*2.1.1. Economic factors*

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

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

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

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

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,

claims in the present situation.

98 Taxes and Taxation Trends

fiscally sustainable countries and nonsustainable countries.

welfare state is to reduce welfare expenditures.

as a result, these are not a fundamental alternative [5].

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

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 income, the debt burden was sure to increase.

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.

Some have paid attention to access to markets where the government can borrow money [21–24]. Drelichman and Voth [23] attempted to account for the fact that eighteenth-century England, whose financial position was worse than Spain's in the sixteenth century, did not face insolvency. Specifically, England was able to borrow at a lower rate of interest than the market interest rate through financial repression, so the cost of interest was low. Thus, the interest burden on repayment of government bonds could be significantly reduced. Moreover, with financial globalization, the government took notice not only of the domestic market, but also the foreign market. In particular, low-income countries with low financial capacity can reduce the burden of foreign debt by improving access to financial markets due to globalization [13, 22, 24], while developed countries do not have a statistically significant impact of the global capital market on fiscal sustainability [24].

At first, decentralization has become a major concern in terms of the decision-making structure of fiscal policy. When there are a large number of participants in the decision-making process, each participant may represent only a narrow range of interest groups. Therefore, it may not be easy to reach consensus due to conflicting interests among participants. Indeed, if there is a structured coalition government or a strong bipartisan system, fiscal soundness is likely to be undermined [40]. In addition, there are slight differences in operational definitions, but generally, it is argued that the higher the number of expenditure departments or the larger the size of the Cabinet, the lower the financial performance [41–44]. In addition, there is a tendency for expansion of deficit and debt when there are a large number of effective political parties in the

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

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The ideological composition of the Cabinet was also affected. The greater the proportion of politicians supporting a left-wing ideology in the Cabinet, the greater the likelihood that the state's fiscal soundness will deteriorate [43]. Traditionally, politicians who support a leftist ideology are relatively supportive of public spending, particularly welfare spending, and have a tolerance for fiscal deficit [46, 47]. However, it is difficult to say with certainty that finances are unstable in the tradition of a representative system. This is consistent with Schmidt [48], who contended that the political composition or ideological differences of a government should not only lead to differences in financial performance, but that the political and economic conditions of each country should also be taken into account. In countries where a social democratic ideology is dominant within the Cabinet, social security spending is generally high, but the level of welfare spending and debt accumulation in these countries has not been high since mid-1970s [48]. While the left wing is generally favorable to a high tax burden and increased public spending, it is also true that differences in the composition of financial and tax systems have played a more important role than ideology in actual history [10].

As mentioned above, the influence of political formulations is limited, and studies focusing on financial systems have recently expanded. Since 1970s, OECD countries have pursued a series of reforms to effectively manage government spending growth and overcome fiscal deficits [49, 50]. In addition, it is necessary to establish a budget system for total budget allocations. In recent empirical studies, the introduction of a top-down budgeting system has had a positive effect on fiscal soundness [27]. In addition, the introduction of explicit fiscal rules has proved effective [51]. The introduction of a fiscal system that controls public expenditures and revenue levels is effective in promoting fiscal soundness, but caution is needed in interpreting it. First, the effectiveness of the fiscal system affects final fiscal performance in combination with the attributes of the political system in each country [52]. Indeed, Hallerberg et al. [32, 33] formulate a centralization index and a rule index for the political system and fiscal policy decision structures to determine their impact on the rate of change in national debt. According to their results, strong fiscal rules in a representative council system and a concentration of decisionmaking power over fiscal policy decisions in a majoritarian system or among mixed-government countries have a statistically significant effect on reducing the national debt ratio.

There are two limitations in the existing research in identifying the determinants of fiscal sustainability of the welfare state. These are further divided into two dimensions: the measure-

coalition or there is a small share of the ruling party in Parliament [43, 45].

**2.2. Limitations of existing studies and approaches of this study**

ment of dependent variables and the composition of independent variables.

In the past, inflation was the main variable of fiscal soundness [25]. Because the national debt is a nominal asset, a slight rise in prices alone can significantly lower the real value of government bonds. However, recently developed countries have guaranteed the independence of the Central Bank in order to prevent inflation risks arising from the arbitrary use of monetary policy. Thus, the importance of monetary policy and inflationary taxation on fiscal soundness has weakened [26]. Especially in the case of European Union countries, it is argued that monetary policy cannot be utilized in accordance with the reality of each country, and thus, it is further argued that there is a limit to the guarantee of financial stability [13, 26].

As confidence in monetary policy weakened following, the influence of fiscal policy began to be emphasized [26]. The most important variable is the aging population. Aging of the population leads to a reduction in the number of workers who can contribute to public finance, an increase in the burden of care, and an increase in welfare spending for the elderly. This may in turn increase the financial burden of the government and undermine financial stability. However, government spending does positively affect the sustainability of national debt, depending on the sector or the form of expenditures [20, 27]. In terms of financial revenues, Kaplanoglou and Rapanos [27] demonstrate that increasing the progressive tax burden may contribute to fiscal sustainability.
