What especially exacerbated the problems in the public finance of the time was the combination of frequent wars, which required substantial extra public financing, and the inability to collect direct taxes, especially income tax.[117] The absence of income tax (some countries had had property tax and/or wealth tax from relatively early on) in part reflected the political under-representation of the poorer classes, but also the limited administrative capability of the bureaucracy. This restricted bureaucratic capacity was indeed one reason why tariffs (the easiest taxes to collect), were so important as a source of revenue in the NDCs in earlier times, and also for many of today’s poorest developing countries.
Income tax was initially only used as an emergency tax intended for war financing. Britain introduced graduated income tax in 1799 to finance the war with France, but scrapped it with the end of the war in 1816. Denmark used income tax for emergency finance during the 1789 Revolutionary War and the 1809 Napoleonic War. The USA introduced a temporary income tax during the Civil War but repealed it soon after the war ended in 1872.[118]
In 1842 Britain became the first country to make income tax permanent. However, the tax was widely opposed as an unequal and intrusive measure; John McCulloch, one of the most influential economists of the time, argued that income taxes ‘require a constant interference with, and inquiry into the affairs of individuals, so that, independent of their inequality, they keep up a perpetual feeling of irritation’.[119] As late as 1874, the abolition of income tax was a major plank of Gladstone’s election platform, although he lost the election.[120]
Denmark introduced a permanent progressive income tax in 1903. In the USA, the income-tax law of 1894 was overturned as ‘unconstitutional’ by the Supreme Court. A subsequent bill was defeated in 1898, and the Sixteenth Amendment allowing federal income tax was only adopted in 1913. However, the tax rate was only one per cent for taxable net income above $3,000, rising to seven per cent on incomes above $500,000. In Belgium, income tax was introduced in 1919, while in Portugal, it was introduced in 1922, but abolished in 1928, and only reinstated in 1933. Despite being known later for its willingness to impose high rates of income tax, Sweden introduced it as late as 1932. In Spain; the first attempt to introduce income tax by the Finance Minister Calvo Sotelo in 1926 was thwarted by a campaign against it, ‘led by the aristocracy of the banking world’.[121]
3.2.6. Social welfare and labour institutions
With the progress in liberalization and deregulation that can bring about a large-scale economic dislocation, as well as the increasing frequency of economic crises, there is a greater concern with providing livelihoods for those worst affected by these processes in developing countries. Even the IMF and the World Bank, which used to be against the introduction into developing countries of what they regarded as ‘premature’ social welfare institutions (especially given their preoccupation with budget deficits), are now talking about the need to provide a ‘safety net’. So, while the standards demanded tend to be quite low, there is now pressure on the developing countries to adopt some minimal social welfare institutions – although this pressure is much weaker than for most of the other items on the ‘good governance’ agenda.
Social welfare institutions are, however, much more than ‘safety nets’; if carefully designed and implemented they can enhance efficiency and productivity growth.[122] Cost-effective public provision of health and education can bring about improvements in labour force quality that can, in turn, raise efficiency and accelerate productivity growth. Social welfare institutions reduce social tensions and enhance the legitimacy of the political system, thus providing a more stable environment for long-term investments. Inter-temporal smoothing of consumption through devices like unemployment benefit can even contribute to dampening the business cycle. And so on.
All these potential benefits of social welfare institutions have to be set against their potential costs. First, there are the potentially corrosive effects of social welfare institutions on the work ethic and the sense of self-worth felt by the recipients of benefits. Second, apparently technical issues can significantly determine the effectiveness and legitimacy of these institutions. These include assessing whether benefit and contribution levels are adequately set, whether the administration of the system is seen as fair and efficient, and whether there is an effective mechanism for checking frauds in the system. Third, trying to raise more taxes in order to finance a social welfare programme in a context where its political legitimacy is not firmly established may lead to ‘investment strikes’ by the rich – or even support for a violent reversal, as in the case of Chile under Allende.
Whatever the exact benefits and costs of a particular social welfare institution may be, the fact that all NDCs have developed a common set of social welfare institutions over time (except for the persistent and disturbing absence of comprehensive health care in the USA) suggests that there are some common needs that have to be addressed across countries. However, it is important to note that social welfare institutions tend to be established at quite a late stage in most countries’ development.
Institutions that take some care of the weaker sections of a society have always been necessary to guarantee social stability. Before industrialization, this care was provided by extended families, local communities and religious organizations. In the NDCs, with the weakening of these institutions following industrialization and urbanization during the nineteenth century, social tensions began to rise, as can be seen from the constant fear of revolution that gripped many of these countries during the century.
However, before the 1870s, social welfare institutions in the NDCs were very poor, with the English Poor Law-type legislation at their core. The poor relief laws of the time stigmatized the recipients of state help, with many countries depriving them of voting rights. For example, Norway and Sweden introduced universal male suffrage in 1898 and 1918 respectively, but it was not until 1918 and 1921 respectively that those who had received state assistance were allowed to vote.[123]
As we can see in table 3.4 below, social welfare institutions in NDCs only started to emerge in the late nineteenth century. Their development was spurred on by the increasing political muscle-flexing of the popular classes after the significant extension of suffrage during this period (see section 3.2.1) and by union activism. There was, however, no fundamental relationship between the extension of suffrage and the extension of welfare institutions. While in countries like New Zealand there is a clear link between the early extension of suffrage and the development of welfare institutions, in cases like that of Germany welfare institutions grew quickly under relatively limited suffrage.
118
Booney 1995, pp. 443-5; Deane, 1979, pp. 228-9 (Britain); M0rch 1982, pp. 160-1 (Denmark); Garraty and Carnes 2000, pp. 408,468; Carlson 1991, p. 540 (USA).
121
M0rch 1982, pp. 160-1 (Denmark); Baack and Ray 1985; Carson 1991, p. 540 (USA); Baudhuin 1946, pp. 113-16 (Belgium); Meta and Valerio 1994, pp. 186-92 (Portugal); Larsson 1993, pp. 79-80 (Sweden); Carr 1980, p. 101 (Spain).