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Maximizing Tax Revenue while Minimizing Political Costs
Author(s): Richard Rose

Source: Journal of Public Policy , Aug., 1985, Vol. 5, No. 3, Taxation (Aug., 1985), pp.
289-320
Published by: Cambridge University Press
Stable URL: https://www.jstor.org/stable/3998441
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Jnl Publ. Pol., 5, 3, 289-320
Maximizing Tax Revenue While Minimizing

Political Costs
R I C H A R D R O S E, Public Poliy, University of Strathclyde
ABSTRACT
Tax revenue is a function of laws and administration as well as economic

activity. Four different theories purport to explain revenue-raising in
contemporary Western nations: universal abstractions about economic
systems; national culture: tax-specific characteristics; avoiding political
costs through political inertia. OECD data on taxation in Western
nations since I 955 show that national tax systems do not have sufficient in
common to validate universalistic generalizations Tax-specific influences
can be identified only for a few major sources of revenue. The inertia
persistence of substantial national distinctiveness reflects a non-decision
making approach to tax policy by politicians. The strategy is to rely
primarily upon revenue-buoyant taxes authorized by past legislation
rather than risk the political blame for introducing new taxes to raise large
amounts of needed additional revenue.
Question to Willie Sutton: Why do you rob banks?

Answer: Because that's where the money is.
The need for revenue is a constant of government, and taxes are the
principal source of government revenue. Following the American bank
robber, Willie Sutton, we can say that governments levy taxes because
that's where the money is. Reliable means of raising public money are
essential for the growth of government (cf. Hinrichs, I966; Braun, 1975;
Ardant, I975). The point is fundamental, yet studies of taxation in
developed nations tend to concentrate attention upon the equity, the
efficiency and the economic effects of tax systems. Whatever other criteria
may be applied, in an era of big government policymakers must
necessarily evaluate taxes in revenue terms.
* The research reported herein is part of a programme on the Growth of Government supported
by British Economic & Social Research Council grant HR 7849/I. The author benefited
from being a visiting scholar in the Fiscal Affairs Department of the International Monetary
Fund in 1984, and from comments by James E. Alt, David Heald, John Kay, Joseph Pechman,
Ann Robinson, and Peter Saunders. None of the aforementioned is responsible for the interpretation
herein.

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290 Richard Rose
Although taxes are necessary, they are not popular. Because taxation is
not confined to countries with free elections, any theory explaining
taxation in terms of popular choice is inappropriate for most countries in
the world today. Since citizens in democratic political systems do not pay
taxes voluntarily, knowledge of the psychology of taxation (cf. Lewis,
I982; David, I98I) cannot substitute for the study of tax revenue.'
Because taxation is viewed as politically costly, politicians do not
volunteer to raise taxes, nor need they do so, for large amounts of
government revenue are routinely raised by established tax laws and
administration.
In order to understand how governments maximize tax revenue while
minimizing political costs, theories should be tested comparatively, since
they propose generalizations that are meant to be true of many different
countries, and of many different taxes. The first section of this paper
identifies four broad theories: universalism; national culture and
institutions; tax-specific determination; and taxation by inertia. The
subsequent sections set out evidence providing robust tests of these ideas
by the systematic analysis of revenues from io major taxes in 20 OECD
nations since 1955.
i. Alternative theories of raising tax revenue
A generic model of taxation is inevitably a public policy model, because

the-chief determinants of revenue-raising are in different domains of the
social sciences - law, public administration, and applied economics - as
well as accountancy and business studies, subjects ignored by most social
scientists but certainly not irrelevant in taxation. Tax revenue (TR)
results from the interaction of laws, administrative actions, and economic
activity. At any given point in time, the revenue yield of a given tax is a
function of the law (L) defining the tax rate and base; administrative
actions (A) taken to apply the law to the base; and the economic activity
(E) defined by law as the base for the tax.
(i) TR = f(L, A, E)
We cannot derive the revenue of the fisc solely from knowledge of the
economy. We must also know what the law defines as taxable, what rate of
tax is levied, and the effectiveness of administrators in collecting tax that
is lawfully due.
Total Tax Revenue (TTR) is the sum of revenue yields from dozens of
different taxes levied within a nation.
(2) TTR = YXfs (Li, A, Ei)

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Maximizing Tax Revenue While Minimizing Political Costs 291
It follows that to understand total tax revenue it is necessary to consider

many different taxes, each of which is a function of particular tax laws and
administrative procedures, and a variety of activities within the economy.
The properties of taxation that are most important in revenue-raising
are two. The first is the percentage of a country's total tax revenue raised
by a given tax, a measure of its relative importance. Secondly, the
percentage of the gross domestic product claimed by a given tax is a
measure of tax effort.
Tax revenue can change by increasing or decreasing, or it may remain
relatively static. Whereas measures of change in a tax's share of total
revenue require that the sum of increases be offset by decreases since the
total remains constant at IOO per cent, measures of tax effort can show all
taxes changing in the same direction. It is also possible for a tax to increase
its claim on the national product, yet decrease its contribution to total
revenue.
Four theories will be considered here, each different in their hypotheses
about the behaviour of specific taxes, whether compared within a nation
or cross nationally.
(i) Universalism. If economics is a science like physics, then variations in
time and place should be of little importance; economic laws (sic) should
be universally applicable. There is even greater reason to expect
universalistic propositions to be true among OECD nations, whose
economies and administrative capabilities are relatively similar when
viewed from a global perspective (cf. Chenery and Syrquin, 1975; Taylor,
I 98 I; Goode, I 984). The broadest universalistic hypothesis is that
taxation should be much the same everywhere, and taxes should change
in much the same way.
A modified universalistic hypothesis is that convergence in taxation is
occurring within OECD nations. Convergence theories recognize the
existence of historical differences between nations, and that some OECD
economies are more modern - or have been modern longer - than others.
The reasons for convergence may reflect economic, political or social
factors. For example, Alt (I983: I92) refers to 'the imperative of
redistribution' as a common influence upon taxation in democratic
political systems. It follows from this assumption that progressive taxes
should be increasing in importance, and regressive taxes declining.
(2) Tax-specific homogeneity. Every textbook of public finance devotes
much space to anatomizing the differences between taxes, e.g. direct and
indirect, or taxes with more or less effective tax handles. The implied
corollary is that each type of tax operates much the same regardless of
the country in which it is employed; its principal characteristics are
assumed to be tax-specific rather than universal. A study of the dynamics
of different taxes within the United Kingdom concludes: 'It is therefore

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292 Richard Rose
reasonable to hypothesize that there are greater similarities between the

same tax in different countries than there are between different taxes
within the same country' (Rose and Karran, I983: 47).
Theories of tax-specific determination both particularize and general-
ize. They hypothesize that many differences between taxes will occur
within a nation. Yet the theories also hypothesize that there will be
consistent regularities; a particular tax will everywhere display much the
same characteristics whatever the national context.
(3) National culture. Much legal and institutional analysis of taxation is a
discussion of tax history rather than tax theory. The history examined is
national. The yield of a particular tax in a particular country at a
particular moment in time is explained by reference to the initial
enactment of a tax and subsequent amendments, and by the evolution of
tax administration and economic activity within a particular national
setting. The term culture is a shorthand phrase to describe the
contemporary residue of influences from this past.
In the most literal sense, theories of national culture may be interpreted
as assuming that every country's tax system is unique. But differences can
occur without leading to uniqueness. Differences in the revenue yield from
particular taxes or total tax revenue are differences of degree, not kind.
Only if differences of degree are pervasively important can uniqueness be
demonstrated. In a modified form, such theories can be treated as
hypothesizing national distinctiveness, rejecting the idea of specific
attributes of taxes being important cross-nationally. At a minimum, it is
hypothesized that national differences will persist for many decades, or
even that OECD nations will become increasingly dissimilar in revenue-
raising.
(4) The force of inertia. This theory starts from the universalistic
assumption that politicians wish to avoid the political costs of voting to
raise taxes. But it also accepts that in an era of big government,
policymakers must have large and increasing flows of tax revenue to
finance programmes that tend to increase in cost from year to year. The
problem is: How can politicians maximize tax revenue while minimizing
political costs?
Inertia is here a force in motion, characterizing tax laws and adminis-
trative agencies that remain in force from year to year. A newly elected
government does not need to vote new taxes in order to raise revenue.
It can simply enforce laws enacted by its predecessors. Administrative
structures provide the continuing institutional resource to dojust this. In
law, tax officials cannot do otherwise; bureaucrats are bound to collect
taxes. To emphasize the continuance of tax policies from a nation's past is
to reject universalist theories, for OECD nations differ in their tax
histories. It also means that the government of the day does not choose a

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particular tax system. The system is the cumulative result of past laws
enforced by present administration; it is not a choice by today's
governors.
The inertia model of taxation hypothesizes that the simplest thing for
politicians to do is to do nothing, that is, to maintain the nation-specific
structure of taxation that it has inherited from (and therefore can blame
upon) its predecessors. The theory thus rejects the conventional
assumption of political scientists and economists that politicians desire
and do make frequent and visible choices about taxation (cf. Roskamp
and Forte, I98I; Robinson and Sandford, I983; Alt, I983). The 'free
policy choice' that Musgrave thought (I969: I47) available to a country
with a rising national product is not available in a high-spending high-tax
country today. Nor is it necessary. Passivity does not mean defaulting on
tax collection; instead, it means enforcing past laws to provide current
revenue. Seemingly small annual increases can compound into large
revenue increases from one election to the next, or from one decade to the
next (cf. Rose and Karran, I984).
The inertia theory of taxation rejects conventional theories of optimal
taxation. As Martin Feldstein (1976: 77) has emphasized:
Discussions of optimal taxation implicitly assume that the tax laws are being
written de novo on a clean sheet of paper. Such tax design is a guide for tax policy in
the Garden of Eden. The optimal tax laws for the next year are not the same as
they would be if taxes were being introduced for the first time. Optimal taxation
depends on the historical context.
Insofar as OECD nations have differed in their national tax systems in

the past, the inertia hypothesis is that they will continue to differ in the
present. Convergence is explicitly rejected, as well as more comprehensive
universalist theories. Tax-specific determinants of revenue are not
necessarily in conflict with determination by inertia. The two theories can
even be complementary. The inertia theory can explain why major
historical differences from the past persist into the present, whereas
properties of particular taxes can explain why, without any action by
government, the revenue yield of some taxes (e.g. progressive income tax)
can rise and the relative yield of other taxes (e.g. excise taxes with fixed
tariffs) fall.
Whatever the relative aesthetic attractiveness of one or another theory,
validity depends upon empirical testing. As a detailed analysis of taxation
within a single nation emphasizes:
The ways in which actual taxes differ from these theoretical taxes are often of
much greater economic significance than the ways in which theoretical taxes
differ from each other (Kay and King, I983:1).

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294 Richard Rose
Hence, it is important to test theories of taxation across nations, across

categories of taxation, and across time.
2. Testing for universalism and convergence
Contemporary economic theory is universalistic; the basic elements of an

economic system are identified by stipulation, and statements about
relationships normally exclude nation-specific and historical contexts. It
is possible to conceive of differences between economic systems, but these
differences are normally described in abstract terms. Differences between
economic theories usually reflect differences in theoretical assumptions
and interpretations rather than national differences. The basic assumption
of universalism is: all nations are much the same.
Universalist theories may be advanced in a modified form, hypothesiz-
ing a tendency toward convergence in taxation among advanced
industrial nations (Bell, 1973; Kerr, I983). Convergence theories
recognize that while in the past there have been major differences in
taxation between OECD nations, for example, between late and early
industrializers, or between Mediterranean and Northern European
nations, the causes are now remote in time. As 'laggard' OECD countries
become more industrialized, they should more closely approximate
universalistic norms. Convergence theories are particularly appropriate
for the era since the I 950s, which has been marked by a conscious effort to
increase the openness of national economies to international influences,
such as foreign trade and multinational corporations, and the growth of
institutions consciously dedicated to promoting tax harmonization, such
as the European Community, and of institutions diffusing ideas of best
practice among nations, such as the OECD and the International
Monetary Fund.
Theories of national culture emphasize the opposite hypothesis:
nations differ from each other. When one turns from the analysis of an
economic system in the abstract to systematic comparison between
nations, then properties of taxation that are constant by stipulation
become potentially variable. This is true not only of comparisons between
high, middle-income and low-income countries, but also within each
category of nation (cf. Tanzi, I982). According to theories of national
culture, averages calculated from OECD statistics tell us little about
particular countries, for the deviation around the mean is expected to be
great.
The emphasis upon national culture leads to the hypothesis that
OECD nations are diverging in their national tax systems. This follows
from Hinrich's (i 966: i o6f) analysis of the fiscal consequences of
economic development. Traditional societies commonly rely upon force to

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extract taxes, and transitional societies rely upon taxes on trade. The
diversity of resources available for taxation in a modern economy is
assumed to offer countries major opportunities to differ in their tax
systems in accord with cultural or other nation-specific characteristics.
The 'politics matters' approach (Castles, I982) offers another theory of
divergence. Control of government over a long period of time by a leftwing
or a rightwing party is hypothesized to create major differences between
national tax systems.
Among the 20 OECD nations selected for analysis here, there is far
more reason to expect an identity, or at least a great similarity of tax
characteristics, than among a global universe. By definition, all OECD
nations are advanced industrial nations, and are subject to political
pressures from a mass electorate.2 The exclusion here of three intermit-
tently democratized and industrializing entrants to OECD, Greece,
Portugal and Turkey, strengthens the presumption.
Whereas national culture theories hypothesize that OECD nations
should differ in their level of aggregate taxation, universalist theories
hypothesize that all countries should take much the same proportion of
the gross domestic product in tax. There is a great deal of similarity in the
tax effort of OECD countries today. In I982 the average nation claimed
38.4 per cent of its national product in taxation; the standard measure of
dispersion around the mean, the coefficient of variation, is very low, o. i 8.
The outliers - Sweden, claiming 50.3 per cent of GDP in taxation, and
Japan, 27.6 per cent - are just that, exceptions to a common pattern. In
1955, the earliest year for which OECD provides detailed comparative
data on tax revenues3, the average nation's tax was one-third lower, 25.2
per cent of the national product. But this difference in aggregate taxation
did not reflect greater diversity among nations. The coefficient of
variation was also low, o. i6. A high similarity in aggregate tax effort has
been maintained, even though individual nations have varied consider-
able in their ranking compared to the moving OECD mean.4
In order to test whether a nation's total tax yield is relatively
homogeneous and thus adequately represented by an aggregate measure
of total tax, it is necessary to examine the principal types of taxes that
collectively constitute the aggregate yield. To do this is sometimes
misleadingly referred to as disaggregation; it is better viewed as
non-aggregation, the inspection of particular taxes before they disappear
in the melting pot of total revenue.
OECD provides the most comparable and comprehensive tax data for
empirically testing theories of revenue-raising (OECD, 1984; Messere,
I983). The assignment of national revenues to tax categories is done after
discussion with staff from relevant national ministries. IMF accounts
itemize taxes in more detail; however, the greater the number of tax

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296 Richard Rose
categories enumerated, the smaller the average proportion of revenue

contributed by any one category. For example, in France the IMF (I983:
284-85) reports tax revenues under I 37 different headings, but 82 of these
categories produces less than O.OI per cent of revenue, and only nine
contribute as much as I.0 per cent to total tax revenue. The IMF
categories are thus too detailed to be useful here.
The median OECD country levies 20 different types of taxes. France
and Britain rank highest, levying 26 and 25 types of taxes, and New
Zealand and Australia rank lowest, levying I4 and I5 taxes respectively.
It could be hypothesized that the higher the level of taxation, the greater
the number of taxes used, as the pressure for more revenue drives
government to seek money in more and more ways; in fact, this is not the
case. The correlation between tax revenue as a proportion of a country's
gross domestic product and the number of taxes used is very low, o.o8. Nor
does the multiplication of taxing jurisdictions increase the number of
taxes; the correlation is o.oo between the sub-national (that is, regional
and local) share of total tax revenue and the number of taxes.
The tax categories employed here have been aggregated from the initial
47 OECD categories on the basis of two criteria, a revenue yield of more
than one per cent of total tax revenue, and use by at least half of OECD
countries. The io tax categories are: income tax, corporation tax, social
security, payroll, property, wealth, VAT and sales, customs, excise, and
otherwise unclassified. To have settled on only two categories, such as
direct and indirect taxes, would have assumed that the components of
each category were empirically similar in revenue yield across nations.
This has elsewhere been shown not to be so (Rose, I984: I07). Examining
the revenue yields of each category of taxes demonstrates that no
substantial source of tax revenue is omitted by the choice of this level of
aggregation. The median contribution to the 20 national tax systems by
the residual unclassifiable category is 0.2 per cent.
If the national tax systems of OECD countries are identical or very
similar, as universalist theories propose, then the proportion of revenue
contributed by each category of taxation should be much the same
cross-nationally, even if the amount that each contributes to national
revenue differs. The similarity in total tax revenue is consistent with this
assumption but not proof, for similarities in aggregate could simply
represent a tendency for cross-national differences to cancel out. For
example, if half the countries were low in income tax and high in sales tax
and the other half the opposite, all could have much the same aggregate
revenue, whilst having two very different types of national tax systems.
In fact, there are substantial cross-national differences in the minimum
and the maximum amount of revenue raised by specific taxes (Table i).
For income tax, which contributes an average of 33 per cent of revenue,

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the variation is between 6I per cent in New Zealand and I3 per cent in
France; for seven taxes the minimum contribution to national revenue is
less than one per cent in at least one country.
A central assumption of universalist theories of taxation is that the
proportion of revenue raised by a given tax is much the same in every
country. The cases at the extreme ends of the range in Table i are assumed
to be exceptions to a tendency for all nations to converge around the mean.
This assumption can be tested by regarding the mean amount of revenue
that different tax categories contribute to the total tax revenue of OECD
nations as the elements of a Standard Tax System. In the Standard Tax
System, income tax contributes 33 per cent of total revenue, social security
24 per cent, and so forth, down to i per cent from payroll taxes and
otherwise unclassifiable taxes (Table i).
TABLE I. Cross-national variations in the use of specific taxes
National Range
Tax Mean Highest Lowest
(as % contributed to
Income 33 6i New Zealand 13 France

Social security 24 45 Italy o Australia, NZ
VAT and sales I4 22 Denmark o Japan

Excise I 2 25 Ireland 2 Luxembourg
Corporation 8 i6 Norway 3 Denmark
Property 3 I I UK 0.004 Italy
Wealth and estate 2 7 Switzerland o.8 Canada

Customs 2 6 Spain o.s Norway
Payroll I 6 Austria o ii countries
Unclassifiable I 4 Japan o 6 countries
Source: Data for this and other tables, unless otherwise noted, collected by the Fiscal Affairs
Division of OECD, and published most comprehensively in Revenue Statistics of OECD
Member Countries (Paris: OECD, 1984). The analysis is the responsibility of the author.
The extent to which a given national tax system is identical to the

Standard Tax System can be measured by a simple distance index, the
arithmetic sum of the differences between the percentage of total revenue
raised by a particular type of tax in the standard system, and a particular
country's share. For example, if a country raises 38 per cent of its tax
revenue from income tax instead of the average of 33 per cent, it is 5 per
cent distant from the Standard, and if it raises 2 per cent from payroll taxes
instead of the I per cent average, this contributes another I per cent to the
total distance. The index thus controls fully for the revenue importance of
each type of tax. The greater the similarity between a country's National
Tax System and the Standard Tax System, the closer the index is to o; the
greater the difference, the higher the index number.

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298 Richard Rose
Universalistic theories posit that the actual distance of OECD nations

from the Standard Tax System should be low for nearly every country,
and consistently so through the years. In its weaker form, convergence
theories predict that whatever the differences among OECD nations in
1955, substantial convergence toward the Standard Tax System should
have occurred since.
In fact, the national tax systems of OECD nations are heterogeneous;
the average OECD nation was 42 per cent distant from the Standard Tax
System in I982 (Table 2). The Standard Tax System is an analytical
abstraction rather than a good guide to the tax practices of most OECD
countries. Deviations from the Standard Tax System are greatest in New
Zealand (65 per cent), Australia (64 per cent) and Denmark (6 I per cent),
which do not make much use of a social security tax. France is very far
from the norm (6o per cent) for the opposite reason, relying upon social
security taxes for 43 per cent of total revenue as against 24 per cent in the
TAB L E 2. National distance from standard tax system
Convergence (-)
Distance Distance Distance Divergence (+)
Index, I955s Index, 1965 Index, 1982 I955-82a i965-82
New Zealand 30 55 65 +35 +IO

Australia 36 50 64 +26 +14
Denmark 56 54 6i +5 +7
France n.a. 65 6o n.a. -5
Spain n.a. 44 50 n.a. +6
Finland 29 34 49 +20 +I5
Japan 36 44 48 + I2 +4
Italy 57 52 46 -I I -6
Luxembourg n.a. 40 40 n.a. 0
Austria 59 40 39 -20 -I
Netherlands 27 3I 39 + I 2 +8
Ireland 72 64 38 -34 -26
Canada 34 40 37 +3 -3
Norway 35 43 35 0 -8
Switzerland 28 4I 33 +5 -8
United Kingdom 24 35 3I +7 -4
Germany 45 26 29 -i6 +3
USA 44 37 28 -i6 -9
Sweden 6i 44 25 -36 -i9
Belgium 48 47 23 -25 -24
Average 42 44 42 -i.6 -2
a In I955 excise and customs must be collapsed into a single category, and data for three
countries is missing. If the i982 data is formatted to match that for 17 countries in I955,
the Distance Index is on average only one per cent less.
(The distance index is calculated by subtracting the share of revenue yielded by a given
tax in a given country from the average OECD share of revenue raised by the tax, as reported
in Table i, and summing the results without regard to the sign.)

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Standard System. Belgium and Sweden deviate least from the Standard
Tax System, 23 and 25 per cent respectively.
In theory, nations could differ from the Standard Tax System because
they grouped into two clusters, for example, according to leftwing or
rightwing governments, or Romance or Anglo-Saxon tax cultures.5 The
extent to which nations high on one tax are similarly positioned on
another can be assessed by a comprehensive correlation matrix of the
share of revenue each tax contributes to its national tax systems. Among
the 36 correlations in the matrix, only three are statistically significant, and
only one theoretically interesting, which is the -o.8i correlation between
the proportion of revenue coming from income tax and social security. But
this difference is not the basis for a typology differentiating national tax
systems as a whole.6 The test for homogeneity reveals heterogeneity
between tax systems.
The disparaties emphasized by historians of national tax systems
suggest that distance from the Standard Tax System was even greater in
the past. But when national tax systems are compared across time to test
for relative convergence since 1955, no convergence is found (Table 2). In
1955 the mean distance was 42 per cent. The country closest to the
Standard then was Britain, an old industrial nation (24 per cent), and the
country furthest, agrarian Ireland (72 per cent). In the next decade
changes occurred within every national tax system. The net effect was a
slight divergence; the mean distance index rose from 42 per cent to 44 per
cent in I965. France had become the nation most different from the
Standard, and Germany the country least distant. The change between
I965 and I982 was slight, averaging two per cent toward the Standard.
After more than a generation of active international economic collabora-
tion and trade, the average OECD nation was 42 per cent distant from a
Standard Tax System in I982, the same as in I955.
Nations are as likely to diverge from the Standard Tax System as to converge.
Between 1955 and I982, seven of the 17 nations examined moved toward
the Standard System, but nine moved away from it, and one did not
change. In the period from I965 to I982, one nation did not change its
distance, eleven moved toward the Standard System, and eight diverged.
There are as many countries moving away from the Standard Tax System
as toward it.
The absence of an identity between tax systems of OECD nations is
consistent with theories that explain tax systems as products of national
cultures. The initial choice of taxes can reflect past cultural conditions.
The inertia of laws and administration can make a particular national
mixture persist. Differences between nations would thus be perpetuated
as a consequence of inertia within a nation. But the distance index also
shows the limits of national influences. Whilst the mean distance of 42 per

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300 Richard Rose
cent is a substantial departure from o, it is far from the maximum. While

countries differ in the extent to which they make use of particular taxes,
usually the differences are a matter of degree, not kind.
Insofar as national cultures are important, then they should affect all
taxes equally. This does not mean that all taxes should raise an equal
amount of revenue; revenue distribution is so skewed that the coefficient of
variation for the revenue yield within national systems is over I.oo in all
but one OECD country. A few big taxes produce most revenue, and a
large number make only small contributions to the fisc.
The most appropriate test for the influence of national cultures is
dynamic; all taxes should change in the same direction through time. This
is consistent with the ordinary citizen's complaint that taxes are going up,
which implies that all taxes of a government are going up.
When changes in the share of revenue contributed to the national tax
system are compared across OECD nations since I955, the results show
no uniformity within a national culture. Instead of shares remaining
uniform in response to uniform cultural pressures, in the average country
three taxes increase their contribution to the revenue, and five decrease
their share. In 14 of 20 nations, more taxes have decreased their
contribution to the national tax system than increased it. For every
example of a tax increasing in relative significance within a nation, at least
one counter-example can normally be cited.
Since any increase in the share of a national tax system necessarily
requires a decrease to offset growth, the stronger test of a common
national propensity for taxes to change in the same direction is to examine
the proportion of the national product collected by each tax. Given that
total revenue as a proportion of the national product has risen on average
by one-half in the period under review, all taxes could be going up on this
measure.
Within every OECD country taxes move in opposite directions in their
claim on the national product. On average, 4.9 taxes have increased their
share of the national product, and 3.I have contracted since I955. No
country has had all its taxes increase claims on the national product.
Notwithstanding the fact that within a nation all taxes are subject to many
common political, administrative, and economic influences, there is no
homogeneity in the movement of taxes within a national culture.
3. Testing for tax-specific homogeneity
Theories of tax-specific homogeneity start from the recognition that taxes,

like nations, can be differentiated in a host of ways. Taxes may be levied on
products or on services or on people; on sellers or buyers; on individuals or
households or corporate entities; directly or indirectly; progressively or

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Maximizing Tax Revenue While Minimizing Political Costs 30I
regressively; by fixed or ad valorem rates; by centralized or decentralized

administration; and with greater or lesser popularity among the
electorate.
The corollary of within-nation differences between taxes is between-
nation similarity within a specific tax category. A tax that is defined as
direct will be direct in Australia or Austria, and a tax regarded as
progressive should have the same effect in Sweden or Switzerland;
properties of specific taxes are independent of national context. While
national laws may vary the rate of a tax or its coverage, a social security
tax remains a social security tax whatever its rate and coverage, as
long as it is an earmarked tax entitling a person to receive social security
benefits.
In this revenue-oriented study of taxation, the most important
difference is between taxes making a substantial contribution to the total
revenue yield, here described as major taxes, and taxes that make a minor
contribution. When comparing taxes, we should not impose a false
equality, discussing each tax as if it were of equal importance to the fisc.
Nor would it here be appropriate to treat at length theoretically
interesting taxes that have little impact upon total revenue, as is often
done in proposals for tax reform.
Even though every nation has dozens of taxes, 83 per cent of revenue in
the average OECD nation is derived from four major taxes: income tax,
social security, VAT and sales, and excise, which together account for
32.O per cent of the national product. The four major taxes produce more
than nine-tenths of the revenue in Sweden, Finland, Denmark, Belgium
and Germany. The degree of concentration is not an artefact of the level of
aggregation. When the 137 IMF tax categories employed in France are
examined, four-income tax, employers and employees social security, and
General Value Added Tax - account for 79 per cent of total tax revenue
(IMF, I983: 284).
The complement of a few taxes raising a large amount of money is that a
large number of taxes account for a very limited fraction of revenue.
Corporation tax, property tax, wealth and estate tax, customs, payroll,
and a miscellany of unclassifiable taxes altogether contribute only
one-sixth of total revenue in the average OECD nation.
Theories of tax-specific similarities hypothesize that a given tax has
much the same properties across national boundaries; it should therefore
raise much the same proportion of total revenue and make much the same
claim on the national product in every OECD nation. The cross-national
coefficient of variation for a specific tax should thus be substantially
less than I.29, the coefficient of variation in the contribution of taxes to a
nation's revenue.
There is a degree of homogeneity in the revenue yield of major taxes in

196.191.248.6 on Fri, 06 May 20hu, 01 Jan 1976 12:34:56 UTC
302 Richard Rose
OECD nations (Table 3). Income tax, in most nations the principal
source of revenue, shows the lowest coefficient of variation for its share of
total revenue (0.35), and the national product (0.38). The taxes ranking
second and third in relative homogeneity - VAT and sales, and excise -
are also major taxes. The two taxes next in relative homogeneity,
corporation tax and social security, are also above-average in the
proportion of total revenue raised. The more money a tax claims, the less
variation it shows cross-nationally.7
TABLE 3. Testing for homogeneity in types of taxes, I955-I982
As % National Tax System As % GDP

Ig5sa i965 1982 I955a 1965 1982
(coefficient of variation) (coefficient of variation)
Major Taxes
Income tax .40 .38 .35 .40 .47 .38
Social Security .73 .64 .6o .82 .7 I .63
VAT and Sales .74 .53 .42 .79 .63 .49
Excise ( 35) 40 52 (-32)b .41 .53
Minor taxes
Corporation .43 .52 .56 .43 .42 .6 i
Property .95 I.I0 I . I 7 .92 I.IO i.i8
Wealth & estate .43 .43 .65 .45 .35 .62
Customs (n.a.) .87 .91 (n.a.) .8o .87
Payroll 2.28 2.35 1I73 2.38 2.45 1.75
Other I.87 2.02 I .57 I .78 I.7I 1.52
a No data available for France, Luxembourg and Spain.

b 1955 data combined for excise and use and customs.
The taxes that vary most from country to country are those that
contribute least to the national revenue, payroll tax, otherwise unclassi-
fiable taxes, customs, and property taxes. The mean coefficient of
variation of minor taxes' contribution to the national tax system is i. i o,
more than twice that for the four major taxes, 0.47. The mean
coefficient of variation for the minor taxes' claim on the national prod
is I.o9; for the four major taxes, it is less than half, 0.5I.
Insofar as a specific type of tax has generic attributes, it should change
in the same direction regardless of the national context. Only if this
occurs, can homogeneity persist. The simplest test is how a given tax
changes its claim on the national product from I955 to I982. By that
criterion, only two major taxes - income tax, and VAT and sales - can
claim to be completely consistent across national boundaries, going up in
every OECD nation. In the past quarter-century, social security has also
increased nearly everywhere. The fourth major tax, excise, takes an
increasing share of the national product in eight countries, and a

196.191.248.6 on Fri, 06 May 2022 17:05:39 UTC
decreasing share in nine. Among minor taxes, there is a general tendency

for their share of the national product to decline, but this tendency is
limited in extent. There is consistent decline in customs, but for each of the
other taxes there are changes in opposite directions (Table 4).
A rise in the percentage contribution that some taxes make to national
revenue will necessarily cause a fall in the share of others. Only two major
taxes - income tax and social security - consistently increase their
contribution to total revenue; excise taxes show a tendency to decline; and
the share of VAT and sales tax increases in half the countries and declines
in the other half (Table 4). The share of minor taxes consistently declines;
this is most marked with customs and property taxes.
TABLE 4. The direction of change in types of tax across nations, I955-82
As % Nat'l Tax gystema As % GDPb

Type of Tax Up Down Up Down
Major
Income tax 14 3 I7 0
Social security I4 2 15 I
VAT & Sales 8 8 o5 0
Excisec 4 I3 8 9
Minor
Corporation 4 I 3 6 i i
Property I I I 6 5
Wealth & estate 2 15 4 12
Customsc O i6 2 I4
Payroll 3 2 4 I
Other 1 4 0 3
a Excludes cases in which a tax contributed less than one per cent of a nation's total tax revenue in
both I955 and 1982, and three countries for which no data was available in I955.
b Excludes cases in which a tax claimed less than 0.5 per cent of a country's GDP in both
I955 and I982.
Figures for customs and excise categories are for the I965-82 period.
Another way to test whether or not a specific tax is becoming more

homogeneous is to compare the coefficient of variation at three different
points of time, I955, I965 and I982. Insofar as the coefficient is declining
in size, then there is a tendency toward convergence in the use of specific
types of tax.
Here again patterns of change differ between major and minor taxes
(Table 3). For income tax, social security, and VAT and sales, the
coefficient of variation has fallen on both measures. By contrast, for each
of the minor taxes the coefficient of variation has increased or remained
very high. Whilst nations do not converge toward the Standard Tax
System, three major taxes - income taxes, social security and VAT - have

196.191.248.6 on Fri, 06 May 2022 17:05:39 UTC
304 Richard Rose
consistently and increasingly shown homogeneity in their contribution to

national revenue and their claim on the national product.
From a policymaker's perspective, consistency within a nation is more
important than cross-national commonality in a specific tax. Within a
national tax system, consistency of revenue is fundamental, because it is
revenue that determines the extent to which expenditure can be financed
without raising taxes or borrowing more. If budget-makers can be
confident in estimating tax revenue from year to year, then they can
budget incrementally, whereas if revenue is unstable, as in poor countries,
then budgeting is much more difficult (Caiden and Wildavsky, I 980; Rose
and Page, i982).
The consistency of a series of annual observations of revenue yields for
each tax can be measured by a least squares regression line (see Rose and
Karran, I983: 39ff). Since annual tax data is available from OECD only
since i 965, the trend analysis must start then. Goodness of fit (that is, an r2
value of .50 or greater) is here regarded as evidence of consistency in a
tax's share of the national tax system or of the national product. A
consistent trend may be up (here defined as an increase of greater than 25
per cent from the base); down (a decrease of greater than 25 per cent); or
stable (no more than plus/minus 25 per cent change). Irregular patterns in
tax revenues (an r2 of less than .50) can be of two different sorts. A cycle is a
non-linear pattern of change producing little net change, because of
fluctuations up and down (a cumulative change of no more than 25 per
cent from the base). Alternatively, when cumulative change up or down is
substantial (greater than a 25 per cent alteration), then the pattern is
unstable, being large in scale but irregular in pattern.
When patterns of change in particular taxes are examined across
OECD nations, few taxes consistently follow the same course. Each tax
normally registers a change in four or five different ways (Table 5). Only
two taxes - income tax and social security - show the same pattern of
change in as many as three-quarters of the countries examined; both
consistently increase. Three-fifths of all changes in taxes are consistent,
but a consistent trend may be down or flat instead of up.
From the point of view of national policymakers, consistency in the
principal sources of revenue, whether the trend be up, down or flat, is
more important than cross-national consistency within analytic categor-
ies. When national tax systems are examined, on average, 7 I per cent of
revenue comes from taxes that are predictably consistent within a nation
in their claim on the national product. In six of 20 nations, more than
nine-tenths of revenue comes from consistent taxes. Aggregate revenue as
a proportion of GDP is even more consistent; the goodness of fit (r2) for
total revenue averages .79. Taxes differ from each other in their pattern of
change, but there is sufficient consistency among major sources of revenue

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TABLE 5. Patterns of change in taxes' share of the national product 1965-82
Consistenta Not Consistent

Steady Stable Steady Cyclicalb Unstablec
increase decrease
Major
Income tax I6 I O 3 0
Social security 14 I 0 2 I
VAT & Sales 10 2 0 7 I
Excise I 5 4 7 3
Minor
Corporation 2 I 3 7 7
Property 2 I 5 7 3
Wealth & estate 2 2 5 6 5
Customs I I I3 3 2
Total N 48 14 30 42 22
(Trends calculated only for taxes accounting for at least 0.5 per cent of GDP in both I965
and 1982).
a Consistent change: r2 trend line fit of .5o or greater. Steady increase if change is cumulatively
greater than 25 per cent, Decrease if down more than 25 per cent, and Stable if ? 25 per cent
of base.
b Cyclical pattern: r2 is less than .50 and cumulative change is less than ? 25 per cent of base.
c Unstable: r2 is less than .50, and the cumulative change is more than ? 25 per cent of base.
for budget-makers to be reasonably confident about a continuing flow of

revenue.
Consistency in many revenue sources does not mean that revenue-
raising is completely routine. The consistent decline in some taxes
requires an increase in the yield from others in order to maintain a steady
stream of aggregate revenue. The question thus arises: What kind of
theory would best describe the way in which governments already raising
large sums in taxation in I955 have increased revenues substantially in
the years since?
4. Minimizing political costs through taxation by inertia
The government's need for revenue is not a question of political values or

political choice; in the first instance it is a given. A condition of taking
office is that a politician swears to uphold the law, tax code and all. A new
government also inherits major programmes of the mixed economy
welfare state, such as pensions, health care and education (Rose, I985).
Most of these programmes are popularly regarded as 'good' goods, since
everybody can expect to benefit from them. Since public programmes are
big, the need for tax revenue is big too. In political as well as economic
terms, taxes are the cost of providing the benefits of government.

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306 Richard Rose
The first problem facing politicians today is how to minimize political

costs while maximizing tax revenue. The object is damage limitation or
blame-sharing (Kavanagh, I980). Twenty years ago many economists
confidently advised that tax revenue could be increased almost effortlessly
through Keynesian policies that would increase the national product, tax
revenue, public expenditure, and take-home pay. Today there is no longer
general confidence that it is practicable to have 'policy without pain'
(Heclo, 198I: 397; see also Rose and Peters, I978). Politicians elected
on a tax-cutting programme feel the pain most, for even if a few margin-
al tax cuts are delivered, in an era of big government taxes remain
big.
Non-decisionmaking is preferred to decision-making in taxation.8 The inertia of
established tax laws and administration continues as long as elected
officeholders do nothing to mount an equal force to stop or redirect it.Just
as uncontrollable spending commitments continue, whatever the wishes
of the government of the day (Rose and Karran, I 984), so too the revenue
to finance these programmes is provided by the inertia of tax laws and
administration. Whether or not the existing tax structure is optimal from
an economist's point of view, it is usually optimal from a politician's point
of view. Doing nothing enables a politician to avoid identification with
proposals to levy new taxes or increase the rates of existing taxes. If
keeping out of trouble is a basic law of politics, then not making decisions
is one way to avoid trouble - in the short run at least. Introducing new
taxes or repealing established taxes cause political controversy, and
uncertainty about revenue flows.
The inertia of established laws minimizes political costs. Laws on the
statute book persist from year to year; the great majority of revenue laws
are old laws (cf. Rose, I 984a). Contemporary governments are committed
to enforce a great repertoire of tax legislation that obligates officials to
collect and citizens to pay income tax, social security, sales, excise wealth,
property, and other taxes. The statute book provides the legal authority
for taxation, identifies the economic activities subject to tax, and the
specific rate to be applied to that base. It also leaves the responsibility for
enacting tax legislation with past governments.
By sustaining familiar taxes, inertia tends to make taxation politically
acceptable, or at least less unacceptable. New tax proposals can induce
anxiety by their unfamiliarity, and novel tax proposals are uncertain of
popular acceptance or effective implementation. By definition, an existing
tax law has been approved by the legislature and the executive, and it has
also been implemented by administrators. Familiarity increases accept-
ance, if only by a process of resignation. For example, British taxpayers
are so inured to high levels of taxation that six years out of seven a majority
expect taxes to rise further (Gallup Poll, I985: 28-29).

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The administrative apparatus needed to collect revenue is also

sustained by the inertia of government organization. Tax officials can
annually collect a predictable amount of revenue at a known cost in
personnel and taxpayer friction; the imperfections of tax administration
are unlikely to differ much from those of other administrative activities of
government (cf. Hood, 1976). Moreover, where resistance is encountered
in collecting revenue from one type of tax, government can shift the
burden to taxes with more effective tax handles. Reliance upon
established administrative procedures greatly facilitates tax administra-
tion, and familiarity tends to produce a predictable response from
taxpayers. Countries frequently scoffed at by Anglo-Saxons for their
failure to collect large sums in income tax, such as France and Italy, are
able to collect as much or more of their total national product in taxation
as Britain and America.
Government must maintain a predictably consistent cash flow because
it is continuously spending billions of its national currency. The inertia of
established taxes makes revenue flows much more predictable. This is
particularly important for taxes that provide the major portion of national
revenue. The two taxes that together usually account for more than half a
nation's total revenue - income tax and social security - are also the two
taxes that almost invariably produce a consistent stream of revenue
(Table 5).
Taxation by inertia explains why OECD nations rely upon a wide
variety of different tax structures to raise high levels of aggregate revenue,
and why there is no convergence between national tax systems. At any
point in time, policymakers are risk-averse. Because they do not want to
forfeit a substantial amount of tax revenue or cut programme expenditure,
politicians refrain from repealing established taxes. Nor do they wish to
introduce new taxes with a substantial impact upon revenue because,
whatever their net effect, the gross cost of a new tax is expected to have a
large and unfavourable impact upon the electorate. In the short term the
logic of the situation is clear: do nothing.
Notwithstanding the considerable furore about high taxes and govern-
ment expenditure in the I970s, political decisions to alter tax laws
normally have a limited revenue impact. For example, the highly
publicized approval of Proposition I 3 in California in I 978 affected only a
limited portion of a single revenue source of one taxing authority in one
state of the United States. The I98I Reagan tax changes have generated
larger marginal changes in revenue, but from a long-term perspective,
they are very much the exception (Witte, I985), and were based upon
supply-side arguments unlikely to have much credibility in future (cf.
Stein, I984; Greider, I982).
The immediate problem facing any government is not that of designing

196.191.248.6 on Fri, 06 May 2022 17:05:39 UTC
308 Richard Rose
a tax structure or reforming it; it is to finance the ongoing costs of

government. In OECD nations the base cost is big; the first charge upon
the fisc is to maintain a steady flow of revenue to meet base costs. Only if
the great bulk of revenue is produced by the inertia of established tax laws
and administrative procedures can politicians begin to consider marginal
changes in taxation.
There is a fundamental disequilibrium in the market for tax reform.
There is a low demand from politicians to redesign or reform taxes and
Washington, where many such proposals are floated, is the national
capital where political institutions make comprehensive redesign least
likely. Proponents of tax reform recognize that unless five stringent
political conditions are satisfied, their goal is 'virtually impossible' (Aaron
and Galper, I985: 132). In universities there are incentives for optimal
taxation theorists to generate ideas for new tax legislation, for they gain
academic visibility by doing so (Peacock, I 98 I). But politicians prefer the
political invisibility of non-decisionmaking. Nor is tax reform popular
with the mass electorate. According to one American survey (David,
I 98 I: 21 I), less than ten per cent think that tax reform will affect their own
taxes. The status quo can mobilize strong defenders when it is attacked,
for the simple reason that it is there. Those who benefit from the existing
tax laws will not welcome the withdrawal of such exemptions, and those
who fear that new legislation will be unfavourable to their interests will
also oppose change.9
A theory of taxation by inertia must do more than explain the
maintenance of a steady flow of revenue. It must also demonstrate how the
inertia force of existing laws can provide a steady increase in revenue. Of
the three terms in the public policy model of taxation, the increase cannot
come from raising the rates or expanding the base, for that would require
positive action by politicians. Administration also requires positive
government action, and tends to be difficult to alter in the short term.
Changes in economic activity are thus the principal potential source for
change in total tax revenue.
Changes in the economy affect revenue by altering the base of a
particular tax. In the era under review here, two changes have been of
greatest importance, economic growth and inflation. By contrast with
expenditure, which may be discussed in volume (or so-called 'real') terms
unrelated to the money sums paying for public goods and services, taxes
are levied in actual current money (Clarke, 1973: 159). Inflation can
increase the value of the tax base, thus generating more actual revenue
without any action by policymakers to change the law. In addition, the
expansion of the economy can increase the economic base. In most years
the economy's tax base expands because of both inflation and economic
growth.

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But the structure of a nation's economy is no more a unidimensional

entity that changes uniformly in all its parts than is a national tax system.
Different parts of an economy are differentially affected by economic
growth. For example, increased capital investment can reduce the yield
from social security taxes, if fewer workers are required to produce a given
volume of goods. Inflation also effects parts of the economy differentially.
In a dynamic economy invariant features of tax laws have special
significance. An excise tax denominated in fixed-money terms, such as a
tobacco tax, will reduce its relative contribution to the fisc if rate and base
are unaltered, whereas revenue from progressive taxes will increase, as the
inflation of money wages increases the amount of income subject to tax at
progressively higher rates.
In order to account for changes in total tax revenues, it is necessary to
consider to what extent a tax is buoyant (that is, tends to generate
disproportionately more revenue than that accounted for by the rate of
economic growth and inflation) or not buoyant (that is, it increases
relatively less than the rate of economic growth and inflation).
The presence or absence of buoyancy in tax revenue is of crucial
political importance. Without buoyancy, politicians would have to
become identified with positive initiatives to raise taxes, actions that
would be politically unpopular. By contrast, if revenue is buoyant, then a
government's total tax revenue can increase without any public decision
on its part.'0
Of the nine taxes reviewed in this paper, one would be expected to be
unusually buoyant, the progressive income tax, and three would be
expected to be relataively buoyant - VAT and sales taxes, social security
tax, and corporation tax- because they are denominated as percentages of
cash flows. Payroll tax, wealth tax, and property tax would be buoyant
only insofar as there was provision for an annual revaluation of the base of
the tax, and the tax rate was a percentage of the base. Two taxes, customs
and excise, would be expected not to be buoyant, since they are
denominated in fixed-money rates unlikely to be raised annually to keep
up with inflation and growth.
The buoyancy of a tax's contribution to total national revenue, i.e., its
propensity to rise faster than the increase in the national product due to
the conjoint effect of economic growth and inlation, can be indicated by
dividing the percentage increase in the current-money revenue yield of a
given tax by the percentage increase in the current-money value of the
gross domestic product during the same period (cf. Aguirre et al. I 98 I: 3).
If the percentage increase is the same for both terms, then the value will be
I.00; the tax will be neither buoyant nor depressed. If the resulting ratio is
greater than I.00, then the tax will be relatively buoyant, and if less than
I.00, it will be depressed relative to the economy as a whole. Comparing

196.191.248.6 on Fri, 06 May 2022 17:05:39 UTC
310 Richard Rose
individual taxes with the change in the money value of the total national
product controls for the effects of both economic growth and inflation.
Within every OECD nation, tax revenue has grown more rapidly than
nominal income since I 955. However, the general tendency for most taxes
to grow faster than nominal national income is not true of all taxes. Even
though all taxes are influenced by the same rate of national inflation and
economic growth, there is a high degree of variation in the buoyancy of
taxes within a nation."'
TABLE 6. The differential buoyancy of tax types,

1955-I982
Buoyancy ratio across I7 countriesa

Tax Type Mean Stand. Dev. Coeff. variation
Major taxes
Income tax 2.34 .90 .39
Social security 4.54 6.56 I.44
VAT & Sales I.58 .55 35
Excise (I965-82) 1.00 .40 .40
Minor taxes
Corporation I.1o .73 .66
Customs (I965-82) .45 .37 .83
Wealth & estate .83 .54 .65
Property .97 .57 .58
Payroll .67 .96 I.42
Unclassified .69 1.40 2.03
Total Taxes I .58 0.28 .I8
a Extreme increases resulting from the introduction of VAT in

Ireland and a payroll tax in Sweden are excluded from the
calculation of means.
Specific taxes tend to vary greatly in their buoyancy ratios. Two taxes -
income tax (mean buoyancy ratio of 2.34) and social security (4.54) - are
well above the buoyancy ratio for total taxation, and VAT and sales (I .58)
is equal to it (Table 6). The other major tax, excise, and one minor tax,
corporation, have also tended to be more buoyant than the nominal
income of society. By contrast, five minor tax categories have been less
buoyant than national economies. There are cross-national differences in
the degree of buoyancy of specific types of taxes. The coefficients of
variation tend to be higher for minor taxes, and excepting social security
taxes,'2 there is little cross-national variation in the buoyancy of major
taxes.
Of primary political importance is the fact that the three taxes r

highest with respect to buoyancy - income, social security and VAT and

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Maximizing Tax Revenue While Minimizing Political Costs 3I I
sales - were already among the most important taxes in I 955. When a few
major taxes grow faster than the economy and most taxes grow more
slowly than the economy, then revenue will increasingly be concentrated
upon a very few taxes of primary political importance. Policymakers can
collect more revenue from fewer taxes by relying upon the buoyancy of
taxes placed on the statute books long ago.
Concentration on revenue-raising from income tax, social security, and
VAT and sales has increased greatly from I 955 to I 982 (Table 7). In 1955,
these three major taxes on average contributed only 51 per cent of total tax
revenue, and the pattern was similar among all OECD countries. More
than a quarter-century of economic growth and inflation has increased the
contribution of buoyant taxes to an average of 7 I per cent of total taxation,
and has done so consistently among OECD nations. As the fisc's need for
money has increased, it has been able to rely more and more upon a few
buoyant taxes already raising large amounts of revenue.
The buoyancy of major taxes has been an important condition for
increasing the capacity of governments to mobilize more and more
TABLE 7. The increasing concentration of tax revenue, 1955-1982
Degree of Concentrationa
National Tax System Mobilization of GDPa
1955 1982 Increase I955 1982 Increase
% % % % ~~~~% %
Belgium 75 83 8 I8 39 21
Sweden 55 82 26 14 41 27
Italy 52 82 29 i6 31 15
Germany 64 8I I8 20 30 I I
Netherlands 59 8I 22 15 37 2I
Denmark 46 78 32 II 35 24
Switzerland 6i 76 I5 12 24 I2
Austria 6o 76 15 I8 3I I3
Finland 58 73 15 I6 27 I I
New Zealand 50 72 22 I4 24 II
USA 47 72 25 I I 22 I I
Norway 58 65 7 i6 3I 15
Ireland 2 I 64 43 5 25 2 I
UK 4I 59 I8 12 23 II
Canada 40 58 i8 9 20 10
Japan 36 56 20 6 15 9
Australia 42 52 I0 10 I6 6
Mean 51 7I -'20 13 28 I5
Std. Dev. I3 10 4 7
Coeff Var. 0.25 0.14 0.32 0.27
a Percent that three principal buoyant taxes - income tax, social security, and VAT and Sales -
contribute to the National Tax System and claim from the Gross Domestic Product respectively.
Statistical calculations based on figures before rounding off.

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3I 2 Richard Rose
revenue. Whereas in 1955 income tax, social security and VAT and sales
on average claimed 13 per cent of the national product, by I 982 their claims
more than doubled, accounting for 28 per cent of the national product.
The extra money generated by these buoyant taxes has not only led to a big
gross increase in revenue, but also helped to replace revenue lost by
taxes that have failed to grow as much as a buoyant economy.
Non-decisionmaking is relative not absolute; although inertia forces
keep boosting revenue, there is no hidden-hand mechanism assuring that
revenue will always rise pari passu with expenditure claims. And
policymakers also want to intervene to make changes in taxation at the
margin. Three different forms of political intervention can be identified:
borrowing, altering the tax rate and base, or repealing laws or adopting
new tax laws.'3 Whilst each is a subject for political debate, if only because
they are the delimited areas within which choices can be made, their
impact upon total revenus is marginal.
Borrowing. When inertia processes of taxation fail to generate a
sufficient revenue to meet expected expenditure, governments can resort
to borrowing to fund the deficit. This is readily explained by a
non-decisionmaking model, for borrowing avoids the need to make a
decision about matters that are both visible and likely to be politically
unpopular, such as increasing taxes or cutting public expenditure.
Whereas conventional Keynesian economic prescriptions justify borrow-
ing as a cyclical and therefore occasional measure to stimulate the
economy, non-decisionmaking treats borrowing as a continuously
desirable political strategy.
Since the slowing down of rates of economic growth with the world
recession of the early 1970S, governments have relied more and more upon
borrowing to finance revenue shortfalls. (Price and Chouraqui, 1983;
Saunders and Klau, I985: Tables I, I9). National tolerance for deficit
finance tends to be variable; in I982 financial deficits ran as high as 13.7
per cent of GDP in Ireland and I I.9 per cent in Italy, three to five times the
level causing anxieties in Britain and America. Whatever the tolerance,
borrowing has its limits; the cumulative effect of higher deficits is an
increase in debt interest payments. This cost is now substantially greater
than public expenditure on defence in OECD nations, and it is projected
to catch up with spending on health or education (OECD, I985).
Altering the tax rate or tax base. Because such changes only require
amendments to existing statutes, they involve far fewer difficulties than
the enactment of new tax statutes. Administrative procedures are
unaltered, except for the revision of published tax tables, forms and
procedures. The revenue yield from an altered rate is almost as
predictable as the yield from an unaltered rate. Political criticism of
altering the rate upwards can be met with the argument that the revenue is

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needed to meet increased expenditure, and a challenge to critics to

propose an alternative tax yielding an equivalent increase in revenue, or
programme cuts making the increase unnecessary. Proposals to reduce
the rate of a tax are difficult to oppose politically, especially if introduced
shortly before a general election.
In an era of inflation, amending the tax laws is inevitable. Inflation
destabilizes taxation by generating too much (sic) revenue. Not only does
it increase the current money yield but also it brings far more people into
the tax net, and pushes people in middle-income brackets into progres-
sively higher tax brackets. On a priori political grounds, one might expect
politicians to respond by annually cutting tax rates or raising tax
exemptions in current money terms, while actually securing some
increase in revenue due to inflation and growth. Headlines would speak of
tax cuts, while the fine print of the budget kept revenue rising.
In fact, politicians in Western nations have usually sought to remove
from their hands the annual responsibility for such decisions, indexing
income tax systems by writing into legislation automatic increases in tax
allowances affecting marginal tax rates. Once a system of indexing is part
of a tax statute, then tax changes will occur without any decision being
taken by politicians of the day. Thus, politicians cannot claim any
political credit for cutting (sic) tax rates. In an inflationary era, proposals
to reduce rates are not perceived as a benefit, but rather as a stimulus to a
larger debate about who is to blame for inflation, and about what taxes
ought to be. Politicians have preferred to deny themselves credit for
adjusting tax rates in order to avoid such annual controversies. Inasmuch
as indexing systems are almost inevitably imperfect, this non-decision-
making approach reduces but does not destroy the buoyancy of
principal revenue sources (Tanzi, I 980).
Altering the tax base is another means of active political intervention in
the revenue-raising process. At any given point in time, statutes define
which economic activities are liable to taxation (the tax base) and which
are not (tax allowances, or more controversially, tax expenditures; cf.
OECD I984a, Surrey and McDaniel, I985).
The exemption of a portion of income from taxation is as old as the
income tax, and allowance for the deduction of mortgage-interest
payments to home-owners is also long established. Proposals to reform or
abolish tax expenditures need to mobilize great political force in order to
overcome the inertia force of statutory definitions of the tax base. The
substantial academic criticism of a variety of tax allowances has not
generated sufficient counterforce to repeal existing statutes (see Wildav-
sky, I985). Even the historically extreme tax revision proposals circulat-
ing in Washington in 1985 propose a reduction of tax allowances to
broaden the tax base, but not the abolition of such electorally popular

196.191.248.6 on Fri, 06 May 2022 17:05:39 UTC
314 Richard Rose
concessions as tax relief for mortgages. In effect 'reform' is about a tax

swap, reducing tax expenditures in returning for reducing tax rates, so
that the revenue effect in aggregate is meant to be nil.
The annual budget of the British Chancellor of the Exchequer provides
an unusual opportunity to test the extent to which there is scope for
politicians to choose to alter revenue yields of taxes, for the Chancellor
publishes the expected impact on revenue of each change proposed, and
Parliament almost invariably endorses the Chancellor's proposals. Thus,
the British government can effectively choose how much or how little it
alters its sources of tax revenue each year.
In fact, the annual budget has only a slight effect on the total revenue
yield and on the revenue yield of specific types of taxes. From 1979 to I 983
a Conservative government notionally pledged to introduce radical
changes in taxation on average altered less than six per cent of gross tax
revenue, and less than two per cent of net tax revenue. Many gross
changes cancelled each other out, e.g., the two biggest changes in the
period, a ?4.6bn reduction in income tax in I979 offset by a ?4.2bn
increase in VAT. Whilst some annual changes were made in most
categories of taxation, the average impact of a change upon total revenue
was 0.4 per cent, and 52 of the 58 changes affected less than one per cent of
total tax revenue.
A systematic inspection of each change introduced in the annual
budget underlines the importance of inertia; the great majority of changes
involved amending the rates or bases of established taxes. If amended
taxes are considered to reflect inertia forces, then virtually ioo per cent of
the tax revenue collected by the Thatcher government occurs under
TABLE 8. The relative importance of taxation by inertia and annual changes in

tax laws in Britain, 197-83
Impact of changes on revenue Revenue from inertia of

established laws
Gross' Netb Gross Net ?mn %
(Cmn) (% total revenue) total revenue
I979 9,675 425 I4.2 o.6 58,500 85.8

1980 3,787 -1,090 4.4 -I.3 82,300 95.6
i98i 3,72! 2,609 3.6 2.7 98,6oo 96.4
I982 5,805 _3,475 4.8 -3.I I 15,000 100
I 983 3,469 2,349 2.6 -I .7 I 30,000 100
aAdding revenue gained and foregone without regard to sign.

bTotal revenue impact after subtracting tax decreases from increases.
Source: Calculated by the author and Dr. Terence Karran from Treasury estimates of the revenue
impact of tax changes, as published in the Financial Times the day after the annual budget
speech. Local authority rates excluded as outside the Chancellor's responsibility.

196.191.248.6 on Fri, 06 May 2022 17:05:39 UTC
primary legislation that has been inherited from its predecessors.

Moreover, the two principle sources of revenue, income tax and social
security, are legacies from the Napoleonic wars and the pre-19I4
introduction of social insurance.
Repeal of an existing tax, or the enactment of a new tax. Taxes are rarely
repealed, for doing this would involve the loss of far more revenue than
that affected by the alteration of tax rates and bases. For example, in
Britain the system of local revenue-raising by rates on property has been
criticized by both Labour and Conservative leaders in opposition. But in
office the same politicians have found themselves in thrall to a source of
revenue introduced under the Poor Law Act of Go i. To repeal property
taxes in Britain would not only mean to forego I I per cent of total revenue;
it would also make it necessary to find a new revenue source for local
government, which would lose upwards of one-third of its tax revenue if
rates were abolished.
Introducing new taxes is far more difficult politically than amending an
existing tax (cf. Hansen, I983). New taxes mobilize overt opposition
within the political process from those they will affect, and are likely to
mobilize covert opposition within the administrative apparatus because
of additional efforts and uncertainties arising from innovation. While the
introduction of new taxes is often talked about, the inertia force of
already enacted taxes usually frustrates major new proposals. A
review of unsuccessful efforts to introduce new taxes in Britain in
recent decades concludes: 'We are left with a pretty pitiful result from
two decades of enthusiastic tax reform' (Robinson and Sandford,
I982: 232).
The language of tax design and tax reform does more to generate
inflated expectations than additional revenue. Changes in tax revenues
are far more likely to result from the unintended consequences of revenue
buoyancy than from the public choices of policymakers. Revenue changes
can also occur when taxpayers react by re-arranging their affairs to
minimize tax liabilities at the margin. Upon occasion a tax swap can
occur, that is, the introduction of a new tax (for example, the single-tariff
VAT in Britain) in exchange for the repeal of an old tax, such as a
multivalue sales tax. In the United States, the I98I Reagan tax cuts
exchanged tax revenue for greater reliance upon borrowing. Hood (i 984)
argues for a biological process model of tax adaptation, in which new taxes
are not so much planned as they are created as mutations of pre-existing
taxes. Change in the tax code is best described as a process of tax
succession, involving a persistence of some properties of taxes inherited
from the past, albeit in a different genetic mix (cf. Hogwood and Peters,
I983).
Resistance to new tax laws and to major alterations in tax rates or the

196.191.248.6 on Fri, 06 May 2022 17:05:39 UTC
3I6 Richard Rose
tax base results in the Law of Inverse Reform: the amount of change that c
purposefully be introduced into a national tax structure varies inversely with its
on total tax revenue. The more money that a tax raises, the greater its i
force, whether in motion (a force against repeal) or stationary (a force
against adoption). Conversely, the less money raised by a tax, the easier it
is to alter because it will have virtually nil effect on total revenue. From a
revenue perspective, tax reform is aboutfringe tuning; it must leave the core
of revenue secure.
Successful proposals for new taxes usually contribute little to public
revenue; the motive for their adoption is not to increase revenue but to
promote economic activity, simplify the administration of taxation, or
advance what is perceived as greater horizontal or vertical equity. Very
occasionally, a new tax may balloon up, producing large revenues after it
has been in effect for decades or, in the case of income tax, a century. The
ballooning up of revenue from a particular tax can occur independently of
or against the intention of its original sponsors, who have departed the
corridors of power long before change occurs.
5. Living with a legacy
A positive as distinct from a normative or a heuristic model of taxation

must start with the historic givenness of a structure of taxes within a
nation. A given set of laws and administrative procedures not only
determines the current year's revenue but also, by the force of inertia, ver
largely determines the following year's revenue as well. The non-
decisionmaking model explains why politicians keep past laws in effect as
the best means of minimizing the political costs of taxation while
maximizing tax revenue.
The growth of government revenue is propelled as much by what
politicians do not do as by what they do do. Each national tax system has a
particular historical structure that tends to persist from decade to decade
because of the logic of political non-decisionmaking. A newly elected
government finds that the need for revenue is great and rising. A
right-of-centre leader such as Margaret Thatcher cannot readily lower the
total level of taxation, even though it is viewed as too much,just as a newly
elected Francois Mitterand or Olaf Palme cannot easily choose to increase
taxation, even though it does not yield enough revenue to finance
increased expenditure.
An understanding of political inertia is more important for understand-
ing taxation than theories of public choice. Politicians do not choose what
they do; they inherit obligations. The greatest impact of their actions is
likely to be upon future governments, as the choices that they make
become a part of the legacy passed to their successors. To regard this

196.191.248.6 on Fri, 06 May 2022 17:05:39 UTC
Maximizing Tax Revenue While Minimizing Political Costs 3I7
legacy as a conscious calculated expression of the net present value of

future consequences is to confuse heuristic with historical processes. The
taxes that bear down most heavily today are unintended and unanticipatable
nth-order consequences of measures set in train decades, generations and
world wars ago. When Pitt introduced the income tax to finance Britain in
the Napoleonic wars, he did not think of the implications of this for the
take-home pay of twentieth century industrial workers. Nor did David
Lloyd George worry about the consequences for the twenty-first century
of decisions about financing social security taken at the beginning of the
twentieth century.
To understand the dynamics of taxation requires giving less attention
to cross-sectional analyses of present calculations, and more to processes
requiring decades to realize their full impact (Rose and Karran, I984).
Changes in economic activity, with all this implies for the tax base, reflect
the gradual compounding of small annual increments. Changes in social
structure affecting the accessibility of citizens to taxation (e.g. the move
from farming to industrial work, or female rates of participation in the
labour force) occur slowly, yet cumulatively to great effect. Whilst no
single alteration of tax laws is likely to be important in itself, a steady series
of slow changes biased in one direction - for example, an increase in social
security taxes, or a failure to increase tobacco tax rates in line with
inflation - will cumulatively add up.
To emphasize the longue duree of government revenue-raising is not to
counsel pessimism, but to stress realism to wouldbe tax reformers. Every
OECD nation today has a tax structure that has evolved through the
centuries; its present shape is not the result of a plan but the cumulative
consequence of the inertia of some buoyant taxes and others that are
depressed. Whether one regards the result as a forest, a jungle or a partly
cultivated terrain is less important than the recognition that tax structures
that have been evolving for centuries are not quickly changed, let alone
transformed (see also Kay and King, I983: 246). The legacy of each newly
elected government is fixed by the past; how that legacy is employed offers
real but limited scope for longterm adaptation, in part by choice and even
more by non-decisionmaking.
NOTES
I.If economic studies of social phenomena may be criticized for their social psychological
assumptions, social psychological studies of taxation are limited by excluding material
phenomena. Survey studies can indicate revenue yield only insofar as: (i) voters' tax preferences
are more or less accurately perceived by their elected representatives; (ii) elected representatives
give them a significant priority; (iii) the problems identified in surveys are amenable to resolution
within the fiscal constraints of government; (iv) the priorities of elected representatives are
effective determinants of administrative action; (v) tax measures are put into effect as desired.

196.191.248.6 on Fri, 06 May 2022 17:05:39 UTC
3I8 Richard Rose
2. For more details of taxes and procedures used for aggregating OECD tax categories, see the longer
paper with a similar title by this author, published as Studies in Public Policy No. 142 (I985) by the
University of Strathclyde Centre for the Study of Public Policy.
3. Note that data are available for France, Luxembourg and Spain only since I965, and it is not
possible to separate data for customs from excise taxes in I955. Cf. OECD (I984: 253-260).
4. The differences in national rankings are indicated by the absence of a high correlation between a
nation's tax effort in I955 and I982, 0.46, and the -0.43 correlation between total tax revenue as a
percentage of GDP in 1955 and change in share between I955 and I982.
5. Distance is independent of the proportion of the national product claimed in total taxes. The
correlation between a country's I982 distance from the Standard Tax System (Table 2) and total
taxes as a share of the national product is not significant (-0.33).
6. The other correlations significant at the 0oi level are those of social security and excises, -o.66,
and customs and wealth tax, o.68. An attempt to develop a typology through cluster analysis also
emphasizes the extent of national differences, for I9 countries are divided into six clusters, an
average of three countries per cluster (see Peters, I985: I5-20).
7. The coefficient of variation correlates significantly and negatively with a tax's mean contribution
to total revenue (-o.67) and with a tax's mean claim on the national product (-o.64).
8. Unlike many studies of non-decisionmaking, which suggest that doing nothing serves rightwing
vested interests, non-decisionmaking here favours the interests of consumers of major public
social programmes at the expense of wealthier taxpayers.
9. Richard Goode has suggested, as a rough rule of thumb, that benefits must be at least four times
the costs in order to make a change in tax laws acceptable in the United States.
Io. In the broad cross-national comparisons undertaken here, it is not practicable to control for the
effects of changes in rates and in the definition of the base. These points are discussed below. The
capacity to make more detailed calculations would undoubtedly change the buoyancy figures for
particular taxes in particular countries, but it would not be expected to alter the general
conclusions set out here.
i i. The mean coefficient of variation for the buoyancy ratios of nine taxes within a nation is o.89, and
the median, 0.76.
I 2. The extreme social security values reflect the fact that while many countries raised their rates and
base for social security taxes as well as letting real growth and inflation generate more income, this
could not occur in countries financing social security with little or no use of such a tax.
13. Increases in charges and user fees are another potential source of increased revenue, but these too
are likely to cause political unpopularity, since they will result in higher prices for goods and
services.
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Maximizing Tax Revenue while Minimizing Political Costs

Author(s): Richard Rose

Stable URL: https://www.jstor.org/stable/3998441

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Maximizing Tax Revenue While Minimizing

R I C H A R D R O S E, Public Poliy, University of Strathclyde

Tax revenue is a function of laws and administration as well as economic

Question to Willie Sutton: Why do you rob banks?

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i. Alternative theories of raising tax revenue

A generic model of taxation is inevitably a public policy model, because

(2) TTR = YXfs (Li, A, Ei)

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It follows that to understand total tax revenue it is necessary to consider

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reasonable to hypothesize that there are greater similarities between the

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Insofar as OECD nations have differed in their national tax systems in

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Hence, it is important to test theories of taxation across nations, across

2. Testing for universalism and convergence

Contemporary economic theory is universalistic; the basic elements of an

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categories enumerated, the smaller the average proportion of revenue

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TABLE I. Cross-national variations in the use of specific taxes

Income 33 6i New Zealand 13 France

VAT and sales I4 22 Denmark o Japan

Wealth and estate 2 7 Switzerland o.8 Canada

The extent to which a given national tax system is identical to the

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Universalistic theories posit that the actual distance of OECD nations

TAB L E 2. National distance from standard tax system

New Zealand 30 55 65 +35 +IO

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cent is a substantial departure from o, it is far from the maximum. While

3. Testing for tax-specific homogeneity

Theories of tax-specific homogeneity start from the recognition that taxes,

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regressively; by fixed or ad valorem rates; by centralized or decentralized

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TABLE 3. Testing for homogeneity in types of taxes, I955-I982

As % National Tax System As % GDP

a No data available for France, Luxembourg and Spain.

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decreasing share in nine. Among minor taxes, there is a general tendency

TABLE 4. The direction of change in types of tax across nations, I955-82

As % Nat'l Tax gystema As % GDPb

Another way to test whether or not a specific tax is becoming more

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consistently and increasingly shown homogeneity in their contribution to

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TABLE 5. Patterns of change in taxes' share of the national product 1965-82

Consistenta Not Consistent

for budget-makers to be reasonably confident about a continuing flow of

4. Minimizing political costs through taxation by inertia

The government's need for revenue is not a question of political values or

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The first problem facing politicians today is how to minimize political

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The administrative apparatus needed to collect revenue is also