Forthcoming: American Journal of Political Science

Duane Swank, Associate Professor

Department of Political Science

Marquette University

PO Box 1881

Milwaukee, WI 53201-1881

Email: duane.swank@marquette.edu

Sven Steinmo, Associate Professor

Department of Political Science, Box 333

University of Colorado

Boulder, CO 80309

Email: steinmo@colorado.edu

We articulate and test an explanation for the remarkable change and continuity in contemporary tax policy in capitalist democracies. We argue that internationalization, domestic economic change, and budgetary pressures each prompt significant changes in tax policy; yet, together, they create a system of constraints on altering the level and distribution of tax burdens. We utilize 1981 to 1995 data from 14 developed democracies to analyze the determinants of taxation. We find that capital mobility and trade are associated with cuts in statutory corporate tax rates but not with reductions in effective average tax rates on capital income. Moreover, we find that capital mobility is negatively associated with the tax components of labor costs. Domestically, structural unemployment leads to reductions in labor and capital taxes while public sector debt and societal needs raise taxes. We conclude with a summary of the new political economy of taxation in capitalist democracies.