Local Tax Rates, Politics and Omitted Variable Bias

  • Stijn Goeminne Ghent University, Faculty of Economics and Business Administration, Henleykaai 84, 9000 Ghent
  • Carine Smolders Ghent University, Faculty of Economics and Business Administration, Henleykaai 84, 9000 Ghent
Keywords: tax rate, partisan politics, political fragmentation, yardstick competition, political budget cycles, fiscal illusion, omitted variable bias, Flemish municipalities

Abstract

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.

Author Biographies

Stijn Goeminne, Ghent University, Faculty of Economics and Business Administration, Henleykaai 84, 9000 Ghent
Assistent Professor
Carine Smolders, Ghent University, Faculty of Economics and Business Administration, Henleykaai 84, 9000 Ghent
Professor

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Published
2015-09-03
Section
Articles