Elections and the structure of taxation in developing countries
This article analyses the impact of the electoral calendar on the composition of tax revenue (direct versus indirect taxes). It thus represents an extension of traditional political budget-cycle analyses assessing the impact of elections on overall revenue. We appeal to the opportunistic political budget model of Drazen and Eslava (2010) to predict the relationship between taxation structure and elections. Panel data from 56 developing countries over the 1980–2006 period reveals a clear pattern of electorally-related policy interventions. Taking the potential endogeneity of election timing into account, we find robust evidence of lower indirect taxes being applied by incumbent governments in the period just prior to an election. Indirect tax revenue in election years is estimated to be 0.3 GDP percentage points lower than in other years, corresponding to a fall of about 3.4% of the average figure in the sample countries, while there is no such relationship with direct tax revenue.
KeywordsPolitical budget cycles Elections Taxation Developing countries
JEL ClassificationD72 E62 O10
The author would like to thank Gerard Chambas, Blessing Chiripanhura, Paul Collier, Jean-Louis Combes, Stuti Khemani, Gregoire Rota-Graziosi, Paul Mosley, and Yogesh Uppal, as well as participants at the 2010 Annual Conference of the Public Choice Society and the 2010 Annual CSAE Conference at Oxford University for valuable comments and suggestions. The author is also grateful to two anonymous referees and to the editor, William F. Shughart II, for their thorough comments on the paper.
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