**1. Introduction**

his chapter begins with the question of the claim that all welfare states face financial difficulties. In other words, it stems from the question: "Are there no strategies to ensure the fiscal sustainability of the welfare state while maintaining the appropriate level of welfare spending?" Early neo-Marxists predicted that the fiscal crisis of the welfare state was unavoidable

Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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<sup>1</sup> This paper is adapted from the author's doctoral dissertation (in Korean).

due to contradictions in the capitalist mode of production, which caused the conflict of accumulation and justification [1, 2]. Streeck [3] also recently argued that the 2008 global financial crisis was an inevitable consequence of an unstable combination of capitalism and democracy in capitalist countries. His argument is that the financial crisis is the result of the demolition of democratic capitalism because of capital beyond democratic control in the process of postcapitalist transition to neoliberalism in the development and reinterpretation of new Marxist claims in the present situation.

which is the tax base of welfare states, by changing individual and corporate investments, savings, and work behaviors [11]. In addition, since taxation acts as a key factor that regulates the members of the political community and forms a reciprocal obligatory relationship between

How Does a Welfare State achieves Fiscal Sustainability? A Study of the Impact of Tax Equity

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In Section 2, which follows, existing research on the determinants of the fiscal sustainability of the welfare state is examined in order to discuss limitations of this research and explain the approach of this study, which strives to address the limitations of existing research. Section 3 identifies the research methods adopted in this study. Section 4 describes the results of the

Research on the financial issues of the welfare state is a classic theme of the welfare state. This is divided into studies focusing on economic factors and studies focusing on institutional factors.

Macroeconomic factors related to the fiscal sustainability of the welfare state include economic growth rates and interest rates, the gap between economic growth rates and interest

At first, the fiscal sustainability of the welfare state is related to the economic growth [13–16]. If the economy grows smoothly, the tax is easily collected. In particular, progressive tax can be applied at a higher rate depending on the increase in income, so that tax rate growth is higher than the economic growth rate. In addition, inflation that accompanies economic growth can lead to a substantial decline in debt value, because debt is a nominal asset, and its value is fixed and transferred to the future. In the low growth phase, however, tax revenue was limited, and real debt burdens were likely to increase. In addition, due to the decrease in

The effects of interest rates on national debt have also been important [13, 16]. In the context of the emphasis on interest rates, some studies have focused on the initial level of debt [17, 18]. This is because countries with high initial debt have high interest rates on national debt, and their fiscal capacity is sensitive to changes in interest rates [19]. Therefore, there is a greater risk that fiscal sustainability will be weaker than that found in countries with low debt level. Meanwhile, some studies have demonstrated that primary balance is important [14, 20]. Sakuragawa and Karou [14] examined the phenomenon that the real interest rate on government bonds is low, while the national debt surge is comparable to the gross domestic product in developed countries as well as Japan by incorporating the concept of intermediation cost is explained. Specifically, government bonds are not very sensitive to interest rate changes because intermediation costs lower deposit interest rates and bond return replaces deposits. Therefore, they argued

the interest rate was not the primary factor, but, rather, the level of the primary balance.

rates, economic openness and financial market accessibility, and inflation.

them, how taxation is formed is closely related to political and social sustainability [12].

analysis, and Section 5 discusses the implications of this study.

**2.1. Existing research on determinants of fiscal sustainability**

**2. Theoretical background**

income, the debt burden was sure to increase.

*2.1.1. Economic factors*

However, it is difficult to accept these claims when we remember that the recent financial crisis has not appeared in all advanced western welfare states. In particular, it is not easy to assert that the fiscal crisis of the welfare state is inevitable, considering that it is not found in the Nordic countries, which provide generous welfare benefits, but it is found in Southern Europe, where the level of welfare spending is low and the social security system is not sufficiently developed when compared to other western welfare states. Therefore, it is necessary to identify what kind of welfare state is fiscally sustainable, as well as the difference between fiscally sustainable countries and nonsustainable countries.

In fact, if the government has sufficient fiscal space and the state is able to cope with increasing debt without damaging fiscal sustainability [4] for welfare expenditures, the problem of fiscal sustainability will not rise seriously. The methods of securing financial resources include the expansion of taxes or nontax receipts, the reduction of public expenditures, the adjustment of expenditure priorities, and increase in expenditure efficiency, currency issuance, and foreign aid [5]. One of the key strategies that advanced welfare states can implement to mitigate financial tensions is to increase tax revenues or reduce welfare spending on major public expenditures. Often in high-income countries, cuts in spending are considered to be superior to revenue increases [6]. It is argued that adjustments through a reduction in public spending are less likely to lead to a recession than tax expansion and may also have a positive impact on growth. According to this assertion, the best way to ensure the fiscal sustainability of a welfare state is to reduce welfare expenditures.

Although, reducing welfare spending is not the only answer to the financial crisis facing the welfare state, because cutting public spending is not always possible and feasible. Alesiana and Giavazzi [6] point out that public spending reduction strategies that are accompanied by appropriate monetary policy play an important role in sound financing, but this is not always possible. As noted, EU countries have limited monetary policies at a single national level [7]. In addition, the sudden reduction of welfare benefits often leads to opposition from the people in the form of restrictions to the government's response to the need for welfare due to new social risks, as well as political resistance from citizens who enjoyed existing welfare benefits [8, 9]. Of course, spending rebalancing and rationalization can be a useful means of securing financial resources within a given budget in the short term. However, as time goes by, marginal returns of spending rebalancing and rationalization are inevitably reduced, and as a result, these are not a fundamental alternative [5].

Therefore, we should focus on resource mobilization in order to secure predictable and sustainable financing [5]. This study focuses on the tax system, which is the main resource for advanced welfare countries among various resource mobilization methods. First, taxation plays an important role in ensuring national policy capacity [10]. It can also lead or inhibit capital accumulation, which is the tax base of welfare states, by changing individual and corporate investments, savings, and work behaviors [11]. In addition, since taxation acts as a key factor that regulates the members of the political community and forms a reciprocal obligatory relationship between them, how taxation is formed is closely related to political and social sustainability [12].

In Section 2, which follows, existing research on the determinants of the fiscal sustainability of the welfare state is examined in order to discuss limitations of this research and explain the approach of this study, which strives to address the limitations of existing research. Section 3 identifies the research methods adopted in this study. Section 4 describes the results of the analysis, and Section 5 discusses the implications of this study.
