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Does democracy affect taxation and government spending? Evidence from developing countries

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  • Profeta, Paola
  • Puglisi, Riccardo
  • Scabrosetti, Simona

Abstract

Focusing on developing countries in three geographical areas (South-East Asia, Latin America and European Union), we explore the relation between political variables and tax revenue, public spending and their structure. We build a new dataset for the 1990–2005 period with fiscal, political and socio-economic variables. Since democracy is a complex and multidimensional concept, we measure it using two variables, the political strength of democratic institutions, and the protection of civil liberties. We perform three sets of estimates: (i) cross-country pooled OLS regressions with region fixed effects, (ii) country fixed effects regressions and (iii) region specific regressions with country fixed effects. While the first model delivers some significant correlations between political variables and tax items, when controlling for country fixed effects we find that tax revenue and tax composition are in general not significantly correlated with the strength of democratic institutions and the protection of civil liberties. The only exceptions are indirect, trade and property taxes. A similar result applies to public spending, with the exception of defense expenditure. Overall, our findings cast some doubt on the exact public policy channels through which political institutions affect economic development.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 41 (2013)
Issue (Month): 3 ()
Pages: 684-718

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Handle: RePEc:eee:jcecon:v:41:y:2013:i:3:p:684-718

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Web page: http://www.elsevier.com/locate/inca/622864

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Keywords: Comprehensive dataset on taxation and public expenditure; POLITY2 index; Civil liberties; Tax structure; Public spending composition;

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Cited by:
  1. Ivanyna, Maksym & von Haldenwang, Christian, 2012. "A comparative view on the tax performance of developing countries: Regional patterns, non-tax revenue and governance," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, Kiel Institute for the World Economy, vol. 6(32), pages 1-44.
  2. Toke Aidt & Peter S. Jensen, 2013. "Democratization and the Size of Government: Evidence from the Long 19th Century," CESifo Working Paper Series, CESifo Group Munich 4132, CESifo Group Munich.
  3. Facundo Piguillem & Alessandro Riboni, 2013. "Spending Biased Legislators - Discipline Through Disagreement," EIEF Working Papers Series, Einaudi Institute for Economics and Finance (EIEF) 1317, Einaudi Institute for Economics and Finance (EIEF), revised Jul 2013.
  4. Sajjad Faraji Dizaji & Mohammad Reza Farzanegan, 2014. "Political Institutions and Government Spending Behavior in Iran," CESifo Working Paper Series, CESifo Group Munich 4620, CESifo Group Munich.
  5. Lars P. Feld & Christoph A. Schaltegger, 2012. "Die Politische Ökonomik der Besteuerung," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, Verein für Socialpolitik, vol. 13(1-2), pages 116-136, 02.
  6. Adam, Antonis & Kammas, Pantelis & Lapatinas, Athanasios, 2013. "Income inequality and the tax structure: Evidence from developed and developing countries," MPRA Paper 46148, University Library of Munich, Germany.

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