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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 referendum introduced the possibility to initiate direct democratic legislation into the local government code. Relying on a sample of all Bavarian municipalities over the period 1980-2011, we hypothesize that complementing a representative form of government with direct democratic elements 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 implement selection on observables and difference-in-discontinuity designs. Our results show that both actual direct democratic activity measured by the number of initiatives and the ease with which direct democratic legislation can be implemented measured by signature and quorum requirements increase local tax rates and shift the tax mix toward taxes with narrower bases.

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  • Asatryan, Zareh & Baskaran, Thushyanthan & Heinemann, Friedrich, 2014. "The effect of direct democracy on the level and structure of local taxes," ZEW Discussion Papers 14-003, ZEW - Leibniz Centre for European Economic Research.
  • Handle: RePEc:zbw:zewdip:14003
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    1. repec:kap:pubcho:v:172:y:2017:i:3:d:10.1007_s11127-017-0460-x is not listed on IDEAS
    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. 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.
    4. repec:wly:amposc:v:62:y:2018:i:1:p:210-229 is not listed on IDEAS
    5. 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.
    6. repec:cog:poango:v:7:y:2019:i:2:p:351-364 is not listed on IDEAS
    7. 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.
    8. Asatryan, Zareh & De Witte, Kristof, 2015. "Direct democracy and local government efficiency," European Journal of Political Economy, Elsevier, vol. 39(C), pages 58-66.
    9. 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.
    10. 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.
    11. Holm-Hadulla, Fédéric, 2018. "Fiscal equalization and the tax structure," Working Paper Series 2203, European Central Bank.
    12. repec:kap:pubcho:v:174:y:2018:i:1:d:10.1007_s11127-017-0486-0 is not listed on IDEAS

    More about this item

    Keywords

    direct democracy; taxation; regression discontinuity; Bavaria;

    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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