The Microfoundations of “Permanent Austerity”: Income Stagnation and Tax Policy Preferences

Speakers: Oliver Jaques, David Weisstanner Abstract: The stagnation of income for substantial parts of the population in recent decades is well known. The consensus in the literature is that income change either has no effect on welfare policy preferences or that a large income decline raises support for welfare policies. However, existing research usually focuses on the spending side rather than the revenue side of the welfare state. Focusing on tax preferences, we present the opposite argument: We predict that when real income growth is stagnant or declining, citizens become less willing to pay taxes, because tax increases would imply a reduction of their consumption level. This argument builds on the idea developed by Pierson (1998; 2001) that in a context of “permanent austerity” the slowdown of growth creates substantial pressure on both the revenue and spending side of the welfare state. We subject this argument to a test by performing a longitudinal analysis of repeated cross-sections (1977-2018) and a panel survey (2006 to 2014) from the General Social Survey (GSS) in the United States. Our main finding is that willingness to pay taxes is higher when people’s economic situation improves in objective and subjective terms. This effect is mainly explained by differences between individuals, which are strongly driven by age and education, rather than changes within individuals in a panel setting. Overall, these findings provide an alternative perspective on the relationship between economic growth and the welfare state.