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Tax Contracts and Elections

  • Gersbach, Hans
  • Schneider, Maik

In this paper we examine the impact of tax contracts, a novel instrument, on elections, policies, and welfare. We consider a political game in which three parties compete to form the government and voters may behave strategically. Parties have policy preferences about the level of public-good provision and benefit from perks when in office. A government raises taxes for both purposes. We show that tax contracts yield moderate policies and lead to lower perks by avoiding the formation of grand coalitions in order to win government. Moreover, in polarized societies they unambiguously improve the welfare of the median voter.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9054.

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Date of creation: Jul 2012
Date of revision:
Handle: RePEc:cpr:ceprdp:9054
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  1. McKelvey, Richard D. & Ordeshook, Peter C., 1987. "Elections with limited information: A multidimensional model," Mathematical Social Sciences, Elsevier, vol. 14(1), pages 77-99, August.
  2. Michele Polo, . "Electoral competition and political rents," Working Papers 144, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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  6. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
  7. Myerson Roger B., 1993. "Effectiveness of Electoral Systems for Reducing Government Corruption: A Game-Theoretic Analysis," Games and Economic Behavior, Elsevier, vol. 5(1), pages 118-132, January.
  8. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135.
  9. Aragones, Enriqueta & Palfrey, Thomas R. & Postlewaite, Andrew, 2006. "Political reputations and campaign promises," Working Papers 1258, California Institute of Technology, Division of the Humanities and Social Sciences.
  10. Mueller,Dennis C., 2003. "Public Choice III," Cambridge Books, Cambridge University Press, number 9780521894753.
  11. Roland Bénabou, 2008. "Joseph Schumpeter Lecture Ideology," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 321-352, 04-05.
  12. Feld, Lars P. & Matsusaka, John G., 2003. "Budget referendums and government spending: evidence from Swiss cantons," Journal of Public Economics, Elsevier, vol. 87(12), pages 2703-2724, December.
  13. Gilat Levy, 2004. "A model of political parties," LSE Research Online Documents on Economics 540, London School of Economics and Political Science, LSE Library.
  14. Gersbach, Hans & Schneider, Maik, 2008. "Tax Contracts and Government Formation," CEPR Discussion Papers 7084, C.E.P.R. Discussion Papers.
  15. Gersbach, Hans & Schneider, Maik T., 2012. "Tax contracts and elections," European Economic Review, Elsevier, vol. 56(7), pages 1461-1479.
  16. Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc.
  17. repec:oup:restud:v:63:y:1996:i:2:p:265-86 is not listed on IDEAS
  18. Weingast, Barry R & Shepsle, Kenneth A & Johnsen, Christopher, 1981. "The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 642-64, August.
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