The political business cycle of tax reforms Lucia Rossel Flores, Martijn Huysmans, Joras Ferwerda
By: Rossel, Lucia
.
Contributor(s): Huysmans, Martijn | Ferwerda, Joras.
Material type: 
ArticleSubject(s): POLITICA FISCAL | POLITICA ECONOMICA | ELECCIONES
In:
Public Choice v. 200, n.1-2, july 2024, p.65-88Summary: A political business cycle (PBC), with governments adjusting and timing economic policy for electoral gains, has long been hypothesized. A lack of data has so far limited testing of this phenomenon for government policies as opposed to fiscal outcomes such as tax revenue or government deficit, especially at the national level. We use new monthly data on tax reform announcements for a set of 22 democracies, 1988–2014, to test the PBC hypothesis for taxation. In addition to the traditional electoral strategy formulation of the PBC, we also put forward and test a capacity version of the PBC. We find evidence for the capacity version but not the traditional version of the PBC: tax reforms are less likely to be announced before elections and more likely after elections, independently of whether they are increases or decreases. Our evidence suggests that while a PBC exists, it may be less driven by strategic electioneering and more innocuous than previously assumed
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| OP 1443/2024/199/1/2 Public Choice | OP 1443/2024/199/1/2 special issue Empirical and Computational Approaches to Collective Choice | OP 1443/2024/200/1/2 Public Choice | OP 1443/2024/200/1/2 -1 The political business cycle of tax reforms | OP 1443/2024/200/1/2 -2 A tale of government spending efficiency and trust in the state | OP 1443/2024/200/1/2 -3 Investment incentives attract foreign direct investment | OP 1443/2024/200/3/4 Public Choice |
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A political business cycle (PBC), with governments adjusting and timing economic policy for electoral gains, has long been hypothesized. A lack of data has so far limited testing of this phenomenon for government policies as opposed to fiscal outcomes such as tax revenue or government deficit, especially at the national level. We use new monthly data on tax reform announcements for a set of 22 democracies, 1988–2014, to test the PBC hypothesis for taxation. In addition to the traditional electoral strategy formulation of the PBC, we also put forward and test a capacity version of the PBC. We find evidence for the capacity version but not the traditional version of the PBC: tax reforms are less likely to be announced before elections and more likely after elections, independently of whether they are increases or decreases. Our evidence suggests that while a PBC exists, it may be less driven by strategic electioneering and more innocuous than previously assumed
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