**5. Conclusion**

the financial burden in the long run by recognizing the tax burden differently, considering the benefits of the fiscal expenditure and the fairness of the tax burden [61, 74]. For example, a fair tax burden may offset the negative effects of welfare spending and may also have a positive impact on fiscal sustainability. For this reason, this study focuses on the moderating effect of the tax structure on the relationship between welfare expenditures and fiscal sustainability, as

**Independent variables Model 1 Model 1**

Equation 2 304 303

Equation 2 122.71\*\*\* 123.37\*\*\*

Number of obs Equation 1 304 303

F value Equation 1 792.60\*\*\* 779.06\*\*\*

**Coefficient Standard error Coefficient Standard error**

Specifically, the gap in the tax base, especially the gap between labor taxation and consumption taxation, hinders the fiscal sustainability of the welfare state in terms of horizontal equity. In addition, the negative effect of welfare expenditures on fiscal sustainability tends to become larger as the gap between labor and consumption increases. On the other hand, the direct effect of the gap between labor and capital taxation does not have a statistically significant effect. Although the impact of the gap between labor and capital taxation on fiscal sustainability is not statistically significant, the negative effects of welfare expenditures on fiscal sustainability intensify when tax equity is not guaranteed. In other words, if the tax burden is not distributed fairly among the tax base (labor, capital, and consumption), it is difficult to

Second, the effect of the level of vertical equity on the fiscal capacity of the welfare state is mixed. The increase of the progression in low-income groups has a statistically significant negative impact on fiscal capacity, while the increase of progressivity in the high-income group is not statistically significant, although it demonstrates a positive impact. In addition, the latter also alleviates the negative impact of welfare expenditures at a statistically significant level. Related to this, it is worth noting that severe income tax burdens on low-income households may have a negative impact on improvements to the fiscal sustainability of the welfare state. It is important to point out the relationships between the ability to pay principle and fiscal sustainability of the welfare state. This is also associated with mixed analysis results in vertical equity. The golden age of the welfare state, from 1930 to 1960, had been supported by the ability to pay principle. As the principle of social justice based on equity was expanded, demand for redistribution expanded, and income tax assumed stronger progressive characteristics. This is due to the fact that in the reality of social ills caused by the monopoly of the capital growth process, the state faithfully tries to tame the working class and to correct the

well as the direct effect of the tax structure on fiscal sustainability.

**Table 5.** Determinants of fiscal sustainability on welfare state.

**Dependent variables**

114 Taxes and Taxation Trends

\* p < 0.05. \*\*p < 0.01. \*\*\*p < 0.001. † p < 0.1.

guarantee the fiscal sustainability of the welfare state.

This study identifies determinants of fiscal sustainability of the welfare state by focusing on tax structure. As confirmed by the results of the study, it is essential to secure financial resources to maintain the welfare state. In the short term, fiscal space may not drive the expansion of welfare expenditures, but it nonetheless leads to this in the medium-to-long term. The problem is that an increase in welfare spending may worsen fiscal sustainability, and it is not always an appropriate solution to reduce welfare expenditures in order to increase fiscal space, which is in keeping with the arguments of welfare state opponents. It is impossible to cut welfare spending thoughtlessly because many social problems should be addressed through collaborative social efforts, and it is also not a suitable alternative to increase welfare spending indefinitely while worsening fiscal space because this may over time dismantle the financial base of the welfare state. It is therefore important to seek ways to maintain welfare spending while ensuring fiscal sustainability.

Finally, diversifying the financial base of the welfare state by combining the ability to pay principle and the benefit principle is advantageous to the fiscal sustainability of the welfare state. Raising social security contributions or private contributions also has a positive effect on fiscal sustainability according to these principles. However, public services through these sources are limited to a small number of regular employees, and this may cause labor tax resistance and the social exclusion of low-income or irregular workers, as well as unemployed. Thus, it must be implemented by diversifying the funding base of the welfare state with a combination of the ability to pay principle and the benefit principle to maintain

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

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

117

Social Welfare Research Center, Seoul National University, Seoul, Republic of Korea

[1] O'Connor J. The Fiscal Crisis of the State. New York: St. Martin's Press; 1973

[2] Gough I. The Political Economy of the Welfare State. London: MacMillan Publishing

[3] Streeck W. Buying Time: The Delayed Crisis of Democratic Capitalism. Verso: Brooklyn,

[4] Heller PS. Understanding Fiscal Space. IMF Policy Discussion Paper, no, 05/04 Ed.

[5] Harris E. Financing social protection floors: Considerations of fiscal space. International

[6] Alesina A, Giavazzi F. The austerity question: 'How?' is as important as 'how much? In: Corsetti G, editor. Austerity: Too Much of a Good Thing? Centre for Economic Policy

[7] Delong JB. The austerity question: 'How?' is as important as 'how much? In: Corsetti G, editor. Austerity: Too Much of a Good Thing? Centre for Economic Policy Research.

[8] Guy P. Fiscal Strains on the Welfare State: Causes and Consequeces. In: Levine CH, Rubin I, editors. Fiscal Stress and Public Policy. Everly Hills, Calif: Sage Publications;

solidarity.

Ko Hyejin

**References**

Company; 1979

NY; 2014

**Author details**

Address all correspondence to: hjesquisse@gmail.com

Washington, DC: International Monetary Fund; 2005

Social Security Review. 2013;**66**:111-143

Research. 2012. pp. 11-15

2012. pp. 17-21

1980. pp. 23-47

As can be seen from the analysis results, the level of tax burden is an important aspect of fiscal sustainability in the welfare state. Tax revenue is the funded basis for maintaining the welfare state, so increasing tax compliance to offset the negative impact of increasing welfare spending will promote social cohesion. However, the national financial effort to maintain the welfare represents more than collecting additional taxes. The excessive burden does not always have a positive impact on fiscal sustainability, and it is not always possible for a country to collect more tax revenues to expand welfare. Thus, the most important aspect of total tax revenue that should be considered is the manner in which tax revenue is raised because depending on which method is adopted, the impact of taxation on the sustainability of economic, political, and social dimensions varies. As indicated in this study, it appears that securing tax fairness contributes to the fiscal sustainability of the welfare state. The following aspects of the tax structure may positively contribute to fiscal sustainability of the welfare state.

First, in terms of the ability to pay principle, the achievement of equity between the tax base and improvements in progressivity may play a positive role in the fiscal sustainability of the welfare state. It appears obvious that the reduction of the gap between labor taxation and consumption taxation plays a significantly positive role in ensuring fiscal sustainability. Consumption tax may play a more positive role than taxation on labor in terms of social and political sustainability, as well as economic sustainability. In fact, advanced welfare countries have been interested in indirect taxation, including consumption tax, for which it is easy to secure public revenues in order to overcome the financial crisis, while it is difficult to secure tax revenue from direct taxes such as income tax and corporation tax, which are sensitive to economic changes [90–93]. In addition, it can contribute to the achievement of intergenerational equity by relieving elderly households, which are often more heavily burdened [94]. Moreover, in the event that the labor taxation base is broken due to labor market dualization and declining employment rates, a consumption tax based on universal solidarity is one way to secure a wide tax base.

However, if we rely only upon the expansion of the consumption tax, it can place an excessive burden on the low-income class due to the regressive tax burden. Therefore, it is necessary to ensure sufficient welfare benefits for low-income people, along with progressive taxation, in order to relax the regressive burden and to narrow the gap between the consumption tax and the labor tax. Specifically, improving vertical equity may also result in a positive contribution to the fiscal sustainability of the welfare state and will secure the political legitimacy of the tax and mitigate the regressive burden that may result from the expansion of a consumption tax. In particular, it is worth noting that a progressive tax on high-income earners does not always cause tax evasion. For example, if the tax burden is in accordance with appropriate benefits that are provided by the state, a progressive tax increases tax compliance. Thus, broadening the tax base by means of the consumption tax must be done in a manner that allocates the fair burden to all citizens according to the ability to pay, which ultimately ensures the fiscal sustainability of the welfare state.

Finally, diversifying the financial base of the welfare state by combining the ability to pay principle and the benefit principle is advantageous to the fiscal sustainability of the welfare state. Raising social security contributions or private contributions also has a positive effect on fiscal sustainability according to these principles. However, public services through these sources are limited to a small number of regular employees, and this may cause labor tax resistance and the social exclusion of low-income or irregular workers, as well as unemployed. Thus, it must be implemented by diversifying the funding base of the welfare state with a combination of the ability to pay principle and the benefit principle to maintain solidarity.
