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Business taxes and the electoral cycle

  • Dirk Foremny

    ()

    (University of Bonn)

  • Nadine Riedel

    ()

    (University of Hohenheim & Oxford University CBT & CESifo Munich)

The purpose of this paper is to assess whether politicians manipulate the timing of tax rate changes in a strategic way to maximize reelection prospects. To do so, we exploit the German local business tax as a testing ground which is set autonomously by German municipalities. As election dates vary across local councils, the data allows us to disentangle effects related to the timing of elections from common trends. Using a rich panel data-set for German municipalities, we assess the impact of elections on local business tax choices. The findings support the notion of a political cycle in tax setting behavior as the growth rate of the local business tax is significantly reduced in the election year and the year prior to the election, while it jumps up in the year after the election. This pattern turns out to be robust against a number of sensitivity checks.

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Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2012/3.

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Length: 40 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:ieb:wpaper:2012/3/doc2012-3
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  1. Kenneth Rogoff & Anne Sibert, 1986. "Elections and Macroeconomic Policy Cycles," NBER Working Papers 1838, National Bureau of Economic Research, Inc.
  2. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  3. John Mikesell, 1978. "Election periods and state tax policy cycles," Public Choice, Springer, vol. 33(3), pages 99-106, January.
  4. Arulampalam, Wiji & Devereux, Michael P. & Maffini, Giorgia, 2012. "The direct incidence of corporate income tax on wages," European Economic Review, Elsevier, vol. 56(6), pages 1038-1054.
  5. Michael A. Nelson, 2000. "Electoral Cycles and the Politics of State Tax Policy," Public Finance Review, , vol. 28(6), pages 540-560, November.
  6. Buettner, Thiess, 2003. "Tax base effects and fiscal externalities of local capital taxation: evidence from a panel of German jurisdictions," Journal of Urban Economics, Elsevier, vol. 54(1), pages 110-128, July.
  7. A. Colin Cameron & Jonah B. Gelbach & Douglas L. Miller, 2011. "Robust Inference With Multiway Clustering," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(2), pages 238-249, April.
  8. Devereux, M.P. & Lockwood, B. & Redoano, M., 2007. "Horizontal and vertical indirect tax competition: Theory and some evidence from the USA," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 451-479, April.
  9. Ronald Kneebone & Kenneth McKenzie, 2001. "Electoral and Partisan Cycles in Fiscal Policy: An Examination of Canadian Provinces," International Tax and Public Finance, Springer, vol. 8(5), pages 753-774, November.
  10. Schuknecht, Ludger, 2000. " Fiscal Policy Cycles and Public Expenditure in Developing Countries," Public Choice, Springer, vol. 102(1-2), pages 115-30, January.
  11. Alberto Alesina & Nouriel Roubini & Gerald D. Cohen, 1997. "Political Cycles and the Macroeconomy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510944, August.
  12. Francisco José Veiga & Linda Gonçalves Veiga, 2004. "Political Business Cycles at the Municipal Level," NIPE Working Papers 4/2004, NIPE - Universidade do Minho.
  13. Lindbeck, Assar, 1976. "Stabilization Policy in Open Economies with Endogenous Politicians," American Economic Review, American Economic Association, vol. 66(2), pages 1-19, May.
  14. Matz Dahlberg & Eva Mörk, 2011. "Is there an election cycle in public employment? Separating time effects from election year effects," Working Papers 2011/8, Institut d'Economia de Barcelona (IEB).
  15. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
  16. Jonah B. Gelbach & Doug Miller, 2009. "Robust Inference with Multi-way Clustering," Working Papers 99, University of California, Davis, Department of Economics.
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