A Fistful of Dollars: Rent Seeking Behaviour and Local Tax Manipulation

Dondena Working Paper Series No: 130, 2019

39 Pages Posted: 25 Oct 2019

Date Written: October 15, 2019

Abstract

The aim of this paper is to study whether politicians manipulate fiscal policy to extract private rents. We focus on the local personal income tax (PIT), in the setting of Italian cities, which is a progressive instrument that allows mayors to set different rates to distinct wage groups. We exploit discontinuities in mayors’ salaries, that are based on population thresholds, to study whether mayors systematically apply lower rates to their own tax bracket. The main results document large rent-seeking activity in fiscal policy. First, we show that when mayors’s salary is exogenously located in the following tax bracket this receives a significantly lower tax rate than the previous bracket, compared to the control group. Second, we show that this rent-seeking activity is highly detrimental for the public treasury, with a considerable reduction in fiscal revenues. And finally, we document that the monetary gains for rent-seeker politicians are rather limited. These results suggest that when fiscal policy is prone to be manipulated politicians do not hesitate to engage in rent-seeking activities even in case of little profits.

Keywords: rent-seeking, fiscal policy, personal income tax, efficiency wage, regression discontinuity design

JEL Classification: D72, E62, H71, P16

Suggested Citation

Giommoni, Tommaso, A Fistful of Dollars: Rent Seeking Behaviour and Local Tax Manipulation (October 15, 2019). Dondena Working Paper Series No: 130, 2019, Available at SSRN: https://ssrn.com/abstract=3470367 or http://dx.doi.org/10.2139/ssrn.3470367

Tommaso Giommoni (Contact Author)

ETH Zürich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

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