The Effect of Direct Democracy on the Level and Structure of Local Taxes

41 Pages Posted: 23 Jan 2014

See all articles by Zareh Asatryan

Zareh Asatryan

ZEW – Leibniz Centre for European Economic Research; University of Freiburg

Thushyanthan Baskaran

University of Goettingen (Göttingen)

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research; University of Heidelberg - Alfred Weber Institute for Economics

Date Written: January 15, 2014

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.

Keywords: Direct democracy, taxation, regression discontinuity, Bavaria

JEL Classification: D72, D78, H71

Suggested Citation

Asatryan, Zareh and Baskaran, Thushyanthan and Heinemann, Friedrich, The Effect of Direct Democracy on the Level and Structure of Local Taxes (January 15, 2014). ZEW - Centre for European Economic Research Discussion Paper No. 14-003, Available at SSRN: https://ssrn.com/abstract=2383246 or http://dx.doi.org/10.2139/ssrn.2383246

Zareh Asatryan (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

L7
1
Mannheim, 68161
Germany

University of Freiburg ( email )

Albert-Ludwigs-Universität Freiburg, Wirtscha.inf.
Kollegiengebäude II, Platz der Alten Synagoge
Freiburg im Breisgau, 79098
Germany

Thushyanthan Baskaran

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

HOME PAGE: http://www.zew.de

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

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