Budget institutions and taxation
While a number of different studies have explored the effects of budgetary procedures and the centralization of the budget process on government debt, deficits and spending, few of them have explored whether such fiscal institutions matter for public revenue. This article argues that centralizing the budget process raises the levels of taxation by limiting the ability of individual government officials to veto tax increases in line with common-pool-problem arguments regarding public finances. Using detailed data on budgetary procedures from 15 EU countries, the empirical analysis shows that greater centralization of the budget process increases taxation as a share of GDP and that both the type of budget centralization and level of government fractionalization matter for the size of this effect. The results suggest that further centralizing the budget process limits government debt and deficits by increasing public revenues as well as constraining public spending.
KeywordsFiscal institutions Budget centralization Taxation, common-pool problem Government fractionalization
I would like to thank Mathias Heinze Pedersen, Peter Kurrild-Klitgaard, Benjamin C. K. Egerod, participants at the 2017 Danish Public Choice Workshop, three anonymous reviewers and the editor of Public Choice for their help, advice and suggestions. Special thanks to Mark Hallerberg for generously sharing the data on budget procedures.
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