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Tax Contracts and Elections

In this paper we examine the impact of tax contracts as a novel institution on elections, policies, and welfare. We consider a political game in which three parties compete to form the government. 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 unambigously improve the welfare of the median voter.

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File URL: http://www.cer.ethz.ch/research/WP-09-123.pdf
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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 09/123.

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Length: 50 pages
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:eth:wpswif:09-123
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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. Grossman, Gene M & Helpman, Elhanan, 1996. "Electoral Competition and Special Interest Politics," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 265-86, April.
  3. Marco Battaglini & Stephen Coate, 2006. "A Dynamic Theory of Public Spending, Taxation and Debt," NBER Working Papers 12100, National Bureau of Economic Research, Inc.
  4. Christian Schultz & Ignacio Ortuño Ortín, 2000. "Public Funding Of Political Parties," Working Papers. Serie AD 2000-27, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  5. Gersbach, Hans & Schneider, Maik T., 2012. "Tax contracts and elections," European Economic Review, Elsevier, vol. 56(7), pages 1461-1479.
  6. 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.
  7. Roland Bénabou, 2008. "Joseph Schumpeter Lecture Ideology," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 321-352, 04-05.
  8. repec:cup:cbooks:9780521894753 is not listed on IDEAS
  9. 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.
  10. Enriqueta Aragonès & Thomas Palfrey & Andrew Postlewaite, 2007. "Political Reputations and Campaign Promises," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 846-884, 06.
  11. Gersbach, Hans & Schneider, Maik, 2008. "Tax Contracts and Government Formation," CEPR Discussion Papers 7084, C.E.P.R. Discussion Papers.
  12. Roger B. Myerson, 1991. "Effectiveness of Electoral Systems for Reducing Government Corruption: A Game-Theoretic Analysis," Discussion Papers 956, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Schaltegger, Christoph A. & Feld, Lars P., 2009. "Do large cabinets favor large governments? Evidence on the fiscal commons problem for Swiss Cantons," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 35-47, February.
  14. Michele Polo, . "Electoral competition and political rents," Working Papers 144, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  15. Gilat Levy, 2004. "A model of political parties," LSE Research Online Documents on Economics 540, London School of Economics and Political Science, LSE Library.
  16. 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.
  17. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135.
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