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All governments require revenue, and domestic taxes are the primary means for generating it. Yet both the size and shape of taxation vary significantly across countries and have been transformed over time. What explains variation in domestic taxation? To answer this question, recent scholarship on taxation has focused on the politics of taxation as a tool for redistribution. This has led to a wide body of research on the fiscal impact of taxation and on the introduction, evolution, and variation in direct and progressive tax regimes, particularly the income tax. Yet the focus on taxation as a redistributive tool yields a puzzle, as more progressive tax systems tend to be found where redistribution is in fact the lowest. Explanations of this paradox often center on the impossibility of high and progressive taxes on capital in the context of international economic integration. Not as well studied are taxes other than the taxation of income, and the deliberate politics of nonfiscal, regulatory, and incentive effects of different tax choices. Methodologically, problems of endogeneity are ubiquitous in the study of tax policy choices, but more sophisticated experimental work is well underway in research on individual preferences for taxation.

Article

Baldur Thorhallsson

Iceland’s European policy is a puzzle. Iceland is deeply embedded in the European project despite its non-EU membership status. Iceland is a member of the European Free Trade Area (EFTA) (1970), the European Economic Area (EEA) (1994), and Schengen (2001). Moreover, Iceland applied for membership in the European Union (EU) in 2009. Nonetheless, the Icelandic political elite have been reluctant to partake in the European integration process. They have hesitated to take any moves toward closer engagement with Europe unless such a move is seen as necessary to deal with a crisis situation. Decisions to engage with the European project have not been made based on outright economic and political preferences. They have primarily been based on economic or political necessity at times when the country has faced a deep economic downturn or its close neighboring states have decided to take part in European integration. The country has essentially been forced to take part in the project in order to prevent crises from emerging or to cope with a current crisis situation. For instance, in 2009, Iceland unexpectedly applied for membership in the EU after the collapse of its economy nine months earlier. However, four years later, after a swift economic recovery and after Iceland having been “betrayed” by the EU in the so-called Ice-save dispute with the United Kingdom and the Netherlands, the accession process was put on hold. The EU was no longer seen as an economic and political savior. Iceland’s close relationships with its powerful neighboring states, the United States and the United Kingdom, have also had considerable influence on the country’s European policy. Iceland’s membership in the EFTA, the EEA, and Schengen was largely dictated by the Nordic states’ decisions to join the organizations and because of crisis situations their lack of membership would have meant for Iceland were it to be left out. Moreover, the decision by the United Kingdom to leave the Union has firmly frozen Iceland’s accession process and contributed to increased criticism of the transfer of autonomy from Reykjavik to Brussels that takes place with the EEA Agreement. Furthermore, many at the right of center in Icelandic politics do not see any security reasons for joining the EU, as Iceland’s defense is guaranteed by a bilateral defense treaty with the United States and membership in the North Atlantic Treaty Organization (NATO). European debates about partial and full participation in the European project have led to harsh opposition in Althingi (the National Parliament), deep divisions in society at large, and public protests. Opposition has been driven by an overwhelming focus on sovereignty concerns. The political discourse on sovereignty and self-determination prevails except when the country is faced with a crisis situation. To prevent a crisis from emerging or to deal with a current crisis, Icelandic politicians reluctantly decide to take partial part in the European project. They are determined to keep autonomy over sectors of primary political importance, sectors that are close to the heart of the nation, those of agriculture and fisheries.

Article

Finance is frequently, but incorrectly, judged a technical matter best left to experts. Equally mistaken is the exasperated conclusion encapsulated in the phrase “people, not profits,” which holds that capitalism, private investors, and markets are simply evil. Finance is necessary for economic development, but also has profound, and often unexamined, implications for social and political spheres. Channels for financial intermediation may be public or private, and national or foreign, implying tradeoffs among organizational forms. Public banks typically are superior in providing public goods and implementing national strategic plans, but private banks and capital markets normally are more efficient, assuming competitive markets. Savings may be sought within the national economy or from abroad, with domestic savings implying a smaller pool yet less subsequent international vulnerability, and foreign inflows offering potential abundance at the cost of external dependence. This framing yields four ideal-types of long-term finance (LTF): national public finance from state development banks; national private finance from domestic private banks and capital markets; foreign public finance via bilateral or multilateral aid or state investment (including from non-traditional lenders, such as China); and foreign private finance sourced from global investors seeking returns. Both national public and foreign public finance dominated long-term investment in Latin America in the early postwar decades of import-substituting industrialization. In the 1970s through the 1990s, they were succeeded by foreign private bank loans, followed by crisis and retrenchment. In the 21st century global political and market conditions brought a resurgence of foreign capital, including from both global private investors and non-Western public sources. Worries about problems arising from Chinese public finance to Latin America are likely overblown, as the quantity remains small, except in some Bolivarian Alliance countries. However, private foreign inflows, strongly promoted by Western-led multilateral actors, from the Organisation for Economic Co-operation and Development (OECD) to the World Bank, during the 2010s, may be more problematic. Excessive dependence on private securities markets funded by globally mobile capital often undercuts achievement of other valued societal goals such as reducing inequality and ensuring democratic accountability. Notwithstanding their predictable flaws, it may be time for a reemphasis on national, and possibly regional, public development banks.