ON THE DETERMINANTS OF LOCAL TAX RATES: NEW EVIDENCE FROM SPAIN

This article examines the determinants of local tax rates. For the two main local taxes in Spain—the property tax and the motor vehicle tax—we test the existence of tax mimicking, yardstick competition, and political trends in a sample of 2,713 municipalities. Using various spatial models, the results support the hypothesis of tax mimicking, with coefficients above 0.40. We also show the relevance of political variables such as the ideology of incumbents and political fragmentation. The fact that incumbents with weaker political support exhibit stronger mimicking behavior is interpreted as evidence in favor of yardstick competition. Finally, we find that incumbents mimic neighboring municipalities ruled by the same political party, confirming the political trends hypothesis. (JEL C31, H71, H77)     

Testing the taxmimicking versus expenditure spill-over hypotheses using English data

Spatial interaction among local governments in tax setting and public spending decisions is receiving increasing attention in the applied public economics literature. Spatial interaction models rely on the presence of an externality from local budget making: in traditional public finance models, external effects originate either from interjurisdictional resource flows due to tax competition for a mobile base, or from local public expenditure spill-overs into neighbouring jurisdictions. However, the recent political agency/yardstick competition literature has stressed the role of ‘informational’ externalities between neighbouring jurisdictions, and predicted tax mimicry at the local level. The actual relevance of the above hypotheses clearly needs to be assessed empirically. In this paper, an attempt is made at discriminating between alternative sources of local fiscal interaction, by using data on the English municipal authorities' budgets. While both public spending levels and local property tax rates exhibit considerable positive spatial autocorrelation, maximum likelihood and instrumental variables estimation results suggest that the interdependence among local governments can be attributed to mimicking behaviour in local property tax setting.     

The incentive effect of fiscal equalization transfers on tax policy

A theoretical analysis considers the impact of a typical system of redistributive “fiscal equalization” transfers on the tax effort of local jurisdictions. More specifically, it shows that the marginal contribution rate, i.e. the rate at which an increase in the tax base reduces those transfers, might be positively associated with the local tax rate while the volume of grants received is likely to be inversely related to the tax rate. These predictions are tested in an empirical analysis of the tax policy of German municipalities. In order to identify the incentive effect the analysis exploits discontinuities in the rules of the fiscal equalization system as well as policy changes. The empirical results support the existence of an incentive effect, suggesting that the high marginal contribution rates induce the municipalities to set significantly higher business tax rates compared with a situation without fiscal equalization.     

Decentralization and electoral accountability: Incentives, separation and voter welfare

This paper provides a systematic analysis of fiscal decentralization on the quality of government by studying jointly its effects on electoral discipline and selection, in a setting where, realistically, voters only have limited information about fiscal policy in other jurisdictions, ruling out yardstick competition. Fiscal centralization reduces the extent of electoral discipline, as a corrupt (rent-seeking) incumbent can target good behavior only at a “minimum winning coalition” of regions (selective rent-diversion) in order to retain office, but thus makes it more profitable for bad incumbents to pool with good ones, thus increasing the probability of electoral discipline occurring at all. Voters tend to prefer centralization when politicians are low quality i.e. more likely to be corruptible. Centralization with uniform taxes can dominate both unconstrained centralization and decentralization, explaining why uniform taxes are so widely observed.     

Does Inter‐jurisdictional Competition Engender a “Race to the Bottom”? A Meta‐Regression Analysis

A growing literature documents the existence of strategic political reactions to public expenditure between rival jurisdictions. These interactions can potentially create a downward expenditure spiral (“race to the bottom”) or a rising expenditure spiral (“race to the top”). However, in the course of identifying the existence of such interactions and ascertaining their underlying triggers, the empirical evidence has produced markedly heterogeneous findings. Most of this heterogeneity can be traced back to study design and institutional differences. This article contributes to the literature by applying meta‐regression analysis to quantify the magnitude of strategic inter‐jurisdictional expenditure interactions, controlling for study, and institutional characteristics. We find several robust results beyond confirming that jurisdictions do engage in strategic expenditure interactions, namely that strategic interactions: (i) are weakening over time, (ii) are stronger among municipalities than among higher levels of government, and (iii) appear to be more influenced from tax competition than yardstick competition, with capital controls and fiscal decentralization shaping the magnitude of fiscal interactions.     

Electoral manipulation via voter-friendly spending: Theory and evidence

We present a model of the political budget cycle in which incumbents try to influence voters by changing the composition of government spending, rather than overall spending or revenues. Rational voters may support an incumbent who targets them with spending before the election even though such spending may be due to opportunistic manipulation, because it may also reflect sincere preference of the incumbent for types of spending voters favor. Classifying expenditures into those which are likely targeted to voters and those that are not, we provide evidence supporting our model in data on local public finances for all Colombian municipalities. Our findings indicate both a pre-electoral increase in targeted expenditures, combined with a contraction of other types of expenditure, and a voter response to targeting.     

Fairness in tax compliance: A political competition model

This paper analyzes the political economy of income redistribution when voters are concerned about fairness in tax compliance. We consider a two‐stage model where there is a two‐party competition over the tax rate and over the intensity of the tax enforcement policy in the first stage, and voters decide about their level of tax compliance in the second stage. We find that if the concern about fairness in tax compliance is high enough, a liberal middle‐income majority of voters may block any income redistribution policy. Alternatively, we find an equilibrium in which the preferences of the median voter are ignored in favor of a coalition formed by a group of relatively poor voters and the richest voters. In this equilibrium income redistribution prevails with no tax enforcement.     

Economic integration and fiscal devolution

In this paper we investigate how economic integration influences the political decision of integration and separation of jurisdictions. In a model with (imperfect) capital mobility, we consider that, not only the redistributive policy itself, but also the level of policy centralization is decided by a majority vote. We find that the net benefit from integration is not monotonic with the level of world capital market integration and present a case where integration of two regions occurs only for intermediate levels of mobility. This conclusion relies on the comparison of the regional majorities’ utility under the various regimes. The benefits from integration arise from the elimination of tax competition across jurisdictions, which allows for more income redistribution, whereas the costs are linked to the diversity of preferences across regions, namely that of the decisive voters. We also show that a federal regime is better than complete centralization in keeping a nation united.     

Learning about challengers

We examine a political agency problem in repeated elections where an incumbent runs against a challenger from the opposing party, whose policy preferences are unknown by voters. We first ask: do voters benefit from attracting a pool of challengers with more moderate ideologies? When voters and politicians are patient, moderating the ideology distribution of centrist and moderate politicians (those close to the median voter) reduces voter welfare by reducing an extreme incumbent's incentives to compromise. We then ask: do voters benefit from informative signals about a challenger's true ideology? We prove that giving voters informative, but sufficiently noisy, signals always harm voters, because they make it harder for incumbents to secure re-election.     

Gender bias and women’s political performance

We model voters’ gender bias as a prejudice on women’s competence coming from a distorted prior. We analyse the effect of this bias in a two-period two-party election model in which voters care about both policy preference and competence. We find that, if voters (wrongly) believe that women are drawn from a distribution of competences with higher weights on lower values, female politicians are less likely to win office but, when elected, they are on average more competent than male elected officials. As a consequence, female incumbents seek re-election more often.     

Why the poor do not expropriate the rich: an old argument in new garb

We consider a political economy with two partisan parties; each party represents a given constituency of voters. If one party (Labour) represents poor voters and the other (Christian Democrats) rich voters, if a redistributive tax policy is the only issue, and if there are no incentive considerations, then in equilibrium the party representing the poor will propose a tax rate of unity. If, however, there are two issues – tax policy and religion, for instance – then this is not generally the case. The analysis shows that, if a simple condition on the distribution of voter preferences holds, then, as the salience of the non-economic issue increases, the tax rate proposed by Labour in equilibrium will fall – possibly even to zero – even though a majority of the population may have an ideal tax rate of unity.     

Partially Revealing Campaign Promises

Candidates competing for political office give promises to voters. There are no legal restraints preventing incumbents from breaking their electoral promises. This paper models campaign promises as pure cheap talk and asks why is it influential. We propose that a candidate's campaign promises are a partially revealing signal of her policy preference type. The incumbent's policy choice is yet another signal of her type. Policy choice is a costly signal (unlike campaign promises). The incumbent keeps her electoral promises in order to preserve ambiguity about her type, which is necessary to assemble a winning majority for reelection. She keeps her promises regardless of information about the efficiency of different public policies which she receives upon taking office. Therefore, campaign promises generate inefficiencies in public policy.     

Do fiscal transfers alleviate business tax competition? Evidence from Germany

According to theory, capacity equalization grants cause local governments to internalize the effects of their tax policies on revenues of neighboring jurisdictions and so raise equilibrium tax rates. This paper empirically analyzes the incentive effects of equalizing transfers on business tax policy by exploiting a natural experiment in the state of Lower Saxony which changed its equalization formula as of 1999. We resort to within-state and across-state difference-in-difference estimates to identify the reform effect on municipalities' business tax rates. Confirming the theoretical prediction, the reform had a significant impact on the municipalities' tax policy in the 4 years after the reform with the effect stabilizing in the fourth to fifth years. The finding is robust to various alternative specifications.     

Newspaper Circulation and Local Government Efficiency*

In this paper, we examine the role of the newspaper market for a key aspect of political accountability: the efficient use of public funds by elected politicians. Newspapers are a major provider of the political information voters use to monitor their elected officials, especially at the local level. Thus, the incentives for politicians to reduce budgetary slack should be stronger in jurisdictions where the electorate is well informed by newspapers. Using panel data on the circulation of some 150 newspapers in Norwegian municipalities, we show that increases in local newspaper circulation are associated with higher levels of local government efficiency.     

Revenue decentralization,central oversight and the political budget cycle: Evidence from Israel

This paper examines whether revenue decentralization and direct external financial supervision affect the incidence and strength of political budget cycles, using a panel of Israeli municipalities during the period 1999–2009. We find that high dependence on central government transfers – as reflected in a low share of locally raised revenues in the municipality's budget – exacerbates political budget cycles, while tight monitoring – exercised through central government appointment of external accountants to debt accumulating municipalities – eliminates them. We also find that this pattern is predominantly accounted for by development expenditures. These results suggest that political budget cycles can result from fiscal institutions that create soft budget constraints: that is, where incumbents and rational voters can expect that the costs of pre-election expansions will be partly covered later by the central government.     

Output‐based rebating of carbon taxes in a neighbour's backyard: Competitiveness,leakage and welfare

We investigate how, in an open economy, carbon taxes combined with output‐based rebating (OBR) perform in interaction with the carbon policies of a large neighbouring trading partner. Analytical results suggest that, whether the purpose of the OBR policy is to compensate firms for carbon tax burdens or to maximize welfare (accounting for global emission reductions), the OBR rate should be positive in policy‐relevant cases. Numerical simulations for Canada, with the US as the neighbouring trading partner, indicate that the impact of US policies on the OBR rate will depend crucially on the purpose of the Canadian OBR policies. If, for a given US carbon policy, Canada's aim is to restore the competitiveness of domestic emission‐intensive and trade‐exposed (EITE) firms to the same level as before the introduction of its own carbon taxation, we find that the necessary domestic OBR rates will be insensitive to the foreign carbon policies. However, if not only the Canadian carbon tax but also an equally high US tax is introduced, compensatory Canadian OBR rates will be up to 50% lower, depending on the sector and on US OBR policy. If the policy objective is to increase economy‐wide allocative efficiency (welfare) of Canadian policies by accounting for carbon leakage, the US policies will have only a minor downward pressure on desirable OBR rates in Canada. Practical choices of OBR rates hardly affect overall domestic economic performance; thus, output‐based rebating qualifies as an instrument for compensating EITE industries without a large sacrifice in terms of economy‐wide allocative efficiency.     

VOTER PREFERENCES FOR TRADE POLICY INSTRUMENTS*

We analyze voter preferences for tariffs and production subsidies. The distribution of tax revenues argument shows that voters with high direct tax burdens prefer tariffs to subsidies. The uncertainty argument demonstrates that if actual tariff and subsidy rates are chosen from the set of individually optimal rates then the range of tariff rates is smaller than the range of subsidy rates. Thus, tariffs might be preferred even though they are less efficient. Finally, the large country argument shows that if a country is large then voters whose income shares decline with more protection prefer tariffs to subsidies.     

Price mimicking under cost-of-service regulation: the Swedish water sector

This study provides an empirical test of price mimicking among publicly owned water utilities. Using a fixed effects spatial Durbin model with data from Swedish municipalities during 2002–2012, I estimate the elasticity of the own relative to neighbors’ average price to 0.14. This behavior can be explained in terms of an informal yardstick competition: when consumers use neighboring municipalities’ prices as benchmarks for costs or as behaviorally based reference prices, policy makers will face the risk of consumer complaints and reduced voter support if deviating too much from neighboring municipalities’ prices. Further, I find some evidence that price mimicking is more pronounced in municipalities where voter support for the ruling coalition is weak.     

Homeownership,Mobility, And Local Income Redistribution

Regions are characterized by different homeownership rates. Homeowners and renters differ in their mobility costs, renters having lower mobility costs. This paper analyses how the presence of those different types of households affects income sorting and tax differences between local jurisdictions. To this aim, we analyze a model of local income redistribution with mobile (renter) and immobile (homeowner) households. Linear income taxes finance a lump sum transfer. Policies are determined endogenously through voting. In such a framework, if there are no or only few homeowners, no income‐sorting equilibrium exists. Above a certain threshold for the homeownership rate we find an inverted U‐shaped relationship between tax differences and homeownership rates, such that tax differences between jurisdictions are highest for intermediate homeownership rates.     

A quantitative theory of social security without commitment

This paper investigates the determination of social security within a general equilibrium, overlapping-generations model where agents live for many periods, and replacement rates are determined through voting in each period by forward looking agents. The distinctive feature is the study of Markov equilibrium policy outcomes which do not rest on a commitment mechanism. Versions of the model are calibrated to the US economic, policy, and demographic conditions. Even in the absence of commitment, the policy preferences of tax-paying working-age voters sustain a positive level of retirement benefits. This follows because the current choices about social security will have, at the time when the current voters will retire, a positive impact on the political support for social security and on the returns to savings. On the other hand, the projected decline in the U.S. population growth rate causes the replacement rate and the tax rate to decline. This quantitative response without commitment differs from that in the case when policies are committed at time zero.