Tax Contracts and Elections

64 Pages Posted: 28 Sep 2012

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Maik T. Schneider

Karl-Franzens-University of Graz

Multiple version iconThere are 2 versions of this paper

Date Written: July 2012

Abstract

In this paper we examine the impact of tax contracts, a novel instrument, on elections, policies, and welfare. We consider a political game in which three parties compete to form the government and voters may behave strategically. 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 unambiguously improve the welfare of the median voter.

Keywords: elections, government formation, political contracts, tax promise

JEL Classification: D72, D82, H55

Suggested Citation

Gersbach, Hans and Schneider, Maik T., Tax Contracts and Elections (July 2012). CEPR Discussion Paper No. DP9054, Available at SSRN: https://ssrn.com/abstract=2153505

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Research ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Maik T. Schneider

Karl-Franzens-University of Graz ( email )

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