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SPEND AND TAX

Margaret Levi and Edgar Kiser April 2015 Margaret Levi is Director, Center for Advanced Study in the Behavioral Sciences and Professor of Political Science, Stanford University. Edgar Kiser is Professor of Sociology, University of Washington.

Please do not circulate without permission of authors. The following contains some ideas that may eventually be the foundation of a book; to call it a rough draft would be a gross overstatement. Most of the bits and pieces of it are currently incomplete (assertions and placeholders for arguments instead of actual arguments) and do not fit together very well. The direction this will eventually take is still unclear. We should also add that this is a pre-empirical paper. Right now we are working on the conceptual framework while we also consider the appropriate methodological approach and cases. Any and all criticisms and suggestions will be appreciated.

Very few states are either rapacious leviathans or founts of abundant public goods; most are unable to provide all the goods and services their citizens want from them, be it because of fiscal constraints or philosophies of government. What defines appropriate government obligations to their citizens (in terms of goods and services) varies not only across countries but also in the same countries over time. Late 20th and early 21st century Britain, the U.S. and Sweden exemplify how quickly the definition can change. Our theory of government obligations and expenditures contains three general categories of determinants. The first is the structural context. Fiscal policies are made and implemented within particular economies and specific geopolitical relations. The second is cultural, the existing beliefs values, and habits about government expenditures and taxation. The third is the nature of the political institutions. One of our aims is to specify the complex interactions between these three levels of causation. In this paper, we focus on the attributes of fiscal culture and, to a lesser extent, its interaction with political institutions. We are going to take for granted that the economic resources of a state and its capacity to make and enforce its policies are critical in determining how a state defines the content of its obligations and to whom. Our primary interest here is in the influence of a polity’s fiscal culture on the definition of government obligations. We focus particularly on 1) the prevailing ideology of government among the key political leadership; and 2) the construction, deconstruction and reconstruction of communities of fate, that is the sense of entwined interests, within the populous. We use these features of fiscal culture to begin to build the foundation for a model that identifies the endogenous sources of change in fiscal cultures and the consequences for government expenditures. Our main focus is on the extent of what we label the publicness of government provided goods and services. What are the reasons for the variation in the amount and universality of government provided goods and services? The preconditions for high publicness are the ability of states to set a high enough tax rate (often difficult, depending on the distribution of power between rulers and elites and the nature of policy-making institutions)1 and have the administrative capacity to collect most of the tax (a severe problem for almost all premodern states and many contemporary ones). If those conditions do not exist, state actors have little discretion or capacity to extend the publicness of government goods and services. If those conditions exist, they can choose that option—but may not. Here is where the fiscal culture comes in. The prevailing fiscal culture which includes the construction of a community of fate, delimits the feasible set of public expenditures.

Three Types of Fiscal Policies The fact that states do such a wide variety of things makes any simple classification of state policies difficult, but for our purposes we can divide fiscal policies into three broad categories: Extraction, Redistribution, and Investment. It is important to note that these are types of policies, not types of states – actual states can be classified by the proportions of each type in their policy

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For example, when rulers are highly dependent on elites to maintain their power, elites can often negotiate very low rates of taxation, making it difficult to adequately fund the state. Feudal aristocrats and capitalists in the contemporary U.S. are two obvious examples. See, for example, Lachmann (2011) and Rueschemeyer, Stephens and Stephens (1992) on the effects of class power on the provision of state policies. 1

portfolios. Particular policies can sometimes be uniquely classified (i.e., as solely extractive), but more often policies contain elements of more than one type (many ‘welfare’ policies combine elements of redistribution and investment).2 Extraction is characterized by rulers taking taxes from subjects or citizens and spending the revenue on: (1) personal consumption; (2) projects that benefit only rulers or their cronies; or (3) payments made to cronies or clients in order to maintain rulers’ control of the state. Rulers’ personal consumption includes things like large palaces, harems, or massive shoe collections for their wives. One of the most common examples of projects benefiting only rulers and their cronies is wars oriented to capturing land or other resources that are taken as ruler’s property or given as gifts to rulers’ cronies. The third type of extraction policy is what is often called clientelism3. Extraction policies obviously require continued control of the state, and one way for rulers to maintain this control is to make payments to clients whose support is necessary to keep them in power. These extraction policies are a subset of what Weber (1978) referred to as patrimonialism. Redistribution involves rulers taxing one group in order to either transfer resources directly to another group or pursue policies that primarily benefit another group. This can be best understood in contrast to traditional prescriptive models of public finance in economics (for a recent summary, see Martinez-Vasquez and Winer 2014). In these models, a just fiscal system is one in which tax payments and the benefits of spending are exactly equal for all citizens. Any citizen who pays more in taxes than she receives in benefits from state spending is considered to be coerced or exploited by the state. Redistributive policies do just that, they divide groups into those who get more than they pay for and those who pay for more than they get.4 Policies normally classified as populist would fall into this category, although it is important to note that not all redistribution is from richer to poorer groups. Investment policies are primarily oriented toward increasing the economic welfare of the entire society in the long term (GDP per capita), generally by facilitating economic growth. Two features mark them: the breadth of their benefits and the length of their time horizons. Most of the things classified as public goods would fit into this category – such as spending on infrastructure, education, the maintenance or social order, and research and development. These are policies that Adam Smith ([1776]1976) saw as the main positive functions of the state, and what Evans (1995) and Kohli (2004) call “Developmental States” primarily pursue investment policies. Extractive policies have the lowest level of publicness; they benefit a very small segment of the population (in the most extreme case, only the ruler). Investment policies have the highest publicness; they benefit not only all members of the society but future members, as well. Redistributive policies are more difficult to classify on this dimension, in part because both different social science theories and different fiscal cultures classify them in different ways. For example, in a highly inclusive fiscal culture, redistributive welfare policies are conceived of as having high publicness, as necessary to provide all citizens with insurance against uncontrollable 2

In this respect, our categories are like Weberian ideal types, they are rarely found in pure form in any particular empirical case. 3 Clientelist policies also have a redistributive component, but redistribution only goes to those necessary to keep rulers in power (members of the winning coalition). We classify them mainly as extraction because their redistribution is solely a means to the end of maintaining the political power of rulers. Redistributive policies may also have this effect, but they also take the redistribution of resources as an end in itself. 4 Almost all state policies have some redistributive consequences, whether or not they are recognized by the actors involved. We classify them as redistributive when this is the main effect of the policy. 2

risks. Redistribution may go to one group today, to another tomorrow, and in the meantime the stress of all citizens is reduced by the knowledge that the state will take care of them if necessary. On the other hand, in more exclusive or individualist fiscal cultures, redistribution is viewed as having low publicness, as the state coercing one group to support another (the theoretical wing of this view is the public finance economics discussed above).

The Relationship between Taxing and Government Expenditure Before turning to the fiscal culture, it is worth considering the relationship between spending and taxing. They might be related in three possible ways. The first is not at all. In extractive states taxes are compulsory payments, taken by force or the threat of force, without rulers making any claims or promises to provide anything to taxpayers in return (some scholars call this ‘tribute’ instead of taxation).5 This is often the case in recently conquered territories, but it also characterized extractive relationships between peasants and autocratic rulers in most premodern states. One variant of this type is clientelism -- an exchange between powerful taxpayers and government in which goods and services are provided to those who have particular power over or claims on the ruler/government. The power of the state is used to wrest resources from the whole to support the requirements of a relatively few constituents necessary to keep the current ruler in power. Patronage systems and crony capitalism both fit in this hybrid category.

A tight one-to-one relationship, in which a particular tax payment is made for a particular good or service from the state, is the second possibility. This is perhaps the easiest way to insure that the costs of paying taxes match the benefits provided by state policies. The payroll tax funding social security in the US provides one example. Another comes from medieval England, in which monarchs often collected a particular tax for a particular war, and even in some cases returned the money if the war was not fought (Barzel and Kiser 2002). Prior to the 19th century, most European states budgeted in this manner (Webber and Wildavsky 1986). Taxation came prior to spending but was linked to a particular expenditure. Steinmo (1989, 1993) argues that when policy-making institutions couple decisions about spending and taxation, rates of both taxation and expenditure are higher and more stable. A third type is a loose relationship between spending and taxing. General fund taxation is used to provide a set of public and collective goods, but there is no clear relationship between the amount of tax paid by individuals and the particular benefits they get from spending. In general fund taxation, the temporal order between taxing and spending is often reversed – states spend, then tax. More precisely, they begin by identifying ways they want to spend revenue, then look for ways to collect it. One way of conceptualizing this type of general fund taxation is as communistic in Marx’s original sense – taxes come from each according to their abilities and spending goes to each according to their needs (perhaps this is the source of its legitimacy problems in many contemporary capitalist states). To put it differently, the relationship between the state and the taxpayer is one of generalized exchange (Martin et al. 2009, 3).

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A related situation, even more common historically, is rulers promising to provide some collective or private good in exchange for taxation, but not honoring that promise. 3

Systems of taxation cannot be divorced from state expenditures; the demand for tax revenue in part determines its supply. Thus, taxation is in part a function of the spending patterns of states: on war, domestic security, education, social insurance and public welfare, religious buildings and ceremonies, disaster relief, and payoffs for political support (bread and circuses). War and security issues are especially important determinants of the demand for tax revenue, because the failure to fund them adequately can result in the demise of the state itself. This is why Tilly’s (1990) work on war and state-making has been so important (see also Kiser and Linton 2001).6 Tax revenue does not always and directly determine spending; rulers often spend more than they take in taxes. However, this does not mean that tax revenue sets no constraints on spending. Tax revenue sets general, long-term constraints on spending, working via what we call “rubber band” causation – spending can be stretched beyond revenue, but only so far and only for so long, until it is pulled back, in one way or another. We will attempt to explain variations in the elasticity of the rubber band throughout history – how tightly (and by what mechanisms) is state spending tethered to total revenue? In other words, what determines the amount and duration of deficit spending? The type of fiscal policy pursued determines the long-term effects of annual deficits on total state debt. For example, investment policies often entail running deficits, just as economic forms often go into debt in order to invest in capital improvements. In both of these cases, investments may enhance efficiency and productivity, thus increasing revenue and decreasing deficits in the long term. This is obviously not true of extractive policies. We also stress the distinction between taxation and total revenue. In addition to taxation, rulers can get revenue from many independent sources (control of natural resources, conquered or confiscated lands) or they can borrow money to fund their expenses. These non-tax sources of revenue often increase the autonomy of rulers, allowing them to pursue policies in their interests alone.

Toward a Model of Fiscal Policy The types of policies pursued by states (extractive, redistributive, investment) and the relationship between taxing and spending are a function of three main categories of causes: economic structure and geopolitics, fiscal culture, and political institutions.

Economic Structure and Geopolitical Relations Economic structure affects fiscal policy mainly by setting constraints on taxation. The most foundational level determining the ability of rulers to extract revenue is the size (total output) and 7 structure (type of production and exchange) of the economy. In other words, the economy sets

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We also expect the nature of the goods and services a government provides to be an important determinant of tax policy and the effectiveness of tax systems. First, people may be more willing to pay taxes for some types of policies than others. Second, the effects of inefficiency and/or corruption may vary across policy domains. For example, are taxpayers more willing to tolerate inefficiency and corruption in defense spending than in welfare spending? This may also vary by political party: for example, will Republicans in the U.S. increase their tax evasion more if corruption occurs in welfare spending than if it occurs in defense spending? 7 The distribution of economic resources is important as well, as the breadth of the distribution of resources determines the potential breadth of the tax base. A broad base is more difficult to tax administratively, but a narrow base (when resources are concentrated in the hands of a small elite) is more difficult to tax politically (as they will have more power relative to rulers). 4

the ceiling for tax rates, which in turn delimits, ceteris paribus, the amount to be expended on public goods. A resource constraint always exists, but it is more severe in some places and times than in others. For most of recorded history, the size and development of economies was the main limitation, and this is still true in some of the less developed parts of the world (e.g., subSaharan Africa). In most premodern states, limitations of the economy and administrative capacity were generally more important inhibitors of tax revenue than the nature of political institutions, but the situation changes in the modern world. In contemporary developed states the economy provides a sufficient tax base and the (usually bureaucratic) administration collects revenue fairly effectively (contemporary Greece and Italy are notable exceptions), but the nature of policy-making institutions (multiple veto points, for example) often limits tax revenue and spending. Other aspects of economic structure also affect the sources of revenue and its fluctuations. Oil dependence can create a great influx of monies into public coffers, but the steadiness of the stream of revenue depends on world prices and also the speed at which the oil fields are depleted. Taxes on trade are only possible if a sufficient volume of trade exists. Economic structure also affects the demand for certain types of state spending. Coercionintensive economies, such as slavery, require spending on repression. As capitalism expands, the demand for spending on education and infrastructure increases, to take just two examples. Geopolitics affects taxation, primarily by shaping the demand for revenue. In premodern states, the main reason for taxation was to fund war (Tilly 1985, 1990). In the contemporary world, countries that depend on a superpower for defense may have to spend less of their budgets on defense, leaving governments the discretion to spend on other public goods or to reduce public expenditures altogether.8

The Role of Fiscal Culture Fiscal systems are not simply a function of existing economic and geopolitical conditions, but also of how those conditions are understood by actors. The fiscal culture of a particular polity comprises two major sets of beliefs: 1) the general conception of the state, that is, the definition of what a state should do and for whom; and 2) the composition of the community (or communities) of fate in terms of who is included and who excluded, whether there is one or many, and, if many, whether they have contesting views of the role and legitimacy of government.9 These two sets of beliefs also affect the level and distribution of compliance with revenue extractions, the demands for and expectations of goods and services, and the kinds of government policies selected. The nature of the beliefs and the justifications for compliance/noncompliance together, form the fiscal culture.

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Exemplary perhaps is the comparison of defense spending data, all as % of GDP, of the U.S. with countries that spend a higher proportion on welfare: Sweden: 1998 2.5; 2012 1,3%; Denmark: 1998 1.6%; 2012 1.3%; US: 1998 16%; 2012 19%. 9

We do not assume that every country has only one fiscal culture. In some cases one fiscal culture will be dominant, in others there will be multiple fiscal cultures in conflict. One of the things we are interested in explaining is the degree of homogeneity or heterogeneity of fiscal culture in different times and places. For example, the greater the heterogeneity of the population, the greater the heterogeneity of fiscal cultures. Fiscal cultures will also become more heterogeneous in times of economic crisis, as debates emerge about the causes of the crisis and how to address it. 5

Beliefs about the responsibilities of government There are several sources of beliefs about appropriate government expenditure, about what goods and services it is the obligation of government to provide. Among the most discussed are ideologies, generally based in economic theory, that focus on the role of taxes and expenditures in promoting economic growth and prosperity (see, e.g. Micklethwait and Wooldridge 2014). Related are considerations of market failures and how and when government has a responsibility to address them; contention abounds around the claim that government should step in when markets fail to provide collective goods or when markets produce negative externalities (Keynes 1936; Friedman 1980). Relatively universal agreement exists that it is government’s responsibility to provide national defense, regulation of social order, basic education, and at least minimal social protection, although disputes continue (and probably will always continue) over the extent to which government purchases relevant services (e.g., mercenary armies, contracted security), regulates private provision (e.g., religious and charter schools, social welfare), or provides such goods and services directly. Even among those who believe government should provide more than the minimum, there is disagreement over which expenditures are essential and which not. And there is further disagreement over the priority of different kinds of public goods, especially when economic downturns require reassessment of budget priorities (see, e.g., Kayser and Grafstrom 2014). And yet another source of contention is what level of government should provide what. We, thus, need a typology that disaggregates potential government provision along various dimensions. Our distinctions between extractive, redistributive, and investment policies is just the beginning of such a typology. The public also has ideas of what government should be doing, ideas grounded not so much in economic or political theory as in habits and practices often supported by institutional arrangements that become self-reinforcing over time.10 This is the claim of recent research on the consumer society in the United States (Cohen 2003; Hyman 2011, 2012; Prasad 2012). Prasad (2012) makes a strong case that the U.S. government’s emphasis on encouraging consumption results, in a complex causal chain, in a less expansive welfare state and a higher rate of poverty than we see in many other advanced industrial countries. This emphasis pre-dates Keynsianism and is grounded in the American way of business and citizenship. We will return to the institutional supports for such a predilection in a different paper (chapter). In addition to resource constraints (only states with a large tax bases can even consider providing universal health care, for example), fiscal culture determines the feasible set out of which rulers choose fiscal policies. The first mechanism through which this works is information. Tax systems are not constructed by actors out of a choice set containing all possible institutions and policies, but out of a set containing only those models known at the time. There is an important historical dimension to this, as information has increased and diffused over time, the choice sets of rulers have expanded. The lack of information about possible alternatives is one of the determinants of the stickiness of tax systems, especially in premodern states. Of course, knowing that an option exists is not sufficient for it to be included in the feasible choice set of rulers, it much also be deemed appropriate or acceptable. Fiscal culture makes some policies obvious,

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It is important to distinguish between two levels of fiscal culture. Elite fiscal culture, our primary focus, is the abstract, theoretical, leading edge of fiscal culture, generally produced by intellectuals (these days in academia or think tanks). Mass fiscal culture is derivative, often consisting of little more than slogans and habits loosely tied to an elite fiscal culture. 6

taken-for-granted choices, and makes others unthinkable. For example, most contemporary states would not view forced labor as an acceptable way to tax. It is also important to analyze the unequal distribution of information across actors. Rulers generally have better information about their policy options than those they rule, and state officials have better information about the taxes they are supposed to collect than rulers do. As agency theory shows, these informational disparities often have important consequences, allowing agents to act contrary to the interests of principals. Fiscal culture further depends on mental models of how fiscal systems work.11 Mental models determine how information is interpreted, and even what counts as useful, important information in the first place. How can we fully understand early modern European tax policy without mercantilism, post-colonial fiscal policy in Africa without modernization theory, or fiscal policy in the late 20th century in Britain and the US without neoliberalism? Mercantilism, modernization theory, and neoliberalism are all mental models that posit certain causal relationships between taxing and particular outcomes such as economic growth and state power. These mental models may be more or less correct, depending on the state of current theories and folk wisdom, and the availability of empirical evidence to correct inaccuracies. The closer they are to correct, the more they converge with a perfect information model, thus the less we have to pay attention to them theoretically. They have probably become more correct over time, but they are still far from irrelevant. For example, there are ongoing disagreements about whether decreasing taxes on the rich spurs economic growth, whether austerity measures help balance budgets, and whether privatizing tax collection makes it more efficient. Discount rates play a role here as well, because they have two important macro-level effects. First, they are one of the most important causes of deficit spending. Deficits will be common when there are immediate spending needs or when rulers have especially high discount rates (due to insecurity of rule, for example) (Levi 1988). The main problem with deficits is that they increase legitimacy in the short term but decrease it in the long run. As the theory of quasivoluntary compliance suggests, legitimacy is in part a function of whether people think they are getting benefits commensurate to the costs they pay in taxes. In the short run, deficit spending allows rulers to provide more benefits than costs, because total taxation is less than total spending. However, as annual deficits accumulate into debt which as to be paid off (at the very least, the interest on the debt must be paid), people will be getting less from state spending than they are paying in taxes (because some of their tax payments go to paying off the debt). This always threatens the legitimacy of states. It also facilitates the rise of anti-tax, anti-state parties, because they can make a compelling argument that the state in inefficient – that it is not providing benefits via spending commensurate to the costs of taxes. The second main effect of high discount rates is that they decrease spending on goods with high initial costs and delayed benefits, such as infrastructure and education. These and many other investment policies require low discount rates. Therefore, in addition to decreasing the overall government provision of goods and services, high discount rates will shift the policy distribution toward those that are more immediately and politically beneficial, often extractive policies and some forms of redistribution.

Communities of Fate The issue of who is to be served by government also has a strong influence on the fiscal culture. At one level, this is an institutional question to be addressed later: who has voice and power within the system and by what means can they exercise demands. But it is also a matter of a 11

For a different interpretation of this, see Webber and Wildavsky (1986) on “budgetary cultures.” 7

more general societal commitment; even in polities where most of the populous is disenfranchised, noblesse oblige or fear of rebellion may motivate broad governmental welfare responsibilities. One way to frame this is in terms of the community of fate, that is, “…those with whom individuals come to perceive their own interests as bound and with whom they are willing to act in solidarity” (Ahlquist and Levi 2013).12 We argue that the greater the breadth of communities of fate both spatially and temporally, the greater the publicness of fiscal policies. The spatial dimension refers to the inclusiveness/expansiveness of the group (the upper bound being inclusion of all citizens of the country)13 and the temporal dimension refers to the time horizons of the community (necessary since many state policies require high initial spending that pays over the long term). Our question then becomes: what are the determinants of the spatial and temporal breadth of communities? From this we can derive more specific empirical questions, for example: what has narrowed the spatial and temporal breadth of the US community of fate (or, made it less of a community of fate) in the post WWII era, leading to a decline in the provision of public goods? As Figure 1 shows, we can use variations in the spatial and temporal breadth of communities of fate to distinguish between different types of contemporary states. Neoliberal state policies primarily reflect the short-term interests of the capitalist class – a narrow community of fate combined with high discount rates. Populist states also act on short-term goals, the immediate redistribution of wealth, but to a broader community of fate (the people, or the poor, in less developed countries almost the same thing). Developmental states pursue investment policies with long-term payoffs (reflecting low discount rates), but like neoliberal states they act primarily in the interest of national capitalists, a narrow community of fate. Social democratic states generally combine investment and redistribution policies, reflecting both low discount rates and a broad community of fate. FIGURE 1 ABOUT HERE An important distinction is necessary here. Interest groups refer to consciously developed coalitions of individuals and corporations that work together to achieve particular political and economic objectives via tools such as votes, lobbying, protest, and other forms of pressure. It is interest groups that were the concern of the pluralists and that inform many important claims about governance (Olson 1982; Fukuyama 2014). Communities of fate, on the other hand, may or may not produce interest groups. Rather, they are the source of the beliefs and norms that are at the base of the fiscal culture and are the source of beliefs about appropriate and possible actions on behalf of the community. The construction of a community of fate is a political and social process, involving leadership and education (or, at least, socialization). The process of constructing communities of fate involves drawing boundaries between groups: who is “like us” and who is not? These boundaries can shift depending on the issue, as revealed

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Ahlquist and Levi’s (2013) concept of a community of fate is in many respects similar to what Singer (1975) and Pinker (2011) call the ‘circle of empathy’. Pinker contentiously argues that this circle of empathy has expanded over time, primarily due to the rise of the novel (see Anderson [1983] for the same argument applied to the rise of nationalism) and later, increasing global travel. 13 We are addressing tax systems here that have national boundaries and thus limits ont he relevant community of fate. It is of course possible for communities of fate to extend beyond national boundaries. Marx’s call for workers of the world to unite is one attempt, the European Union is another, and the instances of American worker solidarity with peasants in developing countries constitute yet another. Most would argue that climate change cannot be effectively addressed without the development of some sort of global community of fate. 8

by Evan Lieberman’s comparison of Brazil and South Africa on two different policy areas (Lieberman 2003, 2009). And to the extent a community of fate is defined by those sharing ethnic or religious ties, the existence of communities of fate may broaden conflict rather than create a consensus on national goals. Among the many instances of this are the different stances towards military service taken by Francophone and Anglophone Canadians during the two world wars (Levi 1997).14 Cases of an expanded community of fate stand in contradistinction to communities that narrow the scope of their members, but they also make clear how difficult it can be to build and sustain widely inclusive communities.15 By understanding the complex of factors that enable organizations to expand membership’s interests to encompass those of unknown others while engendering a sense of efficacy and pride in group actions that go beyond the reasons members joined, we can begin to define the conditions under which it might be possible even for governments to generate polities in which more of their constituents will consider and vote in the interests of others. Leaders of states clearly enjoy rents, and citizens tolerate them to varying degrees. As one of us argued several decades ago (Levi 1988), rulers (or, more generally, formal leaders) maximize revenue, but how they spend the returns varies widely and depends on a combination of personal goals and incentives and political constraints. In other words, the nature of the rents, particularly personal rents, can vary considerably. In extractive states, they spend returns on themselves or a small set of cronies, but in others the wealth produced is shared more generally among the population. Numerous authors have attempted to assess the conditions under which governments predate or are developmental (see, e.g. Evans 1989; Campos and Root 1996; Moore 1998; Kang 2002; Moore 2004; Acemoglu and Robinson 2012), but the question remains an open one. The reasons for this variation rest largely with the personal motivations of and the institutional constraints on formal leaders. Rulers’ actions are generally delimited by institutional constraints and the bargaining power of other powerful actors (Levi 1988; Bueno de Mesquita et al. 2003). However, leaders may also possess ideologies and principles they then attempt to embody in the rules and norms of the state (Levi and Epperly 2009). In contemporary state-building efforts, Gandhi and Mandela come to mind, but so does Mobutu, who started with such principles but whose love of power trumped his earlier and more ethical motivations. Too many union leaders fit this description over time—and far too many heroes of the revolution who become the heads of state. The pivotal moments in state histories can have institutional persistence through time. The first of these pivotal moments (what some call critical junctures) comes in the initial phase of state formation. As Stinchcombe (1965) noted for economic firms, the timing of the formation of organizations matters because conditions present at their founding determine aspects of their structure, and these often persist over time. In our cases, fiscal cultures present at the time of state formation often determine the characteristics of political institutions created by initial rulers.

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We do not assume that rulers have perfect information about what size of community of fate is optimal. Strategic decisions about incorporation in the governing coalition as a means of extending the community of fate can be disastrous or enabling. Julius Caesar learned the first lesson (too late) when Brutus delivered his deathblow. When Nelson Mandela absorbed some of his former enemies into his government, he signaled that the new community of fate included white as well as black and colored South Africans. Both Caesar and Mandela were smart and able, and both, it can be argued, were seriously attempting to build an enduring and welfare-enhancing government. Yet, mistakes can be made. 15 Elites oppose the broadening of communities of fate under certain conditions. Acemoglu and Robinson’s (2006) argument about democratization can be applied here: when broadening of communities of fate is expected to result in redistributive policies funded by higher taxes on elites, they will oppose it. 9

For example, the constitution of the United States and the political institutions it created were a product of its anti-colonial and anti-tax origins. In order to prevent the re-emergence of ‘tyranny’, multiple veto points and ‘checks and balances’ were embedded in political institutions, making it difficult to increase taxes and spending to this day. The founding leadership coalitions of emerging states have several commonalities with the pivotal leaders of the unions described in Ahlquist and Levi (2013). Leaders of both formative states and unions build coalitions that allow them to fight successfully to win the battles essential to gain control over the governing apparatus. They then use those coalitions or build others in order to actually govern. What coalitions they form and with whom has consequences for the kind of governance institutions and communities of fate that emerge.16 Not unusually, a few benefit from the resources and efforts of the many. In other cases, economic growth may result and the majority benefit—albeit accompanied by unequal division among the leaders and the led. Very occasionally a government is grounded in a more fully inclusive process, enfranchising much of the population and making it easier for them to influence policy. The cultural values and beliefs present at the time of founding also help define the community of fate. For example, states formed prior to the development of feminism are unlikely to include women in the community of fate, and states formed when racist ideologies are dominant are not expected to include minority groups. The presence of a culture of democracy at the time of founding, apart from its institutional effects, will produce a broader community of fate, as will the presence of an ideology of nationalism.17 In all of these ways, fiscal culture reflects more general cultural principles. The communities of fate formed in periods of state formation to not emerge from some tabula rasa, but are constructed out of the group identities and cleavages present at the time (themselves products of the prevailing general ideologies). Some states form in areas containing relatively homogeneous populations, whereas others emerge in a context of population heterogeneity. These different starting points have important consequences for the nature of the communities of fate that develop. Several scholars have argued that population heterogeneity (most look at ethnic heterogeneity) decreases social capital, social cohesion, and generalized trust (Alesina and La Ferrara 2000; Putnam 2007). A recent survey of the literature concludes that this relationship is strongest when inequality and segregation are also high (van der Meer and Tolsma 2014). By fragmenting the community of fate, heterogeneity decreases support for policies with high publicness, especially if those policies entail any redistribution toward minority groups (see Costa and Kahn [2003] on the U.S. and Eger [2010] on Sweden). Homogeneous populations and high levels social capital are neither necessary nor sufficient conditions for a broad community of fate, but they make that outcome more likely.18 Founding effects (what some have called ‘imprinting’) do tend to persist over time, but we must also be able to explain why communities of fate expand and contract in existing states. One major set of causes is exogenous changes in culture, geopolitics, the economy, or political institutions. Democratization provides one example. One reason for an initial link between the

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Recent work of importance in the huge literature on state building includes North, Wallis and Weingast (2009), Fukuyama (2011), Acemoglu and Robinson (2012). But also, see more recent work on coalition building Eaton and Weir (2015). 17 The rise of nationalism in the 18th and 19th centuries (Anderson 1983) is expected to have an especially strong impact on the breadth of communities of fate. Therefore, all else equal, we expect communities of fate to be broader after this period than before it. 18 Lieberman’s (2003) work shows how complicated and interactive the effects of heterogeneity can be – cleavages on one dimension of heterogeneity can often create solidarity on another dimension, especially if state policies make particular types of heterogeneity especially salient. 10

broadening perception of the community of fate and the increased publicness of government provision was the move from a theory that based a ruler’s legitimacy in religion to a theory that established legitimacy on the justification “…that they in some sense ‘represented’ the broader interests of the whole community” (Fukuyama 2014, 50). The expansion of citizenship further institutionalized the requirement of government to be attentive to the demands of its people while expanding the conception of who was in the community of fate. Shifts in other general ideologies also impact the size of communities of fate – feminist ideologies increase the incorporation of women, and anti-racist ideologies increase the incorporation of minorities, for example. Shifts in the heterogeneity of populations also affect the inclusiveness of communities of fate, and thus the publicness of fiscal policies. For example, increases in immigration (a function of changes in economic structure and geopolitics) can increase heterogeneity and the new groups may not be fully incorporated into the existing community of fate. If citizens perceive that government spending (especially redistributive spending) is benefitting these new immigrants, then support for such spending may decline (Eger [2010] shows that this has happened “even in Sweden”). Warfare also impacts communities of fate. The literature on war and state-making inspired by Tilly (1985, 1990) has focused in the direct effects of war on taxes and political institutions. Our focus is on the indirect effects of war on the state: war affects the inclusiveness of communities of fate, and through that affects fiscal policies. Government leaders may demand great sacrifices at times of war. This is the time when the members of a polity are most likely to overcome their ethnic, racial, religious and other identities to form a more national community of fate.19 Following Simmel (1955) and Coser (1956), we argue that warfare should expand communities of fate, and therefore lead to increases in spending on policies with high publicness. This works first through a general cultural mechanism, wars define ‘us’ as the group sharing an interest in defeating ‘them’. Conscription provides a second causal mechanism: by forcing interaction between different types of people in pursuit of a shared goal it increases solidarity and trust among those who fight together, possibly facilitating a broad community of fate that transcends group boundaries (see Weber [1976] on the development of nationalism in France). It also has a third effect, highlighted in the recent work of Stasavage and Scheve (forthcoming); it creates a justification for more progressive taxation as a means to ensure compensatory fairness, given that the young bear the burden of death and disability. Even in peacetime, some governmental leaders make calls for extraordinary public service, such as serving in the Peace Corps or VISTA in the United States, engaging in voluntary work brigades as in Cuba, or undertaking energy conservation and recycling in countries throughout the world. Some ask for citizen compliance with highly invasive programs such as vaccinations or the Indian government’s attempt to build a national identity database. Clearly some governments are better able than others to win low-cost compliance with these requests. Economic crises also often alter communities of fate. Most importantly, economic downturns often lead to increased group conflict, as groups are competing for fewer resources. One outcome of this conflict is the shrinking of communities of fate, as some groups (often minorities or recent immigrants) are excluded.

19

Of course, war can, as we saw in the Canadian case [Levi 1997], have the opposite effect. 11

The Role of Political Institutions Fiscal cultures interact in important ways with political institutions. Of particular import are the rules affecting aggregation of interests and the administrative and bureaucratic apparatus and processes that delimit the possible.20 The argument that institutions shape preferences, initially a criticism of neoclassical economics for taking preferences as exogenous and unchanging, has now become well accepted (Steinmo 1993; Rothstein 1998). We want to stress the other side of the coin, preferences (especially the preferences of rulers and key elites) shape institutions, and that preferences regarding fiscal policies are primarily a function of the dominant fiscal culture. While we acknowledge that the causal relationships between political institutions and fiscal culture are complex and reciprocal, our focus is on endogenizing institutions by showing how they are derived from fiscal cultures.

Policy-Making Institutions In thinking about the aggregation of interests, we rely on selectorate theory and the theory of veto points. Selectorate theory (Bueno de Mesquita et al. 2003) begins with the Downsian assumption that rulers want to gain and maintain power. The characteristics of selection institutions (institutions governing the selection of rulers) determine their policy preferences. These institutions specify who is in the selectorate (all actors with some control over choosing rulers, for example registered voters in a democracy) and the size of the winning coalition (the subset of the 21 selectorate whose support is necessary to get or maintain rule). The size of the selectorate and the size of the winning coalition determine the content of state policy and the degree of loyalty of supporters to the current regime.22 The smaller the winning coalition in any state, the more clientelist the fiscal policy. The characteristics of selection institutions determine the policy preferences of rulers, but whether and how those preferences are translated into actual policies depends on the nature of policy-making institutions, and there are many arguments about how policy-making institutions affect policies. MORE HERE Policy-making institutions are important proximate causes of state policy, but where do they come from? Similarities across them provide some clues: There are often similarities between political institutions in states that: (1) developed at the same time; (2) share similar colonial heritages (ex-British colonies have a propensity for democracy, for example); and (3) are geographically clustered (presidential systems are more common in North and South America, whereas parliamentary systems are more common in Europe). There are lots of possible ways to explain these similarities, but similar fiscal cultures provide one parsimonious account.

20

Fukuyama (2014) offers a recent and compelling account. For example, in hereditary monarchies both the selectorate (all aristocrats) and the winning coalition (a majority of aristocrats) are small. In rigged electoral systems (such as the USSR) the selectorate is large (all adult citizens) but the winning coalition is small (all party members). 22 This model has two important virtues compared to the autocracy/democracy dichotomy common in the literature: (1) the same model is used to analyze both autocratic and democratic states; and (2) it reveals variations within different types of both democracy and autocracy. 21

12

Public Administration and Bureaucracy Making policies is only the first part of the process; they must also be implemented. If the economy provides adequate/abundant resources to tax, do rulers have enough effective and trustworthy agents to effectively collect taxes? For most premodern states, the simple answer was no – administrative limitations prevented them from collecting much revenue. To analyze the implementation of state policies we need a model of the relations between rulers and officials in charge of carrying out state policies and a model of the extent to which taxpayers will be willing to comply. For the former we use a version of agency theory that combines insights from Weber (1978) and contemporary economics (Jensen and Meckling 1976; Kiser 1999), and for the latter we use Levi’s (1988) theory of quasi-voluntary compliance.23 Both of these are to some extent products of fiscal culture, so we conclude this section and the next by showing how fiscal culture affects administrative structure and quasi-voluntary compliance. Agency theory focuses on the ways rulers try to mitigate problems of asymmetric information (their agents know more than they do about tax collection) by the ways they select, monitor, and sanction agents. Agency theory can also give us a clear definition of administrative efficiency to be used as a baseline in measuring state capacity. The most efficient tax administration is the one that produces the highest net revenue within the set of structural constraints present at the time, where net revenue means gross revenue (set by the tax rate and tax structure) minus administrative costs, costs of agent corruption, and costs of taxpayer evasion. We can illustrate the model with a quick analysis of some of the agency problems in premodern states. One of the main problems premodern states faced in providing adequate policies with high publicness is the they lacked sufficient administrative capacity to collect taxes in areas far from the capital. These problems are only mitigated with the development of technologies of communications, transportation, and information processing (a function of the level of economic development). The costs and effectiveness of monitoring are primarily determined by these technologies of control, since they determine the ease with which principals can acquire information about agents (Weber 1978:224). The higher the level of development of technologies 24 of control, the greater the monitoring capacity of rulers, ceteris paribus. When the monitoring capacity of rulers is poor, some decentralized forms of patrimonial administration will be more efficient (i.e., produce more net revenue for rulers) than centralized bureaucracy (Kiser 1994; Kiser and Kane 2001). The only remaining choice they have is what form of decentralization 23

For Weber (1978), 274, the agency relationship between rulers and their administrative staffs is essential to understanding political history: "historical reality involves a continuous, though for the most part latent, conflict between chiefs and their administrative staffs for appropriation and expropriation in relation to one another." Furthermore, Weber (1978), 225, 991-9 realizes that the reason agents are often able to get away with acting contrary to the interests of principals is that they have better information concerning the quality of their performance than principals do. This is a classic statement of an agency problem, delegation of authority leading to problems of control due to conflicting interests of principals and agents, and informational asymmetries favoring agents. Weber's ideal types of forms of state organization (patrimonialism, bureaucracy) can best be understood as his attempt to model agency problems in different structural contexts. They are essentially typical clusters of recruitment, monitoring, and sanctioning strategies.

24

Economic development does not always have positive effects on administrative capacity. For example, although rich people have always found ways of hiding taxable assets from states, the globalization of finance has made this easier by increasing opportunities for hiding assets in banks in other countries. 13

(feudalism, prebendalism, tax farming, etc.) to use. The ideal typical administrative equilibrium for most premodern states and empires was to use tax farming for indirect taxes and some type of decentralized patrimonialism (feudal, prebendal, administration by local notables) for the collection of direct taxes. Rulers will only choose to use centralized bureaucratic hierarchies when their monitoring capacity is good enough to ensure agent compliance. Agency theory alone is insufficient to understand state policy implementation, it focuses on the relationship between rulers and officials, but undertheorizes the citizens/subjects who are paying taxes and receiving state services. Power also affects tax administration. For example, tax collectors, like other state officials, were often chosen not on the basis of their skills but because of their power relative to rulers. This not only decreased efficiency in the short term, but in the long term it made tax administration very difficult to reform. Once powerful actors became entrenched in lucrative administrative positions, it was difficult to dislodge them even when changes in conditions made other administrative arrangements (such as bureaucracies that hired on the basis of merit) more efficient. This is why the transition to bureaucratic administrations is often caused not just by changes in economic conditions, but by things like revolutions that dislodge the power of entrenched officials.25 Fiscal culture affects tax administration in important ways. First, it determines who and what can be taxed. For example, in medieval and early modern European monarchies, aristocrats were generally exempt from direct taxation. Aristocrats and rulers comprised a very small community of fate, and they supported themselves by extractive taxation of the peasantry. Second, it often determines the appropriate administrative structure. The development and spread of bureaucratic administration was due initially to changes in economic structure and power relations (as noted above), but after that point it was depicted by modernization theory as the ‘proper’ administrative structure for any modern state, and was therefore deployed in African states even when it decreased administrative efficiency (Kiser and Sacks 2011). As a final example, the use of tax farming and other forms of privatized administration is a function not of efficiency considerations, but also of fiscal cultures validating the privatization of administration (patrimonialism in premodern states, neoliberalism now).

Quasi-voluntary compliance In all governments, leaders who fail to deliver to key constituents—be they warlords or voters— are likely to find themselves out of power. Throughout history, the belief that government is untrustworthy and/or unjust has affected the extent to which a fiscal system can be based on cooperation or coercion (see, e.g., Daunton 2001, 2002; Sánchez Román 2013). Only those who succeed in satisfying the material or policy demands of those they are supposed to be serving have a chance of being able to induce willing compliance with governmental extractions and policies. In the best functioning polities, a virtuous circle exists in which governments provide promised goods and services, citizens then comply quasi-voluntarily with tax and other extractions, which enables governments to provide more in goods and services, inducing more citizens to quasi-voluntarily comply (Levi et al. 2009a; Levi and Sacks 2009). Crucial to this story is the delivery of positive returns. For taxpayers this generally means provision of basic security and the political underpinnings for prosperity: infrastructure, a stable system of justice, education and health services, and the like. But, as we discussed in the case of the ILA, leaders can win their rents from others than those they govern. On the other hand, rulers relying on military and economic support from abroad have less incentive to care about the population and greater ability to employ repression (see, e.g., Bates

25

See Kiser and Kane (2001) on the effects of the English and French revolutions. 14

2001, 2008). They can actually or effectively own salt mines, petroleum fields, or other major sources of revenues, thus enhancing their autonomy from constituents.26 A quid pro quo from government, while necessary, is not a sufficient condition for contingent consent. Quasi-voluntary compliance and contingent consent are more widespread when citizens deem fair the process for determining who gets what and when (Levi 1997; Levi and Sacks 2009) 27 . In governments, fairness is embodied in the extent to which due process exists, bureaucracies are neutral in their distribution of goods and services, and there is a process (usually representative) by which citizens can influence given policies and not just vote on leaders. What constitutes fairness varies across societies and time. Nonetheless, any government that does not meet widely held expectations on these matters is likely to suffer resistance and dissent, passive and active.28 With the provision of valued collective goods and the establishment of fairness, according to prevailing norms, governmental leaders then have an opportunity to achieve compliance with laws, regulations, and taxes. Not only is the state more likely to prosper, but so is the leader, whose rents—be they in votes, budgets, personal income, or successful demands for action—are likely to improve. They are also more likely to succeed at importuning extraordinary political action, such as engagement in wars or other forms of self-sacrifice, particularly if they also resort to the evocation of threats, quandaries and the politics of fear (Weingast 1997, 2005; Schofield 2006). However, reliance on fear and resentment tends to require a narrowing of the community of fate to those who share, ethnic, religious, racial, and national attributes (Bates et al. 1998; Petersen 2002). In situations where citizens feel relatively secure, ceteris paribus, and where government is believed to be relatively trustworthy, individuals are likely to respond to a call such as John F. Kennedy’s, “Ask not what your country can do for you - ask what you can do for your country.” They are more likely to expand their communities of fate. Individuals are less likely to comply if they perceive a high incidence of evasion by others. Quasi-voluntary compliance is compliance motivated by a willingness to comply but backed up by coercion, particularly coercion that ensures that others will be obeying the law. The achievement of compliance with government extractions and regulations depends on the competent exercise of the coercive capacity of the state, including its ability to detect and punish those who illegally evade their obligations.29 When taxpayers perceive that government is relatively effective, competent, and procedurally just, there is the potential for the development of a virtuous circle. The more effective and procedurally just the government, the greater the willingness of citizens to accept governmental authority and therefore the greater the degree of quasi-voluntary compliance, which then 26

Whether the discussion is about premodern states or the contemporary “resource curse”, a large and growing literature details the manipulation of available resources by the formal leaders of government. For the first, see, e.g. Levi (1988), North (1981), Kiser (1994). For the second, see, e.g., Goldberg, Wibbels and Mvukiyehe (2008), Luong and Weinthal (2010), Ross (2006), Ross (2012), Haber and Menaldo (2011). 27 This term originated in Levi (1988) but has been elaborated most recently in the context of Afrobarometer data concerning the reasons citizens are willing to pay taxes. See Levi and Sacks (2009), Levi and Sacks (2012), Levi, Sacks and Tyler (2009b), Sacks and Levi (2010). Also see Delalande and Huret (2013). 28 This argument draws on Cook, Hardin and Levi (2005), chapters 8 & 9, also, see Rothstein (1998), Rothstein (2011), and Tyler (1990). 29 Bueno de Mesquita, Smith, Siverson and Morrow (2003) argue that the extent to which the winning coalition is loyal to the ruler (essentially a measure of legitimacy) is greater the smaller the winning coalition and the larger the selectorate (in this situation, disloyal members of the winning coalition can easily be replaced). 15

improves government’s capacity to become more effective and to evoke deference, which in turn increases quasi-voluntary compliance (see Figure 2). FIGURE 2 ABOUT HERE The virtuous cycle depicted in Figure 1 is quite rare historically. Governments can easily lose the confidence of taxpayers by failing to deliver promised returns for taxes or by engaging in favoritism, corruption, and clientelism instead. Rulers achieve the quasi-voluntary compliance of the few, often to the detriment of the many.30 Once quasi-voluntary compliance breaks down, it becomes very difficult to elicit it again. The presence of virtuous and vicious circles of legitimacy is one of the main determinants of the high level of path dependence of fiscal systems. Fiscal culture also shapes the nature and amount of quasi-voluntary compliance. The nature of the contract between rulers and citizens/subjects varies in different fiscal cultures. What constitutes the quid-pro-quo for tax payment, and thus what constitutes a violation of the contract, depends on the fiscal culture. For example, in states dominated by extractive policies, the main form of contract violation is rulers taxing more than the customary amount (see Weber [1978] on traditional authority). In states dominated by investment policies, lack of economic growth (the justification for investment) will be seen as a contract violation. Rising inequality has the same effect in states mainly pursuing redistribution. In each of these cases, a very different outcome will be seem as a violation of the contract, and thus will result in a decline in quasi-voluntary compliance. This is also true of norms of fairness. Although some norms of fairness are fairly general, they too differ across fiscal cultures. In most contemporary democratic states, fairness norms are violated if all taxpayers are not treated in the same manner. However, few thought it was unfair to treat slaves or serfs differently than aristocrats in premodern extractive states. As these examples illustrate, one important trend over time has been a raising of the bar for both contract enforcement and fairness – it is more difficult, more is required, for most contemporary rulers to achieve quasi-voluntary compliance than it was for most premodern rulers.

Stability and Change in Fiscal Culture Where does fiscal culture come from and why does it change? Fiscal culture is primarily a product of lived experience; it is shaped by political institutions and state policies. As Pierson (1994, 2004) argues, in addition to preferences shaping policies, policies shape preferences. This tends to create fairly stable sets of mental models of how fiscal systems do and should work, and accompanying sets of fiscal habits. Habit is one major source of stability and an important component of the microfoundations of fiscal culture. In terms of contemporary cognitive psychology, much of our fiscal behavior is associational and automatic , not the product of explicit rational calculation (Kahneman 2011). Fiscal habits (always voting for a particular political party regardless of platform changes, always paying taxes regardless of risk of punishment, etc.) develop over time, often persist even after the conditions that created them have changed. There are many important macro-level consequences of tax habits. Habits are one of the main sources of path dependence, they can partly explain why fiscal systems are often sticky (slow to

30

Quasi-voluntary compliance can exist at many levels: among all taxpayers, among state officials, or among members of winning coalitions, and has different effects at each of these levels. 16

change when objective conditions change).31 Habits are also a core part of what Weber called traditional authority. Barzel and Kiser (1997, 2002) elaborate on Weber’s insights by showing that much taxation is customary, and very resistant to change. In terms of contemporary cognitive psychology, when tax levels are stable over time they come to be taken as a baseline for judgments about appropriate levels of taxation (mixing values and habits). We are especially interested in exploring the process by which regimes move from one equilibrium to another in terms of the publicness of state policy, that is, why and how the fiscal culture shifts. This transformation will often be the result of a political shock or crisis (see Kiser and Schneider 1994 on conquest; Kiser and Kane 2001 on revolution). Another frequent source of change is pressure on resource constraints, be they caused by downturns in the economy or changes in population pressure (exploding birth rates in India, immigration to Europe). A third main source of change is diffusion from other states, primarily from “leading edge” states that innovate in political institutions and policies. Given these pressures—and sometimes in their absence (to be explored empirically) -endogenous sources of change may come to the fore and be the actual source of transformation of the fiscal culture. In these remaining paragraphs, we are going to mention three examples of what we mean. This is a preliminary sampling at best but gives a sense of where we hope to go: The failure of government to deliver on its promises for goods and services can stimulate a sufficient breakdown in quasi-voluntary compliance and belief in the reigning fiscal culture. The wonderful Red Plenty (Spufford 2012) offers a compelling picture of how the Soviet regime’s promise of significant improvement in the material well-being of its citizens became a reason for the demise of the regime. The revolution that created the USSR overthrew an extractive state and greatly expanded the community of fate. It began with massive redistribution, and it established a state that focused on investment (primarily in education, infrastructure, and capital-intensive industry) in an attempt to catch up with more developed capitalist states. Its promise of the communist utopia required low discount rates, citizens were asked to sacrifice now for payoffs in the future. When the promised payoffs didn’t come, in part because party elites shifted to an extraction strategy (many began to refer to the USSR as “state capitalism”) and in part because their strategy for catching up economically worked better for the old industrial economy than for the emerging information-based one, the majority of citizens believed the state had violated its contract with them and quasi-voluntary compliance sharply declined, further exacerbating the economic collapse. An expansion of the proclaimed community of fate that important groups contest can also lead to a revision of the fiscal culture. The Civil Rights movement led to an expansion not only of citizenship but of the community of moral obligation in 1960s America. Many Americans (and not just southerners) resented this expansion, particularly when it came to inclusion in social 31

We can also say something about the conditions under which non-instrumental aspects of fiscal culture (deviations from rationality) will be more or less important. The existence of large groups Hechter (1987) is insufficient to weed out these effects, because they are not random individual variations that will thus balance out, but systematic features of particular fiscal cultures. What does weed out the effects of noninstrumental microfoundations to a large extent is formal (especially bureaucratic) organization. People in organizations are no less prone to the effects of values and habits than people outside them, but bureaucratic organizations provide sufficient information-gathering resources and checks on individual behavior to mitigate the effects of individual actions based on them. We expect the actions of bureaucratic organizations will be more rational (less affected by fiscal culture) than the actions of individuals. For example, fiscal culture should affect the actions of voters more than the policies of states, and the policies of kings more than contemporary democratic presidents. 17

insurance and welfare protections. With Johnson’s “Great Society” programs, the US welfare state was expanded both extensively (by the expansion of the community of fate) and intensively (with new benefits being provided). The predictable backlash began with Nixon’s “southern strategy” and peaked in the Reagan era. When stagflation put additional pressure on resources, those who delimited the community of fate looked for reasons to justify reductions in expenditure; they demonized Keynesianism and sought a new ideological grounding for the fiscal culture. Black mothers on welfare were demonized as welfare queens—thus putting them outside the community of fate. Quasi-voluntary compliance declined dramatically – no one wanted to pay taxes to support the state, and balanced budgets were replaced by perennial deficits. The investment policies that had made the US a world leader in infrastructure, education, and research and development were no longer supported, and the US went from leader to laggard in each of these areas. A more positive story (although the ending is not yet written) is unified Germany, when the country’s community of fate came to include the East as well as the West. The incorporation of East Germany required high spending for both redistribution and investment, funded by taxes on West Germans. Despite the massive economic costs, the commitment to the larger Germany held. The maintenance of a broad community of fate is not a common occurrence, as we can see from the problematic relationships that exist between northern and southern Italians, or between Catalans and the rest of Spain, just to take two contemporary examples.32

32

Similar issues exist at a larger scale in the European Union, it is unclear as we are writing this whether a European community of fate can be created and maintained. Will Germans be willing to continue to pay taxes for redistributive policies benefitting southern Europe (as they did for East Germany), or will the EU begin to fragment and shrink? 18

Figure 1: Deriving Types of States from Communities of Fate and Discount Rates

Communities of Fate Narrow

Broad

Discount Rates High Low Neoliberal States Developmental States

Populist States Social Democratic States

19

Figure 2: How Quasi-Voluntary Compliance Creates A Virtuous Circle

20

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