Ideas, Institutions, and Tax Policy in the US and the UK

Alex Waddan

Dr Wadden is a Senior Lecturer in American Politics and American Foreign Policy, University of Leicester

Daniel Beland

Prof. Beland is a Professor at the Johnson-Shoyama Graduate School in Public Policy, and Canada Research Chair in Public Policy

The impact of the 2008 recession led to a renewed vigorous debate about tax fairness in the context of fiscal scarcity, once again drawing attention to the importance of tax policy as a source of political conflict. The arguments made by President Obama and the Labour leadership in the UK, for increased taxes on the highest earners, challenged a political and policy landscape that had been dominated by a tax cutting rhetoric since the electoral triumphs of Prime Minister Thatcher and President Reagan.

Yet, while these remarks suggest convergence between the two countries in terms of tax policy, it is also important to understand the differences evident over this period. Importantly, as argued in our recent Policy Studies article, a productive way of understanding both similarity and difference is to rigorously investigate the interaction of ideas and institutions in the two countries. As considerable social science literature already suggests, institutional and ideational approaches have significant analytical value in their own terms but our study shows how breaking down ideas and institutions into more specific categories before exploring how they concretely interact improves our understanding of policy trajectories.

At this point it is important here to define our terms in focused, and empirically traceable, ways while simultaneously recognizing the changing nature of their interaction over time. With regard to institutions, we have formal institutional mechanisms that are relatively rigid and stable over time. In addition, there are norms that are not absolute but that do strongly affect behavior. Third, government bureaucracies, such as the respective Treasury departments, impact on particular policy domains. Fourth, we include policy legacies from existing programs as institutions that shape behavior. Finally, we identify political parties as critical types of institutions with their own formal and informal rules and norms. We define ideas as the normative beliefs of political actors as expressed in their discourse, although we distinguish between ideas that are core beliefs and what we call framing processes that may be less consistent in terms of their short-term articulation, but where the purpose is to underpin fundamental core beliefs.

Employing this framework, in our article, we examine the development of tax policy in the US and UK since the end of the 1970s when the electoral triumphs of Reagan and Thatcher seemed to herald a new direction in fiscal principles in the two countries. In ideational terms both were committed to deep cuts in marginal income tax rates and the parties they led have remained faithful to these ideas. Crucially, at least through to the 2008 recession, it was presumed that this tax cutting agenda gave Republicans and Conservatives political leverage over their partisan opponents who struggled to reconcile their spending preferences with the anti-tax discourse. Yet, despite this conventional wisdom that increasing taxes was politically toxic, there were significant tax increases in both countries that directly impacted peoples’ pocketbooks. While those increases were politically damaging for the political actors held responsible in the US, in the UK the public backlash was more limited. This is counter-intuitive because comparative institutional analysis of the US and UK commonly supposes that it is easier for a government with a majority of M.P.s in the House of Commons to impose its will on the legislative process than it is for the executive in the US to do the same. Presidents are often frustrated figures, even in times of unified government. This difference reflects the greater number of veto points in the US legislative process as well as the higher levels of party discipline in the UK. Hence, the Conservative Governments in the UK through the 1980s and early 1990s were able to advance income tax cutting budgets relatively unencumbered by Labour’s Opposition. In the US, on the other hand, the balance of partisan power in Congress meant that the two most significant tax cutting legislative efforts, in 1981 and 2001, needed some Democratic support. In these cases, the lack of party discipline worked to the advantage of Presidents Reagan and Bush, respectively, as both were able to win enough Democrat support.

The interaction between specific ideational and institutional factors is even more striking when we turn to episodes of tax raising, and the subsequent political fall-out, in the two countries. Here, while legislative rules and partisan behavior remain important, other institutional factors come into play. First, while in the UK the Treasury acted as a strong voice for fiscal discipline, the same was not the case in the US as illustrated when Treasury Secretary Paul O’Neill’s misgivings about substantial tax cuts in 2001 and 2003 were effectively ignored.

Second, reflecting long-term historical developments, policy legacies gave political actors different options for raising revenue in the two countries. In the UK Conservative governments have consistently increased existing levels of VAT, while both Conservative and Labour governments increased an array of “sin taxes”, notably on cigarettes and petrol. While unpopular, these did not provoke significant electoral backlash. In the US, on the other hand, there was no national consumption tax to increase, and little appetite for introducing one. As a consequence in 1990 and 1993 Presidents Bush snr and Clinton turned to income tax hikes as a means of increasing federal government revenue. For Bush this was a calamitous reversal of his 1988 campaign pledge. For Clinton and the Democrats the electoral reckoning came in November 1994. There were many factors contributing to the Republican sweep that year, but the controversy over the 1993 budget undoubtedly reinforced the GOP’s messaging.

Jumping forward to tax policy in the midst of the Great Recession, it is evident that conservatives on both sides of the Atlantic have retained their core belief in cutting marginal income tax rates. In the UK, the Conservative-led Coalition Government cut the top rate of tax from 50% to 45%. Consistent with previous behavior, however, VAT was increased. In the US, Republicans vehemently opposed any attempt to rollback the W. Bush tax cuts, though again the peculiarities of US institutional arrangements complicated matters. The procedural methods used to enact the 2001 cuts meant they were due to expire ten years later. There was a temporary extension in 2010, but the expiration date came again at the end of 2012. At this point President Obama argued that the highest earners should pay more in tax and, since legislative action was needed to re-authorize rather than rollback the 2001 package, he had institutional leverage. In the end, the Republican controlled House voted to maintain the vast majority of cuts but let the cuts on those earning over $400,000 expire: And even this compromise was opposed by a clear majority of Republicans.

These conservative responses to the budgetary crises bring us to our last points. In the UK, the Conservative party has consistently favored tax cuts but has remained willing to increase consumption taxes. In the US, any compromise with tax hikers has increasingly come to be seen as heresy: And here it is important to consider the position of individual legislators. In the U.K., institutionalized party discipline trumps ideological purity. Conservative MPs voted for increasing VAT in 2010 because they were told do so by the Prime Minister and were not concerned that they would come under attack from the party’s base. In the US, the rise of groups such as Americans for Tax Reform and the Club for Growth mean that individual legislator behavior is policed in a manner not paralleled in the UK. Republican incumbents, especially in the House, are often more fearful of a challenge mounted from within their own party in the primary than of losing in the general election. Any such internal challenge is much more likely to be effective if it has the support of a group such as the ATR, angered by incumbents who have violated the anti-tax agenda. On tax policy at least, therefore, the relative lack of institutional party discipline has worked over time to enforce a greater degree of ideological purity amongst US conservatives than their UK counterparts. In turn, this illustrates the need for a careful unpicking of institutional and ideational factors and the manner in which they interact. 

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