*2.2.2. Determinants of fiscal sustainability of welfare states*

Although the composition of the national finance has recently been pointed out as a determinant of fiscal sustainability [6, 27], empirical research has lacked reflection them. In the previous study, total public spending and total tax burden level were mostly considered, focusing on identifying whether spending cutoff strategies and tax expansion strategies are more effective to ensure fiscal sustainability [56, 64]. It is true that those were difficult to suggest specific policy measures to enhance the fiscal sustainability of the welfare state. Related to this, this study focuses on tax structure as a determinant of fiscal sustainability of welfare state.

Basically, tax is a representative resource mobilization tool of the advanced welfare state. Therefore, the level of tax burden in terms of public revenue should be discussed in relation to the fiscal sustainability of the welfare state. In order to cover welfare expenditures, a certain level of tax burden must be guaranteed, but if the tax burden is too high, it is not easy to increase the burden level [19, 65]. There are many reasons for the increase in incentives for tax avoidance and tax evasion. On the other hand, too low level of tax burden can also negatively impact fiscal sustainability. This is because there is a high possibility that sufficient financial resources are not available for public expenditure.

purposes so that it can maintain actuarial soundness and positively affect the fiscal sustainability of the welfare state. In addition, political support will likely be high because it pays for the benefits that will come in the future [70]. Particularly in the case of contributions by the private sector, the loyalty of the contributors may be higher because it is more exclusive than the social security tax. However, this may lead to the undesirable exclusion of low-income people, which may hinder social and political sustainability. In this sense, it is possible that the social security system is limited to a small number of full-time workers and the corpora-

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

http://dx.doi.org/10.5772/intechopen.72527

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As mentioned above, each aspect of equity in the tax structure may have different impacts on the fiscal sustainability of the welfare state. In addition, the tax structure may change the impact of welfare expenditures on the fiscal sustainability of a welfare state. First, increasing welfare expenditures worsens the nation's financial condition. However, if the level of welfare spending is combined with a sufficient level of tax burden and a fair tax burden, then the negative impact of welfare expenditures may decrease [61, 74]. Thus, we must examine the moderating effects of tax structure on the impact of welfare expenditures and fiscal sustain-

The analysis of national finances should incorporate careful selection of the analysis target because analysis results may be different depending on which country is analyzed. Because, there is a huge gap between the high- and low-income countries' socioeconomic development levels, especially in terms of the level of public expenditures, the taxation capacity, and the tax structure, so it is necessary to analyze the two groups separately. This chapter analyses the 17 OECD countries, and considering the possibility of data access and the analysis of OECD major countries is reasonable in order to draw implications in the establishment of a welfare state with a financial balance. Specifically, the analysis includes Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Italy, the Netherlands, Norway, Portugal,

Next, this chapter analyzes the fiscal sustainability of welfare states over the course of 28 years, from 1986 to 2013, while the independent variables, including tax structure and welfare expenditures, are based on the period from 1985 to 2012, lagged term (*t* − 1), considering temporal

welfare and tax reforms to alleviate the burden of national financing, having experienced severe economic downturns during the mid to late 1970s. Since the effects of reform are not immediately

This is based on the fact that the expenditures for that year are carried out in accordance with the previous year's budget plan. The analysis is also conducted by adding value from 5 years prior to reflect the medium-term fiscal plan in highincome countries as a 5-year plan. In the determinants of fiscal sustainability of the welfare state, the correlation between welfare expenditures and fiscal capacity may not be reflected within a short time frame. In particular, the impact of fiscal capacity on welfare expenditures is likely to be seen in the medium term, because in high-income countries, the level of public expenditures is usually determined through the medium- and long-term financial management of the country.

Those OECD countries have undergone a series of

tion, so it leads to unfairness in the tax burden and severe tax resistance [71–73].

ability, as well as the direct effects of tax structure on fiscal sustainability.

Spain, Sweden, Switzerland, the United Kingdom, and the United States.

**3. Research method**

**3.1. Analysis target and timing**

precedence as a requirement for causality.3

3

In addition, the structural characteristics of tax, especially tax equity, should be considered as the main factors. Because taxation inevitably violates the private ownership of a member, a lack of reasonable grounds for who owes taxes can lead to tax resistance and promote social conflict and division. Therefore, taxes must be imposed on the basis of justifiable grounds to secure political support for welfare states [12]. Indeed, the views on the taxation of the public are determined not by the level of burden but by the fairness of burden [27, 66]. The fairness of taxation can be defined as the principle of the ability to pay and the benefit principle. The former is the view that members of society are obliged to pay taxes regardless of the benefits they receive from the state as a member of the state. Accordingly, it is fair and desirable to pay taxes according to the ability to pay or to charge. On the other hand, the principle of benefit attaches importance to the exchange of benefits from tax and public goods, with the view that the taxpayer will pay the benefits of the provision of national services. In other words, it is fair to pay fair compensation for benefits.

Tax on the basis of each principle can have a different impact on the fiscal sustainability of a welfare state. First, in relation to the principle of ability to pay, direct taxation with a high tax rate can have a negative impact on economic growth by lowering incentives for labor and high tax evasion in the high-income class. On the basis of this, the enhancement of tax progressivity may hinder the fiscal sustainability of the welfare state. However, it is also true that people are not always opposed to high-level taxation [67]. In addition, the Progressive Tax System can be designed to lower income inequality by designing the higher income group to pay a higher tax burden than the low-income group, thus contributing to social sustainability by preventing conflicts between taxpayers and beneficiaries due to worsening income distribution.

Meanwhile, the horizontal equity, one part of ability to pay, is also considered. Related to this, the possibility of taxation of capital and property is lowered due to the intensification of tax competition caused by globalization [68], and advanced welfare countries have shown a tendency to rely on a consumption tax rather than an income tax. Unlike in the past, the gap between the labor and the capital is significantly increasing, while the gap between the labor and the consumption is significantly decreasing. Recalling that vertical equity and horizontal equity are inseparable, and that inequity on one side is not offset by the achievement of equity through other principles [69], the inhibition of confidence that the tax burden is fairly distributed can make it difficult and may not only lead to a lack of financial resources to support the welfare state, but also to difficulties in obtaining political support. Thus, the widening gap between tax sources have a negative effect on the fiscal sustainability of the welfare state as the level of equity is raised to the level of horizontal equity.

On the other hand, social security contributions and the contributions of the private sector are closely related to the principle of benefit. This is mainly used for specific social security purposes so that it can maintain actuarial soundness and positively affect the fiscal sustainability of the welfare state. In addition, political support will likely be high because it pays for the benefits that will come in the future [70]. Particularly in the case of contributions by the private sector, the loyalty of the contributors may be higher because it is more exclusive than the social security tax. However, this may lead to the undesirable exclusion of low-income people, which may hinder social and political sustainability. In this sense, it is possible that the social security system is limited to a small number of full-time workers and the corporation, so it leads to unfairness in the tax burden and severe tax resistance [71–73].

As mentioned above, each aspect of equity in the tax structure may have different impacts on the fiscal sustainability of the welfare state. In addition, the tax structure may change the impact of welfare expenditures on the fiscal sustainability of a welfare state. First, increasing welfare expenditures worsens the nation's financial condition. However, if the level of welfare spending is combined with a sufficient level of tax burden and a fair tax burden, then the negative impact of welfare expenditures may decrease [61, 74]. Thus, we must examine the moderating effects of tax structure on the impact of welfare expenditures and fiscal sustainability, as well as the direct effects of tax structure on fiscal sustainability.
