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Why is Business in Some Countries More Hostile to Social Redistribution than in Others?

Periodic Reporting for period 1 - BUSWEL (Why is Business in Some Countries More Hostile to Social Redistribution than in Others?)

Reporting period: 2016-10-01 to 2018-09-30

Context and objectives

To what extent can political activities of organized business interest groups explain the increase in economic inequality in recent decades ? In all advanced industrialized countries, inequality in incomes and wealth declined in the period from World War I to about the 1970s. Since then, inequality has risen sharply. Yet, this recent increase in inequalities varies considerably across countries, as Thomas Piketty shows. The resurgence of inequality is strongest in the United States, where the share of income going to the top one per cent increased from 8 per cent (1980) to 18 per cent (2010). The rebound of income inequality is much weaker in many parts of Europe. In Sweden, the income share of the top one per cent increased from 4 percent (1980) to 7 percent (2010). Similarly, in Germany, the share increased from 10 per cent to 12 percent in this period. In short, the return to high levels of inequality in recent decades is much more stronger in the United States than in Europe.

This project investigated the contribution of political activities by business interest groups to explaining these differences through comparative case studies of five countries, which are Germany, Austria, Denmark, Sweden, and the United States. The project focused on three policy fields: corporate taxation, inheritance taxation, and wage bargaining. The overall objective of the project was to thereby get a better understanding of the impact of business interest groups on the politics of social inequality. The findings of the project will be of relevance to European and national policy-makers, as well as to executives of business interest associations.

Overview of findings

The project concluded that the intensity of goal conflicts between the goals of social equality and the goals of business interest groups varies across policy fields. The following two examples illustrate this general point:

1. The study of wage bargaining found that statutory coverage extension serves as an important mechanism against the erosion of bargaining coverage. Statutory coverage extension extends coverage of collective agreements to firms that are not organized in the bargaining employers’ association. The study found that the attitudes of employers’ associations toward the use of statutory coverage extension vary significantly across countries. In Germany, for instance, employers’ association have since the 1990s turned against the use of statutory coverage extension, while in the Netherlands, in contrast, employers’ associations support its use. The project was able to show that such cross-national differences in employer attitudes are one important factor for explaining why the use of statutory coverage extension is viable only in some countries.

2. The study of reforms in corporate taxes and inheritance taxes found that the responsiveness of governments to business demands for tax cuts varies depending on, first, the expected effects of a tax cut on tax revenues, and second, the expected effects of a tax cut on voter behavior. Thus, the study found that governments tend to adopt business friendly cuts only when they do not undermine tax revenues and when they do not conflict with the preferences of voters. Where business demands for cuts conflict with revenue needs of governments, governments tend to adopt compensatory measures, such as combining a cut in the statutory tax rate (‘headline rate’) with a widening of the tax base, for instance, by closing down tax exemptions.
The focus during the project period was on the collection of data and sources. Three types of sources were collected and analyzed: policy documents, media reports, and information gained through semi-structured interviews with policy-makers and policy experts.

The project consisted of six work packages, one for the data collection analysis for each of the five cases (Denmark, Sweden, Germany, Austria, United States) and one for the writing of a follow-up project proposal.

During the project period the MSCA Fellow developed a proposal for a new research project. TThis project will deal with political responses to corporate tax avoidance and the proposal has been submitted to the Independent Research Fund Denmark (Danmarks Frie Forskingsfond) on October 5th, 2018.

The results achieved so far show that the impact of business interest groups on the politics of social inequality depends on two factors (a) the character of the policy at hand, (b) and types of firms represented by a business interest group.

Specifically, as elaborated earlier, the project found that the responsiveness of governments to business demands for policy changes that enhance social inequality, such as cuts to f taxes with a progressive structure, depends primarily on two variables: (a) the extent to which such changes undermine the overall level of tax revenues. Governments are more likely to heed business demands for tax cuts if the expected effects on tax revenues is limited; and (b) the extent to which business demands co-inside with voter preferences. Governments are more inclined to heed business demands for tax cuts in areas where the preferences of business groups align with the preferences of broad segments of voters. This effect could be shown through case studies of reforms on corporate taxat and on inheritance tax.

Paster, T. 2017. 'How Do Business Interest Groups Respond to Political Challenges? A Study of the Politics of German Employers'. New Political Economy, 23(6), pp.1-16.
Paster, T. (forthcoming). Varieties of Capitalism und Sozialpolitik. Handbuch Sozialpolitik. H. Obinger and M. G. Schmidt. Wiesbaden, Springer.
Paster, T. (forthcoming). Business Interests and the Development of the German Welfare State. Business Interests and the Development of the Modern Welfare State. D. O. Nijhuis. Abingdon, Routledge.

The communication of results to the public was integrated with the communication strategy of the host institution. In particular, the host institution produced a video about the project, a short interview with the MSCA fellow, which was disseminated through the social media channels of the host institution and the fellow. Results were also presented at major international conferences, including the Council of European Studies, the Society for the Advancement of Socio-Economics, and the European Social Science History Association.

Results will also be published on the project’s webpage (see below). Three policy briefs will be published on the website and circulated to policy-makers.
The focus of the project on government responsiveness toward business demands for tax cuts has moved our understanding of the impact of business interest groups on the politics of social inequality forward by specifying the conditions under which governments are responsive to inequality-enhancing demands from the business community, such as tax cuts or the erosion of collective bargaining.

Further work wil be carried out to test the validity of the hypotheses generated with further cases and policy fields. Work on the project continues after the completion of the MSCA fellowship. During the coming six months the project will focus on revising papers for submission to peer-reviewed journals and to presenting papers at academic conferences (e.g. Danish Political Science Association, November 2nd, 2018).
Figure 1: Revenues from inheritance and gift taxes as a share of total tax revenues, OECD average