Local Tax Rates, Politics and Omitted Variable Bias
DOI:
https://doi.org/10.4335/13.3.933-951(2015)Keywords:
tax rate, partisan politics, political fragmentation, yardstick competition, political budget cycles, fiscal illusion, omitted variable bias, Flemish municipalitiesAbstract
Several studies have demonstrated the impact of political and institutional characteristics on communities’ fiscal policies. Typically, these characteristics have been studied in isolation, and possible interactions with other political determinants have been ignored. Yet, fiscal policy decisions are subject to political and institutional forces contemporaneously. This study combines different models to explain the variation in the Flemish local income tax rate and the local property tax rate simultaneously. The results of the individual analyses are equated with those of the joint analysis, thereby concluding that isolated testing may suffer from specification bias.
References
<p align="justify"><span lang="EN-US" style="font-size: 13px; font-family: Cambria">Allers, M. & Elhorst, J. (2005) Tax mimicking and yardstick competition among local governments in the Netherlands, International Tax and Public Finance, 12(4), pp. 493-513.
Ashworth, J., Geys, B. & Heyndels, B. (2006) Determinants of tax innovation : the case of environmental taxes in Flemish municipalities, European Journal of Political Economy, 22(1), pp. 223-247.
Ashworth, J. & Heyndels, B. (1997) Politicians' preferences on local tax rates, European Journal of Political Economy, 13(3), pp. 479-502.
Ashworth, J. & Heyndels, B. (2000) Politicians' opinions on tax reform, &, 103(1), pp. 117-138.
Bastiaens, E., De Borger, B. & Vanneste, J. (2001) Expenditure and taxation effects of local public debt and unconditional grants: evidence from Flemish municipalities, Brussels Economic Review, 17, pp. 71-89.
Besley, T. & Case, A. (1995) Incumbent Behavior - Vote-Seeking, Tax-Setting, and Yardstick Competition, American Economic Review, 85(1), pp. 25-45.
Bordignon, M., Cerniglia, F. & Revelli, F. (2003) In search of yardstick competition: a spatial analysis of Italian municipality property tax setting, Journal of Urban Economics, 54(2), pp. 199-217.
Brett, C. & Pinkse, J. (2000) The determinants of municipal tax rates in British Columbia, Canadian Journal of Economics, 33(3), pp. 695-714.
Brueckner, J. & Saavedra, L. (2001) Do local governments engage in strategic property-tax competition?, National Tax Journal, 54(2), pp. 203-229.
Buettner, T. (2001) Local business taxation and competition for capital: the choice of the tax rate, Regional Science and Urban Economics, 31(2-3), pp. 215-245.
Courant, P., Gramlich., E. & Rubinfeld, D. (1979) The stimulative effects of intergovernmental grants, In: Mieszkowski, P. & Oakland, W. (eds.) Fiscal federalism and grants-in-aids (Washington DC: The Urban Institute), pp. 5-21.
Delgado, F. & Mayor, M. (2011) Tax mimicking among local governments: some evidence from Spanish municipalities, Portuguese Economic Journal, 10(2), pp. 149-164.
Dexia (2014) Lokale financiën - Gemeenten (Brussels: Dexia).
Edmark, K. & Ågren, H. (2008) Identifying strategic interactions in Swedish local income tax policies, Journal of Urban Economics, 63(3), pp. 849-857.
Frey, B. & Schneider, F. (1978) An empirical study of politico-economic interaction in the United States, Review of Economics and Statistics, 60(2), pp. 174-183.
Gérard, M., Jayet, H. & Paty, S. (2010) Tax interactions among Belgian municipalities, Regional Science and Urban Economics, 40(5), pp. 336-342.
Gujarati, D. (2003) Basic Econometrics (New York: McGraw-Hill).
Hettich, W. & Winer, S. (1988) Economic and political foundations of tax structure, American Economic Review, 78(4), pp. 701-712.
Hettich, W. & Winer, S. (1999) Democratic choice and taxation (Cambridge: Cambridge University Press).
Heyndels, B. & Smolders, C. (1994) Fiscal illusion at the local-level - Empirical evidence for the Flemish Municipalities, Public Choice, 80(3-4), pp. 325-338.
Heyndels, B. & Smolders, C. (1995) Tax complexity and fiscal illusion, Public Choice, 85(1-2), pp. 127-141.
Heyndels, B. & Vuchelen, J. (1998) Tax mimicking among Belgian municipalities, National Tax Journal, 51(1), pp. 89-101.
Hibbs, D. (1977) Political parties and macro-economic policy, American Political Science Review, 71, pp. 1467-1487.
Kelejian, H. & Prucha, I. (1998) Generalized spatial 2SLS procedure for estimating a spatial autoregressive model with autoregressive disturbances, Journal of Real Estate Finance and Economics, 17(1), pp. 99-121.
Kontopoulos, Y. & Perotti, R. (1999) Government fragmentation and fiscal policy outcomes: Evidence from OECD countries, In: Poterba, J. & Von Hagen, J. (eds.) Fiscal institutions and fiscal performance (Chicago: University of Chicago Press), pp. 81-102.
Lijphart, A. & Crepaz, M. (1991) Corporatism and consensus democracy in 18 countries, British Journal of Political Science, 21, pp. 235-246.
Martinez-Vazquez, J. (1983) Renters' illusion or savvy?, Public Finance Review, 11(2), pp. 237-243.
Oates, W. E. (1972) Fiscal federalism (New York: Harcourt Brace Jovanovich).
Padovano, F. & Petrarca, I. (2014) Are the responsibility and yardstick competition hypotheses mutually consistent?, European Journal of Political Economy, 34, pp. 459-477, doi:10.1016/j.ejpoleco.2013.09.006.
Ricciuti, R. (2004) Political fragmentation and fiscal outcomes, Public Choice, 118(3-4), pp. 365-388.
Roubini, N. & Sachs, J. (1989) Government spending and budget deficits in the industrial countries, Economic Policy, 4(8), pp. 99-132, doi: 10.2307/1344465.
Solé Ollé, A. (2003) Electoral accountability and tax mimicking : The effects of electoral margins, coalition government and ideology, European Journal of Political Economy, 19(4), pp. 685-713, doi: 10.1016/S0176-2680(03)00023-5.
Vermeir, J. & Heyndels, B. (2006) Tax policy and yardstick voting in Flemish municipal elections, Applied Economics, 38(19), pp. 2285-2298.
von Hagen, J. (2010) Sticking to fiscal plans: the role of institutions, Public Choice, 144(3), pp. 487-503.
Wagner, R. (1976) Revenue structure, fiscal illusion, and budgetary choice, Public Choice, 25(1), pp. 45-61.
Werck, K., Heyndels, B. & Geys, B. (2008) The impact of 'central places' on spatial spending patterns: evidence from Flemish local government cultural expenditures, Journal of Cultural Economics, 32(1), pp. 35-58.
Zellner, A. & Theil, H. (1962) 3SLS : simultaneous estimation of simultaneous equations, Econometrica, 30(1), pp. 54-78.
Zodrow, G. & Mieszkowski, P. (1986) Pigou, Tiebout, property taxation, and the underprovision of local public-goods, Journal of Urban Economics, 19(3), pp. 356-370.
</span></p>
Ashworth, J., Geys, B. & Heyndels, B. (2006) Determinants of tax innovation : the case of environmental taxes in Flemish municipalities, European Journal of Political Economy, 22(1), pp. 223-247.
Ashworth, J. & Heyndels, B. (1997) Politicians' preferences on local tax rates, European Journal of Political Economy, 13(3), pp. 479-502.
Ashworth, J. & Heyndels, B. (2000) Politicians' opinions on tax reform, &, 103(1), pp. 117-138.
Bastiaens, E., De Borger, B. & Vanneste, J. (2001) Expenditure and taxation effects of local public debt and unconditional grants: evidence from Flemish municipalities, Brussels Economic Review, 17, pp. 71-89.
Besley, T. & Case, A. (1995) Incumbent Behavior - Vote-Seeking, Tax-Setting, and Yardstick Competition, American Economic Review, 85(1), pp. 25-45.
Bordignon, M., Cerniglia, F. & Revelli, F. (2003) In search of yardstick competition: a spatial analysis of Italian municipality property tax setting, Journal of Urban Economics, 54(2), pp. 199-217.
Brett, C. & Pinkse, J. (2000) The determinants of municipal tax rates in British Columbia, Canadian Journal of Economics, 33(3), pp. 695-714.
Brueckner, J. & Saavedra, L. (2001) Do local governments engage in strategic property-tax competition?, National Tax Journal, 54(2), pp. 203-229.
Buettner, T. (2001) Local business taxation and competition for capital: the choice of the tax rate, Regional Science and Urban Economics, 31(2-3), pp. 215-245.
Courant, P., Gramlich., E. & Rubinfeld, D. (1979) The stimulative effects of intergovernmental grants, In: Mieszkowski, P. & Oakland, W. (eds.) Fiscal federalism and grants-in-aids (Washington DC: The Urban Institute), pp. 5-21.
Delgado, F. & Mayor, M. (2011) Tax mimicking among local governments: some evidence from Spanish municipalities, Portuguese Economic Journal, 10(2), pp. 149-164.
Dexia (2014) Lokale financiën - Gemeenten (Brussels: Dexia).
Edmark, K. & Ågren, H. (2008) Identifying strategic interactions in Swedish local income tax policies, Journal of Urban Economics, 63(3), pp. 849-857.
Frey, B. & Schneider, F. (1978) An empirical study of politico-economic interaction in the United States, Review of Economics and Statistics, 60(2), pp. 174-183.
Gérard, M., Jayet, H. & Paty, S. (2010) Tax interactions among Belgian municipalities, Regional Science and Urban Economics, 40(5), pp. 336-342.
Gujarati, D. (2003) Basic Econometrics (New York: McGraw-Hill).
Hettich, W. & Winer, S. (1988) Economic and political foundations of tax structure, American Economic Review, 78(4), pp. 701-712.
Hettich, W. & Winer, S. (1999) Democratic choice and taxation (Cambridge: Cambridge University Press).
Heyndels, B. & Smolders, C. (1994) Fiscal illusion at the local-level - Empirical evidence for the Flemish Municipalities, Public Choice, 80(3-4), pp. 325-338.
Heyndels, B. & Smolders, C. (1995) Tax complexity and fiscal illusion, Public Choice, 85(1-2), pp. 127-141.
Heyndels, B. & Vuchelen, J. (1998) Tax mimicking among Belgian municipalities, National Tax Journal, 51(1), pp. 89-101.
Hibbs, D. (1977) Political parties and macro-economic policy, American Political Science Review, 71, pp. 1467-1487.
Kelejian, H. & Prucha, I. (1998) Generalized spatial 2SLS procedure for estimating a spatial autoregressive model with autoregressive disturbances, Journal of Real Estate Finance and Economics, 17(1), pp. 99-121.
Kontopoulos, Y. & Perotti, R. (1999) Government fragmentation and fiscal policy outcomes: Evidence from OECD countries, In: Poterba, J. & Von Hagen, J. (eds.) Fiscal institutions and fiscal performance (Chicago: University of Chicago Press), pp. 81-102.
Lijphart, A. & Crepaz, M. (1991) Corporatism and consensus democracy in 18 countries, British Journal of Political Science, 21, pp. 235-246.
Martinez-Vazquez, J. (1983) Renters' illusion or savvy?, Public Finance Review, 11(2), pp. 237-243.
Oates, W. E. (1972) Fiscal federalism (New York: Harcourt Brace Jovanovich).
Padovano, F. & Petrarca, I. (2014) Are the responsibility and yardstick competition hypotheses mutually consistent?, European Journal of Political Economy, 34, pp. 459-477, doi:10.1016/j.ejpoleco.2013.09.006.
Ricciuti, R. (2004) Political fragmentation and fiscal outcomes, Public Choice, 118(3-4), pp. 365-388.
Roubini, N. & Sachs, J. (1989) Government spending and budget deficits in the industrial countries, Economic Policy, 4(8), pp. 99-132, doi: 10.2307/1344465.
Solé Ollé, A. (2003) Electoral accountability and tax mimicking : The effects of electoral margins, coalition government and ideology, European Journal of Political Economy, 19(4), pp. 685-713, doi: 10.1016/S0176-2680(03)00023-5.
Vermeir, J. & Heyndels, B. (2006) Tax policy and yardstick voting in Flemish municipal elections, Applied Economics, 38(19), pp. 2285-2298.
von Hagen, J. (2010) Sticking to fiscal plans: the role of institutions, Public Choice, 144(3), pp. 487-503.
Wagner, R. (1976) Revenue structure, fiscal illusion, and budgetary choice, Public Choice, 25(1), pp. 45-61.
Werck, K., Heyndels, B. & Geys, B. (2008) The impact of 'central places' on spatial spending patterns: evidence from Flemish local government cultural expenditures, Journal of Cultural Economics, 32(1), pp. 35-58.
Zellner, A. & Theil, H. (1962) 3SLS : simultaneous estimation of simultaneous equations, Econometrica, 30(1), pp. 54-78.
Zodrow, G. & Mieszkowski, P. (1986) Pigou, Tiebout, property taxation, and the underprovision of local public-goods, Journal of Urban Economics, 19(3), pp. 356-370.
</span></p>
Published
2015-09-03
Issue
Section
Article
