Financing the welfare state and the politics of taxation

In an era of 'permanent austerity' (Pierson, 2001) and financial crisis, the issue of financing welfare state provision is topical. Moreover, the future of welfare state funding in countries with ageing populations is no doubt raising increasing interest in scholarly as well as policy circles. Yet the financing side of welfare provision has traditionally been given little attention and remains somewhat of a black box of the welfare state. The fact that some of the financing mechanisms have remained 'hidden' has added to the confusion about existing policy alternatives. In this chapter we start by discussing the main determinants of the financing needs of welfare systems. We then turn to the different sources of revenue and patterns of welfare state funding in the advanced industrial nations. The third section analyses the politics of taxation and financing trends in the mature welfare states. In particular, we address the impact of the different financing techniques on employment and economic growth and on the political legitimacy and reform possibilities of the different social protection systems. The fourth section addresses the issue of the redistributive impact of the different financing techniques and underlines the importance of analysing the dynamics between how the financial resources are raised and spent. Finally, the chapter discusses the current and future challenges to welfare state financing in the face of increased globalisation and ageing populations. In the conclusion, we summarize the key lessons to be learnt from the analysis of welfare state financing.