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The effect of direct democracy on the level and structure of local taxes

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  • Asatryan, Zareh
  • Baskaran, Thushyanthan
  • Heinemann, Friedrich

Abstract

We study the effect of direct democracy on local taxation. Our setting is the German federal state of Bavaria, where in 1995 a state-wide reform introduced the possibility to initiate direct democratic legislation into the local government code. Relying on a sample of all Bavarian municipalities over 1980-2011, we hypothesize that complementing a representative form of government with the initiative process leads to (i) higher local tax rates and (ii) a shift of the local tax mix from taxes with broader (property taxes) to taxes with narrower bases (business taxes). For identification, we rely on a difference-in-discontinuity design. Our results suggest that the ease with which local initiatives can be implemented – measured by signature and quorum requirements – increases local tax rates and shift the tax mix toward taxes with narrower bases.

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  • Asatryan, Zareh & Baskaran, Thushyanthan & Heinemann, Friedrich, 2017. "The effect of direct democracy on the level and structure of local taxes," Regional Science and Urban Economics, Elsevier, vol. 65(C), pages 38-55.
  • Handle: RePEc:eee:regeco:v:65:y:2017:i:c:p:38-55
    DOI: 10.1016/j.regsciurbeco.2017.04.006
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    Cited by:

    1. Philipp Harms & Claudi Landwehr, 2018. "Money is where the fun ends: material interests and individuals preference for direct democracy," Working Papers 1815, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz.
    2. Zareh Asatryan & Annika Havlik & Frank Streif, 2017. "Vetoing and inaugurating policy like others do: evidence on spatial interactions in voter initiatives," Public Choice, Springer, vol. 172(3), pages 525-544, September.
    3. Stephan Geschwind & Felix Roesel, 2021. "Taxation under Direct Democracy," CESifo Working Paper Series 9166, CESifo.
    4. Asatryan, Zareh & De Witte, Kristof, 2015. "Direct democracy and local government efficiency," European Journal of Political Economy, Elsevier, vol. 39(C), pages 58-66.
    5. Zareh Asatryan, 2016. "The indirect effects of direct democracy: local government size and non-budgetary voter initiatives in Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(3), pages 580-601, June.
    6. Felix Arnold & Ronny Freier & Magdalena Pallauf & David Stadelmann, 2016. "Voting for direct democratic participation: evidence from an initiative election," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(4), pages 716-740, August.
    7. Andrew C. Eggers & Ronny Freier & Veronica Grembi & Tommaso Nannicini, 2018. "Regression Discontinuity Designs Based on Population Thresholds: Pitfalls and Solutions," American Journal of Political Science, John Wiley & Sons, vol. 62(1), pages 210-229, January.
    8. Asatryan, Zareh, 2014. "The indirect effects of direct democracy: Local government size and non-budgetary voter initiatives," ZEW Discussion Papers 14-004, ZEW - Leibniz Centre for European Economic Research.
    9. Holm-Hadulla, Fédéric, 2020. "Fiscal equalization and the tax structure," Regional Science and Urban Economics, Elsevier, vol. 81(C).
    10. Anna Harvey, 2020. "Applying regression discontinuity designs to American political development," Public Choice, Springer, vol. 185(3), pages 377-399, December.
    11. John G. Matsusaka, 2018. "Public policy and the initiative and referendum: a survey with some new evidence," Public Choice, Springer, vol. 174(1), pages 107-143, January.
    12. Caroline J. Tolbert & Christopher Witko & Cary Wolbers, 2019. "Public Support for Higher Taxes on the Wealthy: California’s Proposition 30," Politics and Governance, Cogitatio Press, vol. 7(2), pages 351-364.
    13. Matthew Gobey & Karolis Matikonis, 2021. "Small business property tax reductions and job growth," Small Business Economics, Springer, vol. 56(1), pages 277-292, January.

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    More about this item

    Keywords

    Direct democracy; Taxation; Regression discontinuity; Bavaria;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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