Business Taxes and the Electoral Cycle

35 Pages Posted: 13 Feb 2012

See all articles by Dirk Foremny

Dirk Foremny

University of Barcelona - Institut d'Economia de Barcelona (IEB) ; CESifo (Center for Economic Studies and Ifo Institute)

Nadine Riedel

Oxford University CBT; University of Hohenheim

Date Written: February 13, 2012

Abstract

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.

Keywords: local business tax choice, political economy, election cycle

JEL Classification: H250, H710, D720

Suggested Citation

Foremny, Dirk and Riedel, Nadine, Business Taxes and the Electoral Cycle (February 13, 2012). CESifo Working Paper Series No. 3729, Available at SSRN: https://ssrn.com/abstract=2004227

Dirk Foremny

University of Barcelona - Institut d'Economia de Barcelona (IEB) ( email )

c/ John M. Keynes, 1-11
Barcelona, 08034
Spain

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Nadine Riedel (Contact Author)

Oxford University CBT ( email )

Park End Street
Oxford, Oxfordshire OX1 1HP
United Kingdom

University of Hohenheim ( email )

Stuttgart
Germany

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