We introduce tax contracts and examine how they affect government formation and welfare of voters in a democracy with proportional elections. A tax contract specifies a range of tax rates a party is committed to if in government. We develop a new model of party competition in which parties choose tax rates, public-good provision, and perks, and we show that the introduction of tax contracts has two effects: a perks effect and a policy-shift effect. The former plays a central role in societies with a low degree of political polarization, where it tends to reduce politicians' perks. If a society is highly polarized, tax contracts can yield more moderate political outcomes. However, there are also circumstances in which tax contracts induce more extreme policies.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
7084.
Find related papers by JEL classification: D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
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