1 Introduction

2 Sociopolitical and Economic Overview

3After the First World War, Goldscheid (1917) and Schumpeter (1918), two Austrian founders of fiscal sociology, i.e. the analysis of taxation and public finance, investigated the crisis of the tax State. They lean to the sociopolitical side because of their historical approach and the role of social classes or groups, as well as to the economic side as analysts of capitalism. For them the formation of the tax State in Western Europe, tax becoming the main resource, constituted a major historical change, whereas classical social scientists explain the modern State in Europe by refering to a rational-legal bureaucratization (Weber), as to capitalism (Marx), or as a functional response to complexity due to the division of labour (Durkheim). Attached to this tradition of fiscal sociology, Mann (1943) proposes a functional analysis of tax: he mantains that taxation leaves the field of public finance, because of the First War, to enter into the field of interventionist State sociology. “Its fiscal function has been combined with a function of social control” (Mann, 1943, p. 225). Three forms of social control are exercised by taxation (p.226): “correction of socially undesirable human behavior, readjustment of economic power between social groups and classes, and combatting the social abuses of capitalism and facilitating the transition to another economic order.” In another article, Mann (1949, p. 119) uses the notion of the “social function of taxation” as part of social reform.

6The Public Choice school develops a radical criticism of the interventionist State, on the basis of the rational choice theory concerning democracy (Buchanan, Tullock, 1962). Its interdisciplinary impact cannot be ignored by fiscal sociology. The (simplified) theory of public choice emphasizes a utilitarian notion of the public decision where politicians, civil servants and voters maximize their self-interest on the political market. Politicians seek to be reelected, which created an electoral expenditure cycle. In democracy, the spending policies financed by taxes are those desired by the median-voter, especially in the case of two great parties (Tullock, 1976). The bureaucrat tends to maximize his budget (Brennan, Buchanan, 1980). The citizen has an aversion for taxation (Downs, 1957). The success of Public Choice is to be related to the crisis years of the 1970’s: as an interventionist tax State discipline, fiscal sociology was then called into question. In answer to that, empirical studies show that the taxpayer is not always motivated by the rationality of self-interest: he is altruistic if the tax State is legitimate (see: section 5).

3 Contribution-Tax and the Interventionist State

9Except for the case where tax is “invisible”, for example some indirect taxes on consumption where the taxpayer does not see the taxation included in prices, five social representations of taxation exist in modern societies: within the framework of the interventionist State, the issue is to institute a tax social contract.

3-1 Social representations tax

10TABLE A: Sociological Representations of Tax

Invisible-Tax	It is not a social representation (for example, but not always, indirect taxes: VAT…)
Tribute-Tax	The felt tax burden is intolerable
Constraint-Tax	The felt tax burden is too heavy
Obligation-Tax	Tax paid to public authorities (one of the two bases of the formation of the tax State in Europe): legal concept
Exchange-Tax	Price paid by the taxpayer for the benefit (services) which he receives from the society: Economic concept
Contribution-Tax	Taxpayer judges it legitimate to finance public institutions or policies: Political form of tax consent

11The “exchange-tax” of economists dominates when the tax system does not justify its interventions by the contribution to the community, solidarity with the poor, but only, as the Public Choice school puts it, as the price for the benefit that each taxpayer (or social group) receives from the State. A form of echange-tax was historically established by the voting system based on tax, which conditioned the attribution of citizenship. Today the price (fees) for the use of some services illustrates this utilitarian notion of the tax consent. Exchange-tax is congruent with the theory of social groups who demand tax advantages. Self-interest theories are however not enough to explain the decision of the taxpayer (see: section 5).

12“Obligation-tax” is based on the definition of jurists : it is an unilateral act of a sovereignty nature implying a financial levy of a public authority without counterpart. Legitimate tax duty is not enough. “Constraint-tax” and “tribute-tax”, situations in which the tax burden is regarded as intolerable, are of course to be proscribed because they encourage tax evasion or revolt. If the perceived constraint is low, tax constitutes an obligation, but if the constraint is too strong, tax is considered as an arbitrary "tribute" (called thus in reference to Roman history). “Tribute-tax” can lead to anti-tax reactions because of its objective financial weight, but also if it is perceiveid as unfair.

3-2 Typology of the tax State

14TABLE B : Tax State Typology

Tax Level 	Intervention level 	Low	High
Low		LIBERAL STATE	TAX STATE CRISIS
High		WASTEFUL STATE	INTERVENTIONIST STATE

15The “liberal State” with its low level of tax and public interventions is that of the European economy of the nineteenth century. Liberal traditional finances express the will to limit the role of the State for political and economic reasons. It is the apology for the State limited to its sovereignty functions (diplomacy, defence, justice…): it is the reign of economic competition and of the (supposed) invisible hand of market to ensure prosperity. The tax State is limited by the prohibition of economic and social interventions, and it is also neutral with regards to economic decisions. In the English tradition, following Smith and Ricardo, tax has a strictly financial role consisting in covering the limited expenditure of the State.

18The rise of tax revenues, the use of other means (borrowing, privatization, spending cuts, fiscal innovations, request for subsidies) and the existence of unpopular financial decisions (King, Gurr, 1988; Gold, 1995; Centeno, 1997) contradict the inexorability of the tax crisis: the relation between taxation and expenditure is a political choice. Finally, the tax cognitive theory shows that the crisis is used as an argument to justify changes in modern tax policy. The cognitive approach (Leroy, 2002, p.16) is relevant to discuss models which study the crisis as a decisive cause of the tax policy. For instance, Peacock and Wiseman (1967) consider the two World Wars and explain that in a quiet period public intervention is limited by the reluctance to be taxed, whereas war increases tax tolerance. After the war period, tax revenues can satify social needs (irreversibility of the public expenditure), in accordance with the increase in public spending (see: the Wagner law). However, according to the neoliberal idea about State retrenchment (see: section 6), the cut of public expenditure in some countries contradicts the irreversibility theory. Campbell (1993), in an important article about fiscal sociology, regards tax reform as a response to an economic, geopolitical or tax crisis. These theories are important, but they are too deterministic and postulate wrongly a general aversion of citizens for taxes (see below). Moreover, the positive link between war and the rise of taxes is not universal: “wars did not make states in Latin America” (Centeno, 1997, p. 1598).

21The “Interventionist State” remains present in spite of the tax cut policies in developed countries: tax revenues are still high, especially in Europe with 38,3 % of GDP (OECD, 2006). Originally, the Welfare State represents a form of public interventionism in accordance with the social justice theory developped in the 19^th century to remedy the effects of the industrial society. The golden age of Welfare State is correlated with the growth of the post-war period characterized by the generalization of Keynesian policies. Admittedly, the economic crisis of the 1970’s is also the crisis of the financing of the Keynesian Welfare State. However, as seen with the tax crisis, several solutions exist to finance the Welfare State politically desired. It is a democratic question of choice, even if the political decision is related to the problem of good public management. The issue is thus to institute a tax social contract of the interventionist State accepted by citizens within a logic of fiscal democracy.

3-3 The tax social contract

23There are several forms of compromise (trade-off) regarding the relationship between the State, taxes and public services. The tax social contract is measured first through the distribution of the tax burden between social groups and the level of social transfers, with a trade-off between low-income classes and rich classes, but it must also relate to the general tax functions (see: section 4). Empirically, there is a strong relation between the source of revenus and the nature of State output: according to Timmons (2005), in his study of 1975-1999 OECD countries, regressive taxes are associated with higher social spending and human development indicators, but not with property rights protection. Cusack and Beramendi (2006) show that “Coordinate Market Economies” governments tax labour more than capital in exchange for a generous Welfare State. Scandinavian countries strongly tax taxpayers with income tax, including labour incomes, and negotiate with firms remunerations of capital in exchange for social protection. But in the Scandinavian social-democratic model, while capital owners accept a large public insurance system and unions a moderation of the wage demand, left-wing governments need to support the (universalist) Welfare State not only by taxing labour, but also by using regressive indirect taxation (Beramendi, Rueda, 2007, p. 627). Indeed, it appears that in Scandinanavian countries (and in France), indirect taxation, measured as a percentage of GDP, is above the average, whereas in most countries tax rate cuts are financed with increases in consumption taxes (or social insurance fees: Steinmo, 2003, p. 225). The so-called "flexicurity" approach, adopted in Austria and Denmark, is also a kind of financial contract (for the creation of the Welfare State: see note 15).

25The contract to the contribution-tax, that I defend here, is a social trade-off accepted in the public interest. In the absence of a contribution-tax contract, the tax is an obligation based on the law, or a particular contract in exchange for services individually received (utilitarian economists), or a insurance contract to guarantee safety (or property: see Montesquieu). Since 1914, modern finances have been intervening more and more in the economy and society, in spite of the neo-liberal ideology in favour of the market following the crisis of the 1970’s (Robinson, 2007; Leroy, 2008). In the global economic age, the social contract of interventionist functions must be reconsidered.

4 Sociopolitical Functions

26The original nature of taxation both as object of public policy (tax policies) and as instrument of the other public policies justifies a turn to a functional approach (as Mann intuited it: see section 2). For dialoguing with economists, the traditional economic analysis of Musgrave (1959), centered on the financial, economic regulation and redistribution tax functions, is to be supplemented, on the sociopolitical side, by including the social, political and territorial functions. In sociology, the functional approach has been traditional since Emile Durkheim. Durkheim (1895) emphasizes the importance of functional explanation in Les règles de la méthode sociologique (chap. 5), but states that we must differentiate between cause and function to explain a social phenomenon. These observations of the famous sociologist invite us to avoid the hyperfunctionalism of the anthropological school (Malinowski) because every institution does not have a function regarding the society as a whole. However, as Merton in Social Theory and Social Structure explains it, the functional analysis is relevant if the social units to which it applies are specified. That leads one to study, according to Durkheim, "social types", and, for us, to propose a tax State typology.

27TABLE C : Sociopolitical Functional-Tax Approach

Financial Function Tax	- Revenues from taxes to finance expenditure
Economic Regulation Function Tax	- Economic action by taxes: priority sectors, exports, research…
Social Function Tax	- Redistribution by progressive income tax towards the poorest - Tax categorization of the society: family taxation, some social groups, products, socially developed or discriminated sectors
Territorial Function Tax	- Legal territory of competence in tax law - Territorial tax inequalities - Territorial development: tax exemptions of certain "weak" rural zones, urban districts, tax incitations for "competitiveness " zones - Safeguarding of the environment: eco-taxes, expenditure taxes
Political Function Tax	- Citizen contribution-tax to general interest policies - Political legitimacy - Tax State compliance - tax democracy with direct tax consent

4-1 The social function of taxes

28Historically, the tax State appeared in Europe with a financial function, but it became and remained interventionist (see above). The social function includes the redistribution of incomes by the taxation because it modifies the social stratification, but extends to the interventions for or against social groups, behaviours and values. In spite of neoliberal tax cut policies, the tax social function remains significant.

30In addition to redistribution, the tax social function relates to society issues. Indeed, many sectors of society are subject to specific treatments by the use of tax expenditure. In spite of the methodological difficulties of measurement (Burnam, 2003), we know that tax expenditure is used in term of social aims in many OECD countries. For example, in 2003, the social function of the tax expenditure (income tax, corporation or company tax and VAT) of Canada, France, and the United States represent around 35 % and economic objectives around 65 % (Godbout, 2006, p. 252). In these three countries, corporation tax is little used for social ends (93 % for economic goals), but income tax is used differently as a social function (Canada: 34,6 %, U.S.: 38,5 %, France: 44,3 %). According to the American Office of Management and Budget, about thirty cases are aimed for by tax expenditure. An incentive tax for the creation of jobs is also a widespread social tool (Faulk, 2002).

31Thus, income tax has now less an objective of redistribution and evolves towards social particularisms to treat specific issues of society. Traditionally, the family is encouraged by this tax, in the form of tax cut or the application of lower tax payment, or general marriage bonus as in France. Mann (1943, p. 226) noted that the Nazi Germany or Fascist Italy surtaxed single people. Recently, the American marriage tax penality is seen as a problem if the tax system does not meet the goal of marriage neutrality, namely the principles of equal treatment of married couples in every State, and the equality of married and nonmarried couples (Berliant, Rothstein, 2003).

32A guaranteed income policy based on tax refunding in favor of the unemployed who find a job but lose the social security benefits, a so-called “negative tax”, is socially interesting because it puts it into concrte form as a compromise between the neoliberal idea of the struggle against the economic discouragement to work of the beneficiaries of welfare transfers, and the social-democrat drive for redistribution towards the poorest. In the case of poverty, the evolution of the cognitive rationality of rulers and citizens changes, as with the American attempt creating a legal guaranteed income in the 1960-70s (Steensland, 2006). Here, the social function distinguishes the "good poor" deserving government aid and the others who should be encouraged to work.

33Many countries encourage philanthropy, even if some have no tax-deductibility or limit its deductibility. The social function sometimes also has a goal moral dissuasion (Johnson, Meier, 1990; Paton and al., 2004), as with tobacco and alcohol taxation, which also fulfills a financial purpose by generating additional revenues. In the U.S., taxation on gambling has a moral goal, whereas gambling is socially acceptable in the U.K. Another example is the tax advantages granted to associations to support the civil society. Let us also quote the cultural tax policy in France: tax incentives aim at protecting cultural inheritance, in particular with the exemption of the wealth tax on works of art, but culture is taxed when it becomes a profit-making activity (Leroy, 1997). The social function thus includes a general redistributive part which is an issue of political debate issue, and particular measures of tax corporatism which harm the transparency of the tax system.

4-2 The political function of taxes

34The political function is at the core of the legitimacy of the tax State. Taxes are part of the creation of the Western European State. Tax revolts occur as an opposition to the legitimacy of taxation, considered as arbitrary. Taxation is an essential indicator of the legitimacy of the State (Cheibub, 1998; Lieberman 2002; Leroy, 2003; Gilley 2006). To take again an example from Schumpeter (1918), the crisis of the feudal society was due to the process called by him the “patrimonialization of the personality” (right of inheritance of the fiefs, opposition between the private and public spheres of interests, independance of the nobility...); the old order and its fiscal foundation changed and the institutionalization of the modern state took place. The reluctance to be taxed for the needs of war, or in other words, the lack of legitimacy of the new tax demands from the monarchy, explains this inalterable change. So, the monarchyt had to use mercenary armies, an expenditure too heavy to balance the budget within the feudal system.

36A “citizen contribution-tax” is possible because self-interest (utilitarianism) does not explain the totality of the taxpayer’s behaviour (see below). Tax thus sometimes provides a support for rulers. For example, the French writer George Sand invites the people to support the new Republican system of 1848 by the payment of taxes. A survey in Israel in the Seventies (Dornstein, 1976) shows that tax compliance by recent immigrants was weaker than of old inhabitants convinced of the legitimacy to finance a modern Jewish State. The use of public money, trust in the government (Bergman, 2002; Torgler, 2003), the tax system’s equity (Taylor, 2005, p. 84) constitute criteria for the citizen of the political legitimacy of tax, whereas political disillusion towards the authorities cause lower compliance.

38The political function of the contribution-tax contradicts the economic theory of fiscal illusion (from Puviani, 1903 to Buchanan and Tullock, 1962) – according to which irrational citizen demand more expenditure and less tax -, and refuses the aversion theory – which states that tax is always abhorred because individual sees the money then gives to the State but he hardly does not see the services (Downs, 1957). Some data partly support the aversion theroy (Lewis, 1982, p. 314), but other tests refute it (Welch, 1985, p. 314; Kemp, 2002, p. 146). To account for the apparently contradictory results, the solution of the puzzle consists in reconstituting the taxpayer’s reasoning with a cognitive rational approach (Leroy, 2007). Citizen considers that his demand for public services can be financed by various means: certainly tax, but also borrowing, reduction of waste, reassignment of some appropriations and subsidies for other, user fees… “More public services and less taxes” is thus not irrational when citizen proposes other resources. Tax aversion is not general (Blount, 2000) and expresses the conviction that the State can and must finance the desired expenditure differently. It depends on the political justification of the function of tax in relation to expenditure. This rational cognitive solution is empirically confirmed by Hadenius (1985) who shows that tax aversion decreases when the link between tax and expenditure is indicated.

39Furthermore, fiscal democracy, defined as the participation of people in the choices of public finance, has positive effects on tax compliance. Torgler (2004, p. 34) uses experiments to show that decision on the level of dissuasion (number of controls and level of penalties) improves compliance. His study is confirmed by other experiments (Alm et al., 1999; Feld and Tyran, 2002) on the relation between democratic decision and compliance. National differences in tax morality depend on the legitimacy of public institutions for citizen, and thus of the political function. From this point of view, (real) direct democracy (Pommerehne and Weck-Hannemann, 1996) is more positive for compliance. Tax transparency is also correlated with the erosion of electoral cycles in fiscal balances (Alt and Dreher Lassen, 2006).

4-3 The territorial and environmental function

40The first legal use of the territorial function has is to define the geographical sovereignty of the tax State. The second use aims at assessing territorial inequalities which resulting from taxation, a form of the territorial social function. For example, in the Belgian tax federalism (Cantillon et al, 2006, p. 1051), social security and personal income taxes reduce income inequality between Flanders and Wallonia by about 75 %. In France, local corporate tax is the first cause of inequalities between subnational authorities. The third use is to determine the differences in the attractivity of territories, in relation to the problem of tax competition (OECD, 1998) of regions and States. For example, globalization leads to tax flight with the relocation of firms and wealthy individuals by making use of offshore tax havens. Another example is the French policy of regional planning that, for reasons of territorial equity, grants tax advantages to rural zones with reduced economomic activity and to deprimed urban districts. The attractivity of territorial taxes is part of the scattering of the objectives of taxation.

41Environmental taxation is the fourth issue concerning the territorial funtion of taxes. It aims to protect territorial natural resources within framework of sustainable development frame. Inspired by ecological claims and recognized by several international agreements, this issue leads to the use of the tax either to penalize activities which destroy the environment (pollution), or to encourage actions to preserve it. As for tax penalization, Stiglitz (2006) considers that American firms should be subject to a specific taxation by other countries because the USA has always refused the protocol of Kyoto, which favours them because it amounts to a as a subsidy contrary to global economic competition. The principle of the pollutant-payer is recognized by the OECD and by the Treaty of the European Union. The ecological tax expenditure, it would be advisable to make the assessment in each country of tax measurements, and to avoid contradictions between tax incentives that are for polluting economic activities and those in favour of the environment.

42Important tax functions are undermined by two factors of the scattering of tax policies. Firstly, the use of the tax tool becomes too targeted to the detriment of the logic of the important functions of the interventionist State. Secondly, in relation to the first factor, the complexity of the tax system accentuates the dilution and the jamming of the tax functions by concealing the whole logic of the tax system. The financial function competes with the recourse to other budgetary resources like borrowing and privatization. The economic division of the tax policy into sectors is carried out to the detriment of the macro-regulation function. The redistribution function struggles to become part of the program of public authorities. Too many particularisms and political compromises to satisfy groups of voters lead to different tax schemes and even to tax evasion.

5 Tax Deviance

5-1 Sociological labelling of tax decision

43The elaboration of a general typology of tax deviance (see: Table D), freely inspired by the labelling theory of the sociologist Becker (1963), appears to dialogue with the law and economics approach. The more complex law is, the more it leaves possibilities to the interplay of the actors of tax deviance: privileged taxpayers build tax schemes up which they defend as a category of (legal) tax avoidance, while the administration tends to label the tax decisions in the category of tax evasion (fraud) of these actors. The sociopolitical interplay makes the borders between legal and illegal categories move both at the stage of voting the tax law and at the stage of the tax audit. Legal and illegal decisions - avoidance, evasion, tax flight, cuts -, have similar economic effects, but different sociological effects: tax evasion is perceived rather negatively, tax flight neutrally, and tax avoidance positively (Kirchler and al., 2003).

44Concerning tax decision based on a scheme, taxpayer sometimes remains passive facing taxes (Caroll, 1987; Webley et al., 1991, p.80), as long as the tax issue does not appear openly during particular events, such as the period of income tax returns, the mediatization of a reform or a social claim. The opportuneness of avoiding the tax is a significant factor (Vogel, 1974, p.507; Lewis, 1982, p.158; Wärneryd, Walerud, 1982, p.205; Webley et al., 1991, p.102), which depends on legal methods of taxation and especially relates to independent workers. The presentation (and the vocabulary: McBarnet, 1991, p. 341) of the tax scheme is chosen by the taxpayer, or his adviser, to enter the legal category of avoidance.

45TABLE D: Tax Decision Typology

Taxpayer Decision 	Authority Decision 	Legal	Illegal
Scheme to avoid tax		AVOIDANCE	EVASION
No tax scheme		COMPLIANCE	ERROR

46Classic labelling theory is used here as a dynamic model: taxpayers, especially firms or people who can pay a tax lawyer, actively handle the woolly borders between avoidance and evasion. An adviser has an interest to keep tax scheme secret in order to avoid competition with other advisers, or because the tax advantage may be invalided by law. The proof of evasion is difficult. An adviser does not request all the details from his client. The answers to the requests of the tax administration only include selected data: sometimes this tendency poses problems (see: Enron scandal). When there is no tax scheme decision and an operation is then labelled as evasion (fraud), the error is disastrous for tax legitimacy, because it increases the idea of administrative arbitrariness. Tax interventionism of course encourages the interplay between the administration and social groups concerning tax deviance labelling, especially when the State does not respect the important functions of taxation when trying to satisfy each particular request: tax optimization is opposed to the bureaucratic interpretation of law.

47The detection of tax evasion depends on financial and human means and on administrative tax co-operation between countries (international fraud). The essential point concerning the sociopolitical approach of tax is to know how the bureaucracy works. A sociological research thus shows that the French administrative decision is an original model of bureaucracy (Leroy, 1993) different from the conception of economsts or of lawyers: the audit decision of more negotiation between the tax inspector and the taxpayer depends on hierarchical management. The law is adapted to every case; administrative statistics do not distinguish between errors, small fraud, serious cheating…; the inspector operates alone in a firm and is regarded as an expert. Important comparative research thus needs to be done in order to know the regulatory strategies of tax authorities. For example, American tax inspectors are evaluated according to the adjustments they propose (Sakurai, 2002, p. 183). But, unfortunately there are only a few studies comparing administrative regulatory styles in the context of taxation. Some scholars criticize the strategy based on threat and legal coercion, regardless of the circumstances, and support (Murphy, 2004) a regulation based on trust (instead of the “stick”) or on a “responsive regulation” (Braithwaite, 2007). Responsive regulation, implemented by the Australian tax administration, comes into play at two levels: first, a cooperative approach encourages self-decision, and in the case of mistakes, allows the taxpayer to persuade the tax office; second, in the case of non-compliance and non-cooperative behaviour, a command and control approach deals the conflict with appropriate sanctions. Another sociopolitical issue consists in investigating the logics of “performance” using budgets of results, within the framework of new management, and establishing its impact on the tax bureaucracy (Leroy, 2007).

5-2 The taxpayer decision

52Nevertheless, if moral values are sometimes relevant, the moral judgment of evasion is rather weak (Leroy, 2003, p. 232). According to the European and World Value Surveys from 1981 to 2004, cheating on taxes is viewed as “never justifiable” by only 53% of the respondents (average rate of all countries). More than moral values, the political legitimacy of the tax is essential. The feeling that the tax system is unfair supports evasion (see above). The taxpayer’s cognitive rationality must be considered in order to explain the subjective appreciation of risk. Other cases also support the cognitive rationality theory (Leroy, 2003). Often, taxpayers do not see indirect taxes (in particular VAT) as a fiscal burden because they "logically" see tax as a consumption cost included in the price; the “relative frustration” theory of Tocqueville explains tax revolts and the French Revolution (see: section 2). Tax history shows that, under the French Monarchy, the myth of the end of tax was recurrent, in particular in the case of military victory: because permanent taxes were recent, it is "logical" to think that tax was exceptional (it was the case with feudal tax). Taxpayers see tax as a cause of deterioration of their economic situation whereas, objectively, it is not the case: for example, the French “Poujade” tax revolt (in 1950s) is explained by the economic inefficiency of shopkeepers, and not by tax. But they think that the State is responsible for their situation, because the State has an economic role: as tax is used to finance the State, it is “rational” not to pay... Thus, the “living” relation of the individual to the tax authorities (Leroy, 2002; Kirchler, et al., 2006) influences compliance. About the relation between tax and expenditure, the citizen considers that his request for public services can be financed by various other means than tax.

6 Conclusion: the Impact of Globalization

53 The dialogue between the economic and the sociopolitical sides of tax sociology is essential for the social science of taxation (and public finance). Indeed, in spite of contributions of the other scholars, only these approaches are enough advanced to theorize the tax system as a whole in conjunction with the legitimacy of public spending policies, and to investigate all the sociopolitical and economic aspects of the tax State. Because it is a king of crisis, globalization opens a vast program. The impact of globalization on taxes and social policies is the subject of a methodological and theoretical debate (see Table E). According to the “efficiency of the market” theory, economic globalization forces policy makers to compete for investment by cutting taxes. On the other hand, the “compensation theory” insists on the resilience of the Welfare State: institutional autonomy limits the negative effects of globalization. Although empirical data about this issue give contrasting results, the efficiency of the market theory is not confirmed.

55TABLE E : The Effects of Economic Globalization

According to the conventional “market efficiency” theory (Tanzi, 1995), economic globalization (EG) forces policy makers to compete for investment by cutting taxes: the Welfare State is undermined by EG because of capital flight, tax dumping and competition (relocation of businesses) and the reduction in the power of political parties and trade unions. According to the critical compensation theory of resilience of the State (Pierson, 1994; Garret, 1998; Scharf, 2000), the tax State stuggles against the negative effects of EG (insecurities, inequalities) in order to satisfy workers, acquired interests, “veto powers” or to continue the past of institutional dependence.

Empirically, the effects of EG depend on the “reference indicators” (OECD, 2005). The study of Garret and Mitchell (2001) of 18 countries in the OECD (1961-1993) shows that: measured by the volume of the exchanges or the opening of the financial market, EG does not decrease tax on capital, but it reduces the total public expenditure, through only a little, (partly) according to the thesis of State retrenchment (efficiency of the market). With the indicator of dependence on countries with low wages, the effect is the opposite, namely public expenditure increases, in accordance with the compensation theory of State resilience.

Measured by the indicator of foreign investment, globalization does not have effects on social expenditures which increase in proportion to unemployment, in accordance with the resilience Welfare State theory (compensation). Another study of 15 countries from 1960 to 1996 (Crepaz, Moser, 2004) shows that EG, measured by the exchange and deregulation of capital, is positively correlated with the amount of social transfers (compensation theory), but this effect depends on the institutional arrangement (competition between different public authorities involving a tendency to blocking and a status quo).

Korpi and Palme (2003) discuss the use of the percentage of social expenditures in the GDP as an indicator of the Welfare State. They defend the approach of "power resources" to explain the retrenchment of the Welfare State in 18 countries within the 1975-1995 period. Economic logic is less relevant than political factors related to power resulting from the conflicts of classes on the labour market. The extent of the retrenchment of Welfare State depends little on the EG, but much more on the partisan variable which more or less slows down (with regard to the context) social spending cuts: the leftist rulers tend to cut social spending when the public finance situation is degraded, but significantly increase them when unemployment is higher (compensation theory). Dreher (2006) confirms the importance of both EG and political social integration. Rudra (2002) shows that there is a major decline of the Welfare State in less-developed countries (LDCs) is more important, because State has less “power resources”, but, in another study (2007, p. 32), he finds that LDCs still have distinct welfare regimes, demonstrating a capacity to formulate different social policies.

Compared to the indicator of international economic openness, a study of 14 countries from1973 to 1999 (Kite, 2002) indicates that there is no clear relation between economic openess and the level of Welfare State (expenditure on social transfers and social public services). There are very open rich countries with a generous Welfare State as well. The idea that a minimal Welfare State and unorganized labour (weak trade unions, flexibility etc.) are an advantage in a global economy is not supported, except for the United States and only in the 1990s. In advanced capitalist democracies, using the indicator of tax on capital, Swank and Steinmo (2002, p. 643) show that, between 1981 and 1995, statutory corporate tax rates (based on tax legislation), have decreased (on average) from 45 to 35% percent, but effective capital tax rates only from 38 to 36 (and the more limited effective corporate and financial income tax from 26 to 24 percent). Tax burdens on capital, labour and consumption as a percentage of the GDP remained stable. Many countries have compensated tax rate cuts with a broadening of the tax base: for example the general investment tax credit eliminated everuwhere by 1992 (Swank, 2006, p. 848).

Confirming the resilience of the Welfare State, the study of Mahler and Jesuit (2006, p. 500) indicates that, whereas private sector income inequality before taxation and social transfers has risen (the average Gini index increasing from 0.404 in 1980 to 0.441 in 2000), tax and transfer redistribution has with also increased disposable income over the period.