The Politics and economics of revenue growth: A cross–national analysis

Despite considerable interest in comparative fiscal policy in general, and the high salience of tax policy and tax reform in the industrialized democracies, there are relatively few cross–national studies of the economic and political correlates of revenues over time. We undertake a cross–national time series study of revenue growth in fourteen OECD countries between 1958 and 1990.We test a number of political and economic hypotheses about revenue change, including political business cycle, 'fiscal illusion', elasticity, and ideological theories. For the 1958—1990 period, we find that all countries, regardless of revenue structure, experience higher real revenue growth as a result of inflation, but that revenue growth is more responsive to unemployment in countries that rely more on direct taxes compared to countries with less direct–tax reliance. We find that this effect is most pronounced in the post–1972 period. We also find that revenue tends to increase in the years following elections, consistent with the idea that governments try to minimize the political fallout from tax increases by separating them as much as possible from election campaign periods; this effect, too, is most pronounced in the post–1972 period. We find no support for 'fiscal illusion' and ideological theories of revenue growth.     

The politics and economics of revenue growth: A cross-national analysis

Abstract Despite considerable interest in comparative fiscal policy in general, and the high salience of tax policy and tax reform in the industrialized democracies, there are relatively few cross–national studies of the economic and political correlates of revenues over time. We undertake a cross–national time series study of revenue growth in fourteen OECD countries between 1958 and 1990.We test a number of political and economic hypotheses about revenue change, including political business cycle, 'fiscal illusion', elasticity, and ideological theories. For the 1958—1990 period, we find that all countries, regardless of revenue structure, experience higher real revenue growth as a result of inflation, but that revenue growth is more responsive to unemployment in countries that rely more on direct taxes compared to countries with less direct–tax reliance. We find that this effect is most pronounced in the post–1972 period. We also find that revenue tends to increase in the years following elections, consistent with the idea that governments try to minimize the political fallout from tax increases by separating them as much as possible from election campaign periods; this effect, too, is most pronounced in the post–1972 period. We find no support for 'fiscal illusion' and ideological theories of revenue growth.     

Treated politicians,treated voters: A natural experiment on political budget cycles

Although pre-electoral political manipulation of the budget — the political budget cycle (PBC) — has been long investigated by scholars, empirical findings are mixed at best. This is partly because of the non-random nature of election timing. There also exist ongoing debates over how the budget is manipulated for electoral purposes. We address these issues by exploiting a natural experiment in Japan, where the timing of both executive and legislative elections in municipalities is fixed, staggered, and as good as random, and by using the detailed items of the municipal budget. We find that total and capital expenditures follow the PBC, but tax revenue does not. We also find that executive elections are associated with the PBC, but legislative elections are not. Against the conventional wisdom that democratic or developed countries are free from the PBC, our case of Japan offers an intriguing exception.     

Testing the Mill hypothesis of fiscal illusion

According to the “Mill hypothesis”, the tax burden from indirect taxation is underestimated because indirect taxes are less “visible” than direct taxes. We experimentally test the Mill hypothesis and identify tax framing as a cause of fiscal illusion. We find that the tax burden associated with an indirect tax is underestimated, whereas this is not the case with an equivalent direct tax. In a referendum to tax and redistribute tax revenue, fiscal illusion is found to distort democratic decisions and to result in “excessive” redistribution. Yet, voters eventually learn to overcome fiscal illusion.     

Inequality, the politics of redistribution and the tax mix

Political economy literature generally predicts a positive relationship between income inequality and redistribution. However, there is no clear empirical evidence supporting such a relationship. By incorporating an informal sector that evades income taxes, we account for the tax-base effect that, along with the political channel, determines the equilibrium redistribution and tax mix. We find a non-monotonic relationship between inequality and redistribution and explore under which conditions an unequal society relies more heavily on indirect taxes to finance redistribution. Ultimately, this paper shows the limitations of the income tax to finance redistribution in developing countries even when taxes are democratically chosen.     

The tax-welfare mix: explaining Japan's weak extractive capacity

Abstract

Despite having the highest level of public debt in the Organisation for Economic Co-operation and Development (OECD), higher than Greece or Italy, Japan has one of the lowest aggregate tax burdens of the advanced industrial democracies. This paper asks why Japan, once described as a strong developmental state, has had such a weak extractive capacity, an inability to raise revenues to confront deficits and public debt? In contrast to the existing explanations that focus on political institutions, partisan preferences, or economic globalization, this article argues that Japan's ‘tax–welfare mix’ – the combination of taxes and redistributive welfare polices – undermined the state's long-term capacity to secure adequate tax revenue. More than just a source of revenue, taxes can be used directly to achieve redistributive goals, such as targeting low taxes and exemptions to specific groups. This study shows how Japan's tax–welfare mix diminished its extractive capacity through three mechanisms: the political lock-in of a redistributive social bargain struck around low taxes, the timing and sequencing of its tax policy and welfare development, and the erosion of public trust, which undermined tax consent. Beyond offering a new theory of extractive capacity, the tax–welfare mix explains aspects of Japan's tax structure that defy existing explanations and contributes to our understanding of the capitalist development state by highlighting the redistributive political function of tax policy and its long-term impact on state capacity.     

Determinants of policy change: a cross national analysis

Abstract. This study is an attempt to explain redistributive policy changes in democratic political systems. The two major competing paradigms of such determinants are the 'political environments matter' hypothesis and the economic resources model. This study attempts to show that there is an interdependent or exchange relationship between the choices of the policy makers and the policy takers, and that the periodic elections and the parties are important institutional mechanisms which make the exchange relationship possible. Several propositions about the conditions of policy change emerge from the assumptions about the behaviour of the policy makers and the policy takers. These propositions along with those emerging from the socio-economic and the political factors are tested using data from 21 contemporary democratic regimes beteen 1952–1980. The two dependent variables in the model are expenditures on the direct transfers to the households, and revenue from the direct taxes. Multiple regression analyses are utilized in the statistical tests. These analyses confirm the contention that political exchange plays an important part as a determinant of policy outcomes. It explains as much, if not more, variation in the model as the socio-economic or political environment variables.     

Election Laws,Mobilization, and Turnout: The Unanticipated Consequences of Election Reform

State governments have experimented with a variety of election laws to make voting more convenient and increase turnout. The impacts of these reforms vary in surprising ways, providing insight into the mechanisms by which states can encourage or reduce turnout. Our theory focuses on mobilization and distinguishes between the direct and indirect effects of election laws. We conduct both aggregate and individual‐level statistical analyses of voter turnout in the 2004 and 2008 presidential elections. The results show that Election Day registration has a consistently positive effect on turnout, whereas the most popular reform—early voting—is actually associated with lower turnout when it is implemented by itself. We propose that early voting has created negative unanticipated consequences by reducing the civic significance of elections for individuals and altering the incentives for political campaigns to invest in mobilization.     

Intervention analysis of electoral tax cycle: The case of Japan

This paper analyzed the impact of elections on tax policy in Japan using an ARIMA (autoregressive integrated moving average)-intervention analysis from 1953 through 1992. We used discretionary tax revenues, which means the changes in tax receipts attributable to changes in the tax code, rather than automatic tax revenues due to business cycles in the economy. The result of this study shows that there is a political tax cycle in Japan. That is, discretionary tax revenues decrease with a statistically significant amount in a year immediately before elections for the House of Representatives. This may be due to the fact that election timings in Japan with a parliamentary system become endogenous.     

INFORMAL SECTOR TAX ADMINISTRATION IN ZIMBABWE

Governments have to raise revenue to finance public goods. This study analyses the challenges that Zimbabwe, like most developing countries, faces in attempting to collect taxes from its informal sector. Because the so‐called informal sector forms a large and sometimes growing component of the economy, collecting sufficient revenues to fund expenditure requires tax authorities to seek ways to collect revenues from those earning their incomes in the informal sector. There has been an attempt to collect taxes from the informal sector in Zimbabwe over the past 8 years. Although the actual amount collected from this sector has increased, an evaluation of the way taxes are administered needs to go beyond the amount of revenue collected. It needs to also look at issues such as the proportion of the informal sector paying these taxes, the amount collected as a proportion of total revenues, the costs incurred in collecting these taxes and the tax administration's ability to encourage quasi‐voluntary compliance. This study indicates that the levels of evasion (confirmed by the informal sector associations themselves), selective application of tax regulations and corruption are alarmingly high. These factors, together with the very high tax rates and sheer ignorance, operate as a serious disincentive in informal sector tax compliance resulting in very low revenues from this sector. Copyright © 2014 John Wiley & Sons, Ltd.     

Revenue Diversification: Fiscal Illusion or Flexible Financial Management

This study examines the trends in revenue diversification in approximately 240 suburban municipalities in the Chicago metropolitan region between 1988 and 1997. It then tests a model of revenue diversification's impact on tax effort using data from 1993 to 1997, and separated by home rule and non–home rule municipalities. Trends show that suburbs with higher increases in diversification tend to be home rule, younger, less residential, experiencing more growth, less reliant on property taxes, and more reliant on sales taxes. Model estimates show that communities with more revenue diversification have lower tax effort when controlling for other determinants of tax effort, and this effect is stronger in non–home rule municipalities.     

Power and Policy Design: A Comparison of Green Taxation in Scandinavian Agriculture

This article demonstrates the political importance of policy design in overcoming the opposition to the use of green taxes directed towards producers. The purpose of the article is to establish the link between the political power of producers and policy design. It is argued that the more politically powerful they are, the more likely policy makers are to reimburse tax revenues, to give producers control over the spending of the revenue and to design tax schemes in which there is a direct relationship between the subject being taxed and pollution. A comparison of fertilizer and pesticide tax policy making in Denmark, Norway and Sweden supports this argument.     

The Local Political Business Cycle

Although local political leaders have fewer policy instruments available than national politicians, they nevertheless engage heavily in the creation of political business cycles, i.e. they try to locate and time the costs and benefits of government policies in such as way as to optimize voter support. The study, which is based on data from the four Nordic countries and Italy and France, shows that expenditures tend to grow faster the closer the local election, while political action to increase local taxes is generally taken only in mid-term years. If one wants to predict how local tax rates and expenditures change, it is as important to know the number of years' to the next election as it is to know the change in the fiscal capabilities of local governments.     

Worldwide experience in sales taxation: Lessons for North America

Worldwide fiscal experience over the past twenty-five years indicates steady expansion in the political and academic constituency for expenditure taxation, including indirect taxes on consumption. Retail levies have emerged as the preferred method of indirect taxation of consumption, as older, pre-retail sales taxes have proven unsuited to modern economic structures. Increasingly, reform of sales taxation has involved a shift to one particular form of tax, the European Community type of value-added tax (VAT). This consumption tax option is again a topic of policy debate in North America, particularly in Canada where a VAT was under active consideration in 1985.This paper sifts through worldwide experience with broad-based sales taxes to identify lessons for tax policy in North America both in the short and longer-run. It indicates that the reputation of such taxes as regressive instruments may have been much exaggerated, and that in any case methods are available, particularly in Canada, for resolving equity issues in sales taxation. The VAT is shown to have marginal economic and administrative advantages over single-stage federal retail taxes in both Canada and the US. However, these advantages are not nearly so significant as in European countries where the VAT was adopted there. Further, sensible debate over the merits and limitations of the VAT in North America will call for much closer scrutiny of the problems unique to this form of tax. Finally, three political issues that were not significant in Europe will likely have an important bearing on any future choices of sales tax instruments, both in the U.S. and in Canada.     

Mobilizing Interests: Group Participation and Competition in Direct Democracy Elections

We examine group mobilization in direct democracy elections by assessing the conditions under which interests will actively support or oppose ballot measures. Motivating our analysis is that the decision to mobilize is driven by the costs and benefits of group participation, a calculus shaped by issue characteristics, state political institutions, and the electoral context. Using data from initiative and referendum measures appearing on statewide ballots from 2003 to 2008, we find that ballot measures involving social and tax issues are likely to produce competition among groups and increase the overall number of groups involved. In addition, we find that group competition and levels of mobilization increased in response to how difficult it would be for the legislature to undo the change brought about from passage of a ballot measure. Lastly, group competition and levels of mobilization increased for ballot measures appearing in nonpresidential election years and for ballot measures featuring a close election. Taken together, our results suggest that groups engage strategically in direct democracy elections to pursue a mix of policy and political goals.     

Tax Structure Turbulence in OECD Countries

This paper analyses whether and to what extent politiciansmanipulate tax structures strategically in order to winelections or for ideological purposes. We introduce anindicator for tax structure turbulence which measures thedegree to which a country's tax structure changes from oneyear to another. Using data on 18 OECD countries over theperiod 1965–1995, we find clear evidence of a politicalbudget cycle in national tax structures. More precisely, wefind that in election years, tax structures are changedsignificantly less than in other years. Further, thedispersion of political power significantly lowers the abilityof governments to change the tax structure. We do not,however, find any evidence of partisan budget cycles innational tax systems following political regime changes.     

Affective polarization and the salience of elections

In this article we analyze the effects of election salience on affective polarization. Campaigns and elections epitomize the moment of maximum political conflict, information spread, mobilization, and activation of political identities and predispositions. We therefore expect that affective polarization will be higher just after an election has taken place. By the same token, as elections lose salience, affective polarization will diminish. We analyze this question using CSES data from 99 post-electoral surveys conducted in 42 countries between 1996 and 2016. Our identification strategy exploits variation in the timing of survey interviews with respect to the election day as an exogenous measure of election salience. The empirical findings indicate that as elections lose salience affective polarization declines. The article further contributes to the debate on the origins of affective polarization by exploring two mechanisms that may account for this relationship: changes in ideological polarization and in the intensity of party identification. Both are relevant mediators, with ideological polarization seemingly playing a more important role.     

Fiscal Policy Cycles and Public Expenditure in Developing Countries

The paper studies empirically the fiscal policy instruments by which governments try to influence election outcomes in 24 developing countries for the 1973–1992 period. The study finds that the main vehicle for expansionary fiscal policies around elections is increasing public expenditure rather than lowering taxes, and public investment cycles seem particularly prominent. Institutional mechanisms which constrain discretionary expenditure policies and which strengthen fiscal control are therefore worthwhile considering to prevent opportunistic policy making around elections.     

On the political economy of national tax revenue forecasts: evidence from OECD countries

Sustainable budgets are important quality signals for the electorate. Politicians might thus have an incentive to influence tax revenue forecasts, which are widely regarded as a key element of national budget plans. Looking at the time period from 1996 to 2012, we systematically analyze whether national tax revenue forecasts in 18 OECD countries are biased due to political manipulation. Drawing on theories from the field of political economy, we test three hypotheses using panel estimation techniques. We find support for partisan politics. Left-wing governments seem to produce more optimistic, or less pessimistic, tax revenue forecasts than do right-wing ones. Contrary to the theoretical prediction based on the “common pool” problem, we find that more fragmented governments and parliaments tend to produce more pessimistic, or less optimistic, tax revenue forecasts. We find no empirical evidence that political business cycles play a role in tax revenue forecasts.     

Presidential elections in Finland: A plea for approval voting

The Finnish President is elected by an indirect method-the people elect special electors who carry out the final election. A proposal for a reform aiming at direct elections is, however, presently being considered. This paper agrees with this proposal and suggests that approval voting is a proper method for direct elections. Several properties of the approval voting system are discussed and the method is demonstrated to be superior to the plurality runoff method in presidential elections. It is argued that the approval voting system chooses a candidate who has overall support in the electorate and that the system therefore promotes the position of the President as a neutral and moderating political force.