicate that VAT rate increases are only positively associated with welfare state generosity under left-leaning governments. Our findings suggest that the regressive tax-welfare nexus is not a structural straitjacket and that policymakers enjoy more political discretion than is often stated.