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.     

Politics Can Limit Policy Opportunism in Fiscal Institutions: Evidence from Official General Fund Revenue Forecasts in the American States

Governments make policy decisions in the same areas in quite different institutions. Some assign policymaking responsibility to institutions designed to be insulated from myopic partisan and electoral pressures and others do not. In this study, we claim that differences in political context and institutional design constrain the policy choices governments make. Testable propositions based on an analysis of varying electoral incentives and time horizons created by these different contexts are empirically tested using panel data on official general fund revenue forecasts in the American states, 1987 to 2008. The empirical evidence reveals that executive branch agencies and independent commissions produce more conservative forecasts than legislatures with one important exception. Executive branch revenue forecasts in states with gubernatorial term limits are indistinguishable from legislative branch forecasts. Further, we find that legislative branch forecasts are more conservative in the presence of divided partisan legislatures than unified party government. In turn, this implies that entrusting policymaking authority to either the executive branch or an independent commission may only be consequential when the political system itself fails to check legislative excesses or executive myopia.     

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.     

Elections and the structure of taxation in developing countries

This article analyses the impact of the electoral calendar on the composition of tax revenue (direct versus indirect taxes). It thus represents an extension of traditional political budget-cycle analyses assessing the impact of elections on overall revenue. We appeal to the opportunistic political budget model of Drazen and Eslava (2010) to predict the relationship between taxation structure and elections. Panel data from 56 developing countries over the 1980–2006 period reveals a clear pattern of electorally-related policy interventions. Taking the potential endogeneity of election timing into account, we find robust evidence of lower indirect taxes being applied by incumbent governments in the period just prior to an election. Indirect tax revenue in election years is estimated to be 0.3 GDP percentage points lower than in other years, corresponding to a fall of about 3.4% of the average figure in the sample countries, while there is no such relationship with direct tax revenue.     

On the political and fiscal determinants of income redistribution under federalism and democracy: evidence from Germany

Several recent studies suggest that transfers from central to regional governments are motivated by political considerations. In this paper we examine if this is also the case for transfers from regional to central governments in the context of the German fiscal equalization system. We examine the factors that contribute to differences in tax revenues across German states. The evidence indicates that both fiscal incentives and political factors can explain these differences, although in Germany the former are more important. Moreover, accounting for fiscal institutions has important consequences for the empirical assessment of political influences on taxation. Overall we find that the political affiliation of the state governor is an important factor in explaining differences in state tax revenues. Thus, the right-wing party (CDU/CSU) is effective in relaxing the tax burden at the state level. In contrast, partisan alignment between the state government and the federal government loses its importance once fiscal conditions enter the empirical model.     

The Revenue Impact of Repeated Tax Amnesties

Proponents argue that tax amnesties raise revenue both in the short and long run, by bringing former nonfilers back into the tax system. Opponents contend that amnesties produce little short‐run revenue and weaken incentives for long‐run tax compliance. However, over the last 21 years, 27 states offered tax amnesties for a second or third time. While previous research has estimated the impact of specific tax amnesties, none have estimated how the impact changes when offered repeatedly. We find that these additional tax amnesties generate less short‐run revenue than predecessors and tend to magnify revenue losses associated with disincentives for long‐run tax compliance.     

When Mayors Matter: Estimating the Impact of Mayoral Partisanship on City Policy

U.S. cities are limited in their ability to set policy. Can these constraints mute the impact of mayors’ partisanship on policy outcomes? We hypothesize that mayoral partisanship will more strongly affect outcomes in policy areas where there is less shared authority between local, state, and federal governments. To test this hypothesis, we create a novel dataset combining U.S. mayoral election returns from 1990 to 2006 with city fiscal data. Using regression discontinuity design, we find that cities that elect a Democratic mayor spend a smaller share of their budget on public safety, a policy area where local discretion is high, than otherwise similar cities that elect a Republican or an Independent. We find no differences on tax policy, social policy, and other areas that are characterized by significant overlapping authority. These results suggest that models of national policymaking are only partially applicable to U.S. cities. They also have implications for political accountability: mayors may not be able to influence the full range of policies that are nominally local responsibilities.     

The Flypaper Effect: Evidence from India

The flypaper effect refers to the phenomenon whereby expenditure stimulus from unconditional grants exceeds that from an equivalent increase in income. The flypaper effect has been described as "money sticks where it hits." The present study empirically tests the flypaper effect for the Indian economy. The study also tests the asymmetry hypothesis that looks at the impact of retrenchment in grants. Results obtained in the present study show the flypaper effect to be vindicated. We find that both capital and revenue expenditures receive a greater stimulus from grants than would an increase in income. Results show that in the prereform period both revenue and capital expenditures are maintained during periods of grant cuts. However, in the postreform period it is only expenditures on revenue accounts that are maintained in periods of grant reduction. We also find that during periods of grant reduction, state governments maintain their expenditure programs by raising their own tax revenue. This suggests that grants from the center have had a disincentive effect and could be a reason that state governments have not exploited their tax potential to the fullest. By bringing to the fore the disincentive effect of grants we wish to emphasize the urgency of taking a closer look at restructuring and redesigning our system of intergovernmental transfers.     

Do housing bubbles generate fiscal bubbles?

This paper examines the effects of the most recent U.S. housing bubble on the fiscal policy of California cities. We use an instrumental variables approach that helps isolate the fiscal consequences of house price appreciation by taking advantage of the influence of local topological constraints on the elasticity of house prices with respect to interest rates. Our analysis generates three main findings. First, despite Prop 13 fiscal constraints, rapid house price appreciation has a strong effect on property tax revenue. Second, the resulting increase in property tax revenue was largely offset by a reduction in other local tax revenue. This offsetting response leaves total city expenditure unrelated to local house prices. In that sense the housing bubble did not produce local fiscal bubbles. Third, we find that fiscal adjustments to house price appreciation depend on local political institutions.     

Tax and expenditure limitations and the fiscal relationships between state and local governments

This paper uses comprehensive data on state and local tax and spending limitations for forty-nine states between 1976 and 1990 to estimate the effects of these limits on the fiscal relationships between state and local government. Results indicate that tax and spending limits on local governments are only partially effective in reducing revenues because political agents bypass limitations by transferring revenue reliance to unconstrained revenue sources, or because unconstrained levels of government take on additional revenue responsibilities. In particular, the empirical analysis demonstrates that binding local government fiscal constraints are associated with reductions in local revenues and increases in state aid to local governments. In contrast, state government limitations are related to reductions in both state and local own source revenues.     

Political Appointments, Civil Service Systems, and Bureaucratic Competence: Organizational Balancing and Executive Branch Revenue Forecasts in the American States

Scholarship on executive politics provides conflicting views about whether staffing administrative agencies through politicized or (politically) autonomous means is the best method for maximizing bureaucratic competence. We offer a theoretical account which maintains that obtaining a proper balance between both types of personnel systems across the supervisory and subordinate levels of an organization will best foster bureaucratic competence. We evaluate our organizational balancing thesis using data on executive branch general revenue fund forecasts in the American states from 1987 to 2002. States with a combination of politically appointed agency executives and merit-selected subordinates generally provide more accurate revenue forecasts than states that possess uniformly politicized personnel selection systems. Conversely, states with a combination of department head–appointed executives and subordinates chosen from an at-will system (i.e., nonmerit) produce more accurate forecasts than states with uniformly autonomous personnel selection systems. Our statistical findings underscore the positive consequences associated with balancing politicized and autonomous means of selecting personnel within hierarchies of political organizations.     

A User's Guide to State Revenue Forecasting

One of the most difficult tasks in preparing a state budget is forecasting available revenues. An overly optimistic forecast may subsequently require unpopular budget cuts, tax increases, or both. A pessimistic forecast may trigger a political controversy over the size of the budget surplus, or may encourage additional spending that cannot be sustained in the future. Forecasters have always informally shared their experience with each other. Only in recent years, however have scholars begun to document those experiences.
A forecast user is an elected official, program manager, reporter or private citizen involved in the budget process who uses a forecast prepared by someone else as a basis for making or influencing policy decisions about state taxes and spending levels. __ While the objectives of these forecast users may vary depending on their role in the budget process, they all share one need in common: a sound forecast which provides them with the information they need to participate in the budget process. The first part of this article briefly reviews the status of revenue forecasting in the states. The second part reviews five specific forecasting issues. The third section, discusses limits of revenue forecasting. The concluding section is a summary and checklist of good revenue forecasting practices.     

The role of tax bases and collections costs in the determination of income tax rates,seigniorage and inflation

A growing theoretical literature on optimal taxation predicts that governments will set the tax rates on money holdings and on more traditional tax bases to minimize the deadweight losses of collecting government revenue. Under the presumption that relative collection costs and tax bases have not changed significantly over time, the empirical time-series seigniorage literature has focused on the theory's tax smoothing implication, finding only weak support. We show that changes in collections costs and tax bases played an important role in the determination of tax composition and find stronger support for tax smoothing when this is taken into account.     

Local Taxation in the Netherlands

Provincial governments in the Netherlands have only one general tax at their disposal. However, it has become an insufficient source of revenue for this level of government in the Dutch system. To increase the revenue raising capacity of the provincial governments, thirteen broad-based general tax proposals not used at the local level were examined. The objective was to find a fair and equitable tax that could easily be collected and would result in fl. 200 million in additional revenue for the provincial governments.     

Taxation by Citation? Exploring Local Governments’ Revenue Motive for Traffic Fines

Anecdotal evidence suggests that local governments may have a revenue motive for traffic fines, beyond public safety concerns. Using California's county-level data over a 12-year period, this article shows that counties increased per capita traffic fines by 40 to 42 cents immediately after a 10 percentage point tax revenue loss in the previous year; however, these counties did not reduce traffic fines if they experienced a tax revenue increase in the previous year. This finding indicates that county governments probably view traffic fines as a revenue source to offset tax revenue loss, but not as a revenue stabilizer to manage revenue fluctuation. This article also finds that low-income and Hispanic-majority counties raised more traffic fines. Counties that generated more revenue from the hotel tax—a tax typically paid by travelers and visitors—raised more traffic fines, indicating a possible tax-exporting behavior by shifting the traffic fine burden to nonlocal drivers.     

Local government grants and income tax revenue: Redistributive politics in Norway 1900–1990

An important aspect of the welfare state is public provision of private goods, primarily education and health care. In Norway the provision of these services has been organized through the local public sector. The development of the welfare state has to a large extent been the development of welfare communes. The important revenue sources of the local and county governments, grants and income tax revenue, have been controlled nationally, and the paper addresses the determinants of these revenues during 1900–1990. The approach combines a demand model of local public services emphasizing price and income-elasticities with a political economy model of central government ideology and strength. The decision making is understood as bargaining between the government and interest groups, and the political structure consequently is of importance for the policy outcome. The analysis shows how politics matter, and the results indicate that a minority coalition government implies 30% more grant and income tax revenue to local and county governments than one party majority in the long run.     

Taxation and local government accountability in a clientelist context: Colombia

Increasing the accountability of local government is an important objective of decentralisation. One way to achieve greater accountability is to enhance the reliance of local governments on locally raised taxes. Property taxes are a prime source of increased revenue for local governments. However, it is difficult to levy them effectively in clientelist political systems, like that of Colombia. Recent reforms there have increased the capacity of municipal governments to raise revenue through property taxation. Giving responsibility for assessments of property values to an independent national agency has been especially useful. Municipal government finances are now to some degree independent and protected from the influence of clientelistic political parties. However continuing problems include: the reluctance of mayors to enforce taxation liabilities; the obstacles to opening local political debates on taxation; and the problems faced by national governments in trying to monitor municipal revenues and expenditures. Copyright © 2003 John Wiley & Sons, Ltd.     

Administrative problems of the provincial sales tax on beer in Papua New Guinea

With the establishment of provincial government in Papua New Guinea, the Organic Law has conferred on the provincial governments the authority to raise revenue using local revenue bases including retail sales taxes. These taxes have significant advantages and a sales tax on beer has particular benefits in P.N.G. in terms of potential yield and ease of administrative management. The tax is levied on the two breweries and the breweries collect the tax at their breweries and wholesale warehouses on behalf of the provincial governments. For the brewery with the dominant share of the market the arrangement under which it collects the tax for a commission and pays over quarterly to the provincial governments brings financial advantage. The brewery with a smaller share of the market and localized sales is less likely to be benefitting by the arrangement. For the future given expected beer consumption a change from a quantity based tax to ad valorem rates would be financially advantageous to the provincial governments, and would reduce the need for some provinces to seek tax sources elsewhere, but experience shows the general benefit of raising the tax, not at the point of final sale, but on the wholesaler or manufacturer.     

Revisiting the Income Tax Effects of Legalizing Same‐Sex Marriages

In this paper we estimate the impacts on income tax collections of legalizing same‐sex marriage. We utilize new individual‐level data sources to estimate the federal income tax consequences of legalizing same‐sex marriages. These data sources also allow us to estimate the impact of legalization on state income tax collections. We find that 23 states would realize a net fiscal benefit from legalization, while 21 states would experience a decline in revenue. The potential (annual) changes in state tax revenue range from negative $29 million in California to positive $16 million in New York. At the federal level, our estimates suggest an overall reduction in revenues, ranging from a potential loss of $187 million to $580 million. Overall, we find that the federal and state impacts are quite modest. We also find that our estimates are only marginally affected by alternative assumptions about how many same‐sex couples will choose to marry and which partner will claim any children for tax deduction purposes.