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Revolving-Door Politics and Income Inequality: A Study on the Role of Finance
Ministers in Europe
1
Despina Alexiadou
2
University of Strathclyde
Do politicians act in their voters’ or in their personal interests? Representative democracy
rests on the assumption that voters elect members of parliament, who in turn elect the
government to represent them. Yet, recent research indicates that the preferences of
individual politicians can have important policy effects beyond and above the party agenda.
In this paper I utilize new data on the professional careers of finance ministers before and
after their ministerial tenure in 18 parliamentary democracies over forty years to test the
revolving-door politics hypothesis. I investigate whether the rise in income inequality can be
partly explained by the policy preferences of finance ministers. I hypothesize that ministers’
policy preferences are influenced by their professional experience as well as by their future
career plans, such as staying in politics or moving to the corporate sector. This paper is one
of the first to study cross-nationally the revolving-door hypothesis, the movement of policy-
makers between private and public sectors, and its effects on policy outcomes.
1
Paper prepared for presentation at the Department of Political Science, Trinity College
Dublin, November 2019
2
Despina.alexiadou@stath.ac.uk
"
2
Introduction
One of the most pressing questions in political and academic debates is what drives income
inequality. In a recent presentation, the economist Thomas Piketty asks: “Why hasn’t
democracy slowed inequality?“ Naturally there are many factors, economic but mostly
political that potentially explain the continuous rise in income inequality. Moving beyond
technological change and economic globalization (OECD, 2011) scholars agree that income
inequality is a political outcome. Shifting preferences within the electorate (Pontusson &
Weisstanner, 2018), declining union density (Western & Rosenfeld, 2011), the structural
role of international finance (Woll, 2016) and party competition (Anderson & Pontusson,
2007; Roemer, 2005), are some of the political explanations for rising inequality. A less
studied explanation is revolving door politics.
Since the 2008 financial crisis, political analysts and scholars have started to look more
closely at the direct ties between politics and business. The Oscar winning documentary
‘Inside Job’ blames revolving door politics for the 2008 financial crisis. According to the
documentary, the de-regulation of the financial industry was the outcome of senior political
appointments directly from Wall Street. The Economist took a similar view in 2010, when it
argued that: “ governments support the financial sector not simply to protect against harm
in the real economy, but because of the political power of the financial sector. This story is
one of a plutocratic cycle, in which the rich write their own financial rules and become richer
still, and in which well-meaning public figures are co-opted by the enormous sums available
to those willing to embrace the Wall Street worldview.”(Economist, 2010).
Revolving door politics, defined as the migration of individuals between government and
business (Etzion & Davis, 2008), is not limited to the financial crisis or to American politics.
In a global sample between 1960 and 2010, one in seven democratically elected leaders
found jobs in the private sector after they left politics (Baturo & Mikhaylov, 2016).
Presidents and prime ministers are not the only ones recruited in the corporate sector.
More than ten percent of Irish MPs landed in corporate and consulting jobs as opposed to
going back to their pre-politics occupations (Baturo & Arlow, 2018).
3
Yet, to this date we have limited knowledge whether politicians’ pre-politics jobs in the
corporate sector and/or post-politics exit to the corporate sector might affect their policy
choices while in office. Baturo and Mikhaylov (2016) fail to find any concrete effects on
spending or growth for those leaders that landed in highly paid jobs in the corporate sector.
However, there is some evidence of a revolving door when we look at the professional
background of finance ministers and central bankers. Wirsching (2018) finds that finance
ministers and central bankers with professional experience in the financial services sector
are associated with more deregulation of the financial sector. In turn, more politicians are
likely to exit to the corporate sector after deregulation has taken place. This finding is
consistent with prior literature that finds that finance ministers and central bankers
educated in more ‘economically orthodox’ departments are associated with higher levels of
financial deregulation (Chwieroth, 2007).
To sum up, while there is no cross-national evidence that politicians’ future career
ambitions might drive their policy choices, there is some evidence that their personal policy
preferences could. Either way, when policy choices are more aligned with the interests of
business than with the interests of voters due to policymakers’ career trajectory, the
problem of a revolving door is real.
This paper aims at contributing to this young literature by investigating whether the
professional background of finance ministers in 18 parliamentary democracies is a
predictors of governments’ tax policy, and by extension whether the appointments of
finance ministers could be contributing to rising income inequality. It asks, all else equal, will
a former banker adopt the same tax policies as a finance minister with a non-financial
background? Second, do finance ministers, who accepted jobs in the financial sector after
they exited politics, adopt similar tax policies as those who did not? Building on prior work
that finds that cabinet ministers’, as well as central bankers’, professional background is an
important predictor of their policy preferences (Adolph, 2013; Alexiadou, 2016; Chwieroth,
2007; Wenzelburger & Staff, 2017; Wirsching, 2018) and utilizing a new dataset on the pre-
and post- politics careers of finance ministers in eighteen parliamentary democracies I test
the revolving door hypothesis on income tax policies. In what follows I present data on the
pre- and post- politics careers of finance ministers before I present the empirical models.
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Finance Ministers in 18 Parliamentary Democracies; is there a revolving door?
The unit of analysis in the original dataset is individual ministers nested in cabinets, which in
turn are nested in governments of 18 parliamentary countries.
3
In other words, the dataset
is structured at four different levels; individual ministers, cabinets, governments and
countries. An original feature of this dataset is that it traces ministerial changes within the
life of a government. This includes both individual ministerial reshuffles and cabinet wide-
reshuffles.
The dataset identifies one minister per cabinet who is responsible for a portfolio. While this
assumption is rather strict given that in many cases more than one ministers co-decide on a
policy, it is also a reasonable assumption to the extent that one minister is ultimately
responsible for drafting a bill and only one minister is accountable to the cabinet, the
parliament and voters over his or her bill. The dataset has 921 entries which include the
reshuffles of a total of 545 finance ministers.
Forty percent of all finance ministers have an academic or legal background and about ten
percent are top bureaucrats, as shown in Figure 1. Somewhat unexpected, the next most
common profession of finance ministers, at about seven percent, is banking, slightly higher
than the profession of economics. However the minister’s party family strongly affects her
professional background as shown in Figure 2. Whereas banking is the fourth most common
profession for finance ministers of centre-right parties, finance ministers of left parties are
more likely to have a background in trade unions and even in blue collar professions than in
banking.
3
"The countries included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Netherlands, New Zealand, Norway, Portugal, Spain,
Sweden, UK
5
Figure 1: Finance Ministers & Prio r Professional E xperience
Figure 2 Finance Ministers & Prior Professional Experience across party families
6
Given that the above percentages are averaged over time and space, it is important that we
get a better understanding of the over-time and cross-country variation in the distribution
of bankers and executives. According to Figure 3, the number of finance ministers who
worked as bankers prior to entering politics peaked in the early eighties, while finance
ministers who worked as former executives of big corporations has slowly been increasing,
and peaking around 2014. In addition, according to Figure 4, even though there is large
cross-country variation in the distribution of former bankers and executives across
countries, there is little systematic variation in terms of varieties of capitalism and welfare
states. Specifically, although New Zealand (a liberal welfare state) has the most finance
ministers with a background in banking, the Netherlands and Finland rank second and third.
Figure 3: Bankers and Executives over time
7
Figure 4: Bankers and executives across countries
Figure 5: Finance Ministers & Post Cabinet Ca reer
8
Figure 6: Finance Ministers & Post Cabinet Ca reer across Party Fa milies
Finally, Figures 5 and 6 present the data on the post politics profession of finance ministers.
Coding ministers’ post politics profession is not an easy exercise as by default most
politicians stay in politics after their ministerial appointment. Moreover, there are
important variations across countries in the tenure of MPs and even of cabinet ministers.
Since a large number of ministers in the dataset where still in politics at the time of coding
half of them are coded as being still in politics. Out of the other half, many retired after
politics and some died. Nonetheless, the first and second most common professions of
finance ministers exiting politics are the corporate and the banking sectors, respectively.
Interestingly, unlike in the case of ministers’ pre-politics background, there are not large
differences as to where former finance ministers go after they leave politics; banking and
the corporate sectors are a common destination for both ministers of the left and the right,
according to Figure 6.
9
Figure 7
Overall, there seems to be scope for revolving door politics in the department of finance
with almost ten percent of finance ministers coming from the financial and corporate
sectors and a significant number of them exiting politics to these sectors. A final question of
interest here is whether finance ministers who have worked as bankers or top executives
have less political experience than finance ministers who come from other professional
backgrounds, such as law or economics. Figure 7 shows that this is indeed the case for the
ministers entering into politics from the financial sector but it is not the case for those
entering from the corporate sector. Former bankers have, on average, about two years less
experience as cabinet ministers than non-bankers. In contrast, the finance ministers who
are coded as former executives have similar experience as cabinet ministers but
substantially more experience as elected members of parliament, with former executives
having more than 15 years in parliament compared to 11 for non-executives.
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Income Distribution & Finance Ministers
Income distribution and tax rates are determined by, economic, social and political factors.
According to the OECD (2011), technological change and globalization do not alone explain
the higher levels of income inequality. Scholars have extensively studied voters’ preferences
for income redistribution (Alesina, Giuliano, Bisin, & Benhabib, 2011; Barnes, 2015;
Beramendi & Rehm, 2016; Gingrich & Ansell, 2012), the role of labour market institutions
(Moene & Wallerstein, 1999; Western & Rosenfeld, 2011), as well as party ideology and
party competition (Alt & Iversen, 2017; Gingrich & Häusermann, 2015; Iversen & Soskice,
2006, 2015; Korpi & Palme, 2003; Roemer, 2005). Income distribution is the outcome of a
complex process broken down to multiple interactions between personal income, income
and employment risk, the progressivity of the tax and welfare state and party competition,
which itself is affected directly by the electoral system. Consequently, attributing any
change in income distribution to any particular actor alone, even if this is a powerful finance
minister, sounds naïve.
Nonetheless, and without dismissing any of the above micro- and macro- determinants of
income inequality, there is merit in examining the possible role of finance ministers in
policies that directly affect income inequality. Finance ministers are instrumental in setting
income and wealth taxes that directly affect how income is distributed in a society. As
income inequality increases with the top income earners controlling a larger percentage of a
society’s wealth, taxes have become less progressive, with lower tax burden on earnings
and wealth and higher taxes on consumption (Kato, 2003). Indeed, some of the most
generous welfare states increasingly relied on regressive taxation (Beramendi & Rueda,
2007). As a result, scholars distinguish between redistributive tax systems and redistributive
social welfare states (Beramendi & Rehm, 2016). This separation between tax and welfare
systems is important in that politicians are given room for manoeuvre to adopt a tax policy
that is favoured by rich constituents, while maintaining the generosity of welfare services in
line with voters’ preferences.
The data on income distribution come from Atkinson and Piketty’s (2007) Top Incomes
Database and are retrieved from the Quality of Government Institute (Teorell et al., 2018).
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These are the most comprehensive time-series data on the distribution of wealth by income
groups. In this paper we use data on the share of income by the top 1 and 5 percent of
income earners. The data that are available for the parliamentary democracies of my
dataset are: Australia, Canada, France, Germany, Ireland, Italy, Holland, Netherlands,
Norway, Portugal, Spain and Sweden. Data on taxes on income as percentage of the GDP
are provided by Eurostat for the years 1970 to 2012 and are retrieved from the Quality of
Government Institute (Teorell et al., 2013).
Figure 8: Income Share and Inco me and Wealth T axes
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Figure 9: Income Share of to p earners over time
Unsurprisingly higher taxes negatively correlate with income inequality. Higher taxes on
income are negatively correlated with the percentage of income controlled by the top 5% of
income earners according to Figure 8. In other words, income inequality increases when tax
revenue decreases. Finally, Figure 9 shows the well-established fact that income inequality
has steadily increased since 1980. Specifically Figure 9 shows that the percentage of income
controlled by the top 1 and 5 percent of earners had a downward trajectory until 1980,
when it started growing again.
Why Bankers and Executives? A Theory of revolving door politics in the department of
finance
The question of interest here is how much of the change in income distribution, and more
specifically in tax rates and tax revenue, can be explained by revolving door politics and
specifically by the background of finance ministers. To what extent do finance ministers who
13
come from the banking and corporate sectors or who plan on landing in these sectors after
they retire from politics actively adopt tax policies that decrease taxes on higher income
earners and the wealthy?
Figure 10
My starting point is to understand who these bankers and executives are in terms of their
demographics and by extension their tax preferences. It is probably a reasonable
assumption that ministers who come from the banking and corporate sectors are high
earners. As such, they should prefer lower and less progressive taxes than the median voter.
There is ample survey and experimental research showing that middle income earners are
the most supportive of higher and more progressive tax rates, with those in low and high
income being less supportive (Ballard-Rosa, Martin, & Scheve, 2017; Barnes, 2015). Even
though there is a complex relationship between education and income, with those highly
educated respondents being the most supportive of higher taxation, bankers and executives
probably chose their industries for the monetary rather than the academic rewards. On top
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of that, the banking and executive sectors are male dominated. In fact, not a single one of
the finance ministers who were former bankers was a woman according to Figure 10. Given
the well documented fact that women are generally more supportive of redistribution (Lott,
John R, 1999), we would expect bankers, in particular, to have strong preferences for lower
taxation and a smaller state. This probably also explains why the majority of bankers and
executives have served under center and right-wing political parties, as shown earlier in
Figure 2.
At the same time, there are important differences between the financial and the corporate
sectors. Not all large businesses share similar policy preferences as they operate in different
markets and they require different skills and labour market regulations (Mares, 2006). The
financial sector is quite unique in that it is largely detached from the rest of the society and
the productive processes. It is no coincidence that increasingly the financialisation of the
economy is seen as a main driver of rising income inequality (Shaxson, 2018). The financial
sector is also unique in that it has outperformed all other sectors of the economy in terms of
size, profits and wage share (Panico & Pinto, 2017). Therefore, I expect bankers to have
even stronger tax preferences that favour the financial sector and high earners compared to
finance ministers who come from the corporate sector.
Accordingly, I test the following two revolving-door hypotheses:
H1: Finance ministers who come from the corporate and the banking sectors, in particular,
are more likely to be associated with lower taxes on income
H2: Finance ministers who find employment to the banking and corporate sectors after they
exit politics, are more likely to be associated with lower taxes.
An example of finance minister who dramatically cut tax rates and had a background in the
financial sector is Charlie McCreevy, who served as a finance minister under the Fianna Fail
and Bertie Ahern. In some ways McCreevy might not be the most representative case of
revolving door politics; he was a chartered accountant before he was elected to parliament,
which is not quite the same as being an investment banker. He was elected at the age of 28,
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so in some ways his profile looks more like the profile of a professional politician.
Nonetheless, he had a background in the financial sector and after he left politics he joined
Ryanair. He was known for his strong pro-market economic views and was a close ally to the
leader of the economically conservative party, the Progressive Democrats, who were in
government with Fianna Fail.
McCreevy is known for his tax cuts because they were so severe that he was blamed for the
2009 debt crisis in Ireland. He single-handedly reduced the standard tax rate from 26 to 20
percent and the top rate from 48 to 42 in the first four budgets. In his first budget he halved
the capital gains tax rate from 40 to 20 percent, and cut corporate tax by half, from 38 to 16
over the course of five budgets.
It is important to note that the tax cuts were electorally popular, and had the support of
both business associations and the trade unions, which had lobbied for lower taxes.
Although the unions insisted on tax cuts for the low-income earners and they voiced their
disagreement with tax cuts for the more well-off, they generally did not reject McCreevy’s
budgets (Padraig Yeates, “Unions hostile to a Budget that employers find good in parts”,
Irish Times, December 6, 2001). Nonetheless, according to commentators and news articles,
McCreevy enjoyed a unique level of independence from his government to the extent that
his budgets were debated neither by the Prime-minister nor the cabinet (Leahy, 2009,
Hardiman, 2010).
McCreevy’s example raises an important question: why do prime ministers or party leaders
appoint former bankers to the government’s second most important portfolio, knowing that
they are likely to have strong and biased policy preferences? Principal-agent theory would
suggest that prime ministers would only appoint former bankers if their own or their party’s
preferences align with the minister’s. Moreover, if the finance minister adopts policies that
diverge from the government’s policy preferences, the prime minister could replace her
overnight. So, ultimately the question is why would an association between tax cuts and
finance ministers’ professional background be evidence of a revolving door rather than of
the government’s policy priorities and commitment to pro-market reforms (Becher, 2016).
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Indeed, corroborating Hypotheses 1 and 2 would not in any way establish causality between
ministers’ backgrounds or future careers and tax cuts. However, informed by a long
literature on ministerial appointments that identifies multiple, political, electoral and
societal drivers for ministerial appointments (Alexiadou, 2016; Berlinski, Dewan, & Dowding,
2012; Dowding & Dumont, 2009; Dumont & Regis, 2012), one can reasonably assume that a
minister’s professional background is not the sole attribute prime ministers’ observe and
care about when appointing their cabinet. A former banker or executive could be appointed
because she/he has a large following among voters, has policy expertise that others in the
parliamentary group do not, has links to the industry that are valued, even if preferences do
not perfectly line up. More specifically one would expect that,
H3: finance ministers with a background in finance are more likely to be appointed in
political systems that have a large and economically important financial sector and that
have a more personalistic electoral system (open versus closed electoral system.
Empirical Models
The data are organised by government/ year, therefore the effects of the regressors on
taxation are by government/year and by country/year. To test Hypotheses 1 and 2, I use
two indicators on tax revenue; one on capital taxes as percent of GDP (D91) and one on
income tax as percent of GDP (D5). These indicators have two advantages over indicators
that code marginal tax rates. They are generally available for longer period of time- starting
in 1970- and they are more informative about the burden of taxation than marginal tax
rates (Mendoza, Razin, & Tesar, 1994). The disadvantage of these indicators is that they do
not necessarily capture the progressivity of taxes. The data are retrieved by the Quality of
Government dataset (Teorell et al., 2013).
The main explanatory variables are the background of finance ministers. In the statistical
models I include the following binary indicators: whether the finance minister is a former
banker, a former executive in a major corporation, a former economist with a PhD, or a
former trade unionist (and/or has a blue-collar background). I include the indicators of
economists and trade unionists to be able to make direct comparisons with alternative
17
backgrounds of ministers who are not expected to have the same effect on taxes as bankers
and executives. Specifically, an economist with a PhD should have more of background in
economics and be less likely to be subject to revolving door politics. Similarly, a finance
minister with a background in manual labour or the trade union movement should be more
inclined to support higher taxes and less subject to the revolving door. At the same time,
these additional indicators are not as common as lawyers, professors and professional
politicians, which are the main reference categories.
I also include an indicator which codes as 1 when a cabinet minister exited politics to enter
the finance or corporate sectors. In terms of controls, I include the 2008 crisis, the total
votes of right-wing parties at the national elections to capture public preferences for more
right-wing economic policies (Korpi & Palme, 2003), whether the minister is appointed by a
right of centre party and finally whether the government is multiparty (Iversen & Soskice,
2006).
The dataset is organized by cabinet so it is not yearly, which helps with the problem of serial
correlation. This data structure has the advantage that we can test whether policy changes
took place during the tenure of finance ministers. The models are estimated with OLS,
country fixed effects, robust standard errors and include the lagged dependent variable
(Beck & Katz, 2011; Grant & Lebo, 2016).
To test Hypothesis 3, that predicts the appointments of ministers with a background in
banking, I estimate a logistic model with robust standard errors. The main predictors are:
open list electoral system (Bormann & Golder, 2013), to test the expectation that the
ministers might have a strong electoral base, and the size of the financial sector, measured
by the value added of the financial sector (Teorell et al., 2013). As control variables I also
include the following: First Past The Post electoral system (Bormann & Golder, 2013), Pro-
Market Electoral Pledges as coded by the Comparative Manifesto Project (Klingemann,
Volkens, Bara, Budge, & McDonald, 2006), whether the cabinet minister is appointed by a
right of centre party, the average number of ministers with a graduate degree in the
government (based on the eight portfolios I code in my dataset), and finally whether the
government is multiparty or single party. Finally I include a control variable on wage
18
bargaining coordination to control for the role of economic institutions (Moene &
Wallerstein, 1999).
Results
The initial results from Tables 1 and 2 are mostly supportive of the first but not the second
hypothesis. Finance ministers with a banking background are associated with cuts in both
capital and income taxes. Appointing a finance minister who was a former banker is
associated with 0.12 percent lower tax on capital and with 1.26 percent lower tax on
income. These are not-insignificant effects as the average tax on capital is only 0.28 percent
of GPD, and of income is 14 percent. In contrast, finance ministers who were former
executives have no effect on taxes and neither does post-politics career; moving to the
banking or corporate sectors does not predict tax policy.
Perhaps this is to be expected; after all tax policy is highly politicized and contested. It is a
tall order to find any associations with the background of finance ministers with tax policy.
Interestingly finance ministers who were economists with a PhD are not more likely to cut
taxes than the average finance minister. Surprisingly, finance ministers who were former
trade union leaders or had a blue-collar background are associated with cuts in income tax.
One possible explanation for this would be that they served in countries and during times of
high-income tax. Nonetheless, this is a surprising finding. The only other variables that have
an impact on income (but on capital) tax is the total number of right votes at elections and
the 2008 financial crisis; they are both associated with lower income tax.
Table 2 predicts the appointments of former bankers, executives, economists with a PhD
and trade union leaders to the portfolio of finance. The results are encouraging in that they
predict what one would expect. Finance ministers with a background in banking are more
likely to be appointed in systems with a large and economically important financial and
insurance sector (the opposite holds for those with a background in the labour movement).
In addition, as expected, former bankers are also more likely to be appointed in more
person-centred electoral systems, but so are former union leaders. In contrast, executives
and economists are more likely to be ministers under closed electoral systems. More pro-
19
market electoral manifestos predict executives in office and are negatively associated with
union leaders, but they have no impact on former bankers.
20
Table 1: Change in marginal income tax for hi gher earners: OLS with Country FE
(1)
(2)
(3)
(4)
Capital Tax
Capital Tax
Income Tax
Income Tax
Lag Capital Tax
0.4900***
0.4648***
(0.058)
(0.056)
Lag Income Tax
0.7044***
0.6830***
(0.077)
(0.083)
Corporate Exit
-0.0168
-0.0062
0.1245
0.1146
(0.012)
(0.013)
(0.139)
(0.173)
Former Banker
-0.0641***
-0.0583***
-0.3810***
-0.4004***
(0.014)
(0.012)
(0.110)
(0.108)
Former Exec.
0.0043
0.0016
0.2386
0.2106
(0.024)
(0.018)
(0.188)
(0.236)
Econ & PhD
-0.0391
-0.0169
0.0064
0.1357
(0.057)
(0.032)
(0.120)
(0.128)
Trade Union
-0.0438
-0.0339
-0.4166**
-0.4077**
(0.032)
(0.020)
(0.175)
(0.150)
2008 Crisis
-0.0244
-0.0104
-0.3701**
-0.5013***
(0.030)
(0.035)
(0.153)
(0.160)
Right Minister
0.0165
-0.0246
(0.012)
(0.129)
Right Votes
-0.0026
-0.0121**
(0.002)
(0.005)
Multiparty
-0.0225
0.0381
(0.017)
(0.165)
Constant
0.0590***
0.1103***
3.4767***
3.8937***
(0.015)
(0.019)
(0.981)
(1.110)
Observations
294
268
294
268
R-squared
0.486
0.478
0.974
0.975
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
21
Table 2: Selecting Bankers, Executives, Economists with PhD & Unionist Finan cial Minist ers
(1)
(2)
(3)
(4)
Banker
Executive
Econ PhD
Unionist
Pro-market Manifesto
0.0091
0.1758**
-0.1965*
-0.4524*
(0.053)
(0.077)
(0.109)
(0.247)
Right Minister
0.4519
-1.3162
1.5190**
(0.593)
(1.174)
(0.714)
Open List
3.6522***
-3.2612***
-2.1659***
2.3445***
(1.190)
(0.699)
(0.634)
(0.819)
SMDP
-0.2529
-1.3230
2.0494**
-0.5385
(0.952)
(1.656)
(0.994)
(0.741)
WB Coordination
-0.0020
-0.6403
-0.1863
0.2044
(0.251)
(0.499)
(0.314)
(0.237)
Size Financial Sector
0.2721*
-0.6051
0.8109***
-0.6494*
(0.141)
(0.632)
(0.150)
(0.366)
Multi-party Gov.
0.4595
-2.1532**
2.0528**
-0.7142
(0.642)
(0.845)
(0.932)
(0.939)
Graduates in Cabinet
-2.8569**
4.2376***
0.8132
-0.7869
(1.250)
(1.550)
(1.857)
(0.905)
Constant
-5.8146***
1.2721
-9.9470***
1.4800
(2.130)
(4.789)
(3.772)
(1.437)
Observations
346
346
346
187
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
22
Finally, cabinets with fewer graduates are more likely to appoint bankers than executives,
indicating that bankers might be appointed for their expertise. Overall, the models from the
logit model are suggestive that societal and political factors play an important role in
ministerial appointments, as discussed in the literature.
23
Discussion
Income inequality has been in the centre of political and academic debates in the last
decade. Innumerable books and articles have been written studying the causes and effects
of rising income inequality across industrialized democracies. Despite important
advancements, an important gap remains between academic work and explanations
advanced in the press and in popular culture. This paper is one of the few that tries to fill in
this gap by studying rigorously a hypothesis that has taken hold in the press, namely the
revolving-door hypothesis. Using unique data on the professional experience of finance
ministers before and after they join politics, I test whether their background and their future
employment predicts changes in income tax. I find evidence that finance ministers who are
former bankers are associated with lower income and capital taxes during their tenure.
However, I fail to find any evidence of a policy impact for those ministers who became
bankers or executives after they left politics.
A couple of explanations are possible for the null finding. First, since this is consistent with
prior work (Baturo & Mikhaylov, 2016), it is possible that indeed politicians’ future career
ambitions do not directly affect their policy choices while in office. This is likely for a couple
of reasons. Most politicians in my sample do not exit politics after their ministerial
appointment. They will either move to another portfolio or become MPs before they retire
from politics. Second, it is not even clear that most of these people have a clear career path
they are getting prepared for. Perhaps a more nuanced analysis here is necessary. Another
explanation is that the data coding on politicians’ future career is not as accurate as the data
coding on their past professional career. Alternatively, corporations do not expect grand
policy changes, such as tax cuts on income or capital from finance ministers. Instead, they
might be more interested in targeted policies such as certain regulations (or deregulation as
shown by Wirsching (2018). Finally, another plausible explanation is that even if politicians
plan on moving to the corporate or finance sectors after they retire from politics, they need
not have to behave in a market-conforming way. These banks or corporations that hire
them do not necessarily do so to reward them for their ‘good behaviour’. Most likely they
24
hire them because they need an insider, someone who has the network and can help them
navigate the workings of government.
Clearly more work needs to be done on the potential effects of revolving door politics.
Having said that, this paper throws some light to the importance of ministerial
appointments on economic policy, complementing important new work on the how the
background of elected officials might impact governance (Bovens & Wille, 2017; Carnes &
Lupu, 2015; O’Grady, 2018). Where finance ministers come from, and what personal views
they hold on tax and income distribution could indeed be consequential for government
policy.
25
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Table 3 Summary Statistics
VARIABLE
OBS
MEAN
STD. DEV
MIN
MAX
Banker
921
0.07
0.25
0.00
1.00
Executive
921
0.02
0.16
0.00
1.00
Economist & PhD
921
0.05
0.22
0.00
1.00
Trade Union/ Blue Collar
921
0.07
0.26
0.00
1.00
Graduate Education
911
0.53
0.28
0.00
1.00
Corporate Exit
921
0.15
0.36
0.00
1.00
Capital Tax
309
0.28
0.25
0.00
1.90
Income Tax
309
14.36
4.87
6.80
31.70
Right Minister
921
0.39
0.49
0.00
1.00
Open List
829
0.83
0.38
0.00
1.00
SMDP
921
0.37
0.48
0.00
1.00
WBC
707
3.05
1.35
1.00
5.00
Financial Sector Value
Added
409
6.31
1.63
1.68
13.86
Multiparty
921
0.57
0.50
0.00
1.00
