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Partisan politics in corporate tax competition

  • Osterloh, Steffen
  • Debus, Marc

This paper studies the effects of political factors, mainly partisanship, on corporate taxes in the past 30 years - a period of intensifying competitive pressure in Europe. Extending the Zodrow-Mieszkowski model by decision-makers who have ideological preferences yields the hypothesis that left-wing leaders set higher corporate tax rates. In the empirical analysis, we introduce a sophisticated measure of ideology derived from content analysis of party manifestos into the literature dealing with partisan effects on tax policy. We can confirm our main hypothesis, but we also find evidence that this partisan effect declines in the course of time. Moreover, we are able to reveal that this effect is mainly driven by the legislatures' stance on welfare policies. Finally, we show that a higher degree of government fragmentation, as well as the leadership of a head of state with an educational background in law counteracts the general tendency to lower tax rates.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 09-078.

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Date of creation: 2009
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Handle: RePEc:zbw:zewdip:09078
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