Are Politicians Successful in their Electoral Strategies? The Case of Tax Revenue Budgeting Errors
DOI:
https://doi.org/10.4335/14.2.157-184(2016)Keywords:
tax projections, electoral cycle, local governments, electoral strategiesAbstract
This paper aims to examine the effect of tax revenue budgeting errors on fiscal balance and mayor’s party re-election. Specifically, we contribute to the literature by testing whether the relationship between tax revenue underestimation and fiscal balance is influenced by political ideology, political strength and the electoral cycle. To this end, we use a 1994-2008 panel of the largest Spanish municipalities. Our results reveal that underestimating tax revenue increases fiscal surpluses or reduces fiscal deficits. Tax revenue underestimation puts pressure on expenditure, thereby creating a revenue windfall and reducing the deficit. Thus, politicians use these resources to serve their own electoral interests rather than to citizens’ preferences. The impact of tax revenue budgeting errors on the fiscal balance depends on mayors’ political strength and the electoral cycle. In fact, we provide evidence that politicians create buffers by underestimating tax revenue, thereby reducing (increasing) fiscal deficits (surpluses) in the preceding years, to increase expenditure in the pre-election and election years. Finally, our estimates reveal that tax revenue underestimation two years before elections influences the mayor`s party reelection prospects positively.
References
Akhmedov, A., & Zhuravskaya, E. (2004) Opportunistic political cycles: test in a young democracy setting, The Quarterly Journal of Economics, 119(4), pp. 1301-1338.
Alan, G. M., Granof, M., & Giroux, G. (1991) An Analysis of Municipal Budget Variances, Accounting, Auditing and Accountability Journal. 4(1), pp. 29-50.
Alesina, A., & Rosenthal, H. (1994) Partisan Politics, Divided Governments, and the Economy (New York: Cambridge University Press).
Alesina, A., & Perotti, R. (1999) Budget deficits and budget institutions, In: Poterba, J. M. & von Hagen, J. (eds.) Fiscal institutions and fiscal performance (Chicago: Chicago Press for National Bureau of Economic Research), pp. 13–36.
Alesina, A., Hausmann, R., Hommes, R., & Stein, E. (1999) Budget Institutions and Fiscal Performance in Latin America, Journal of Development Economics, 59(2), pp. 253–273.
Alesina, A., & Drazen, A. (1991). Why are Stabilizations Delayed?, The American Economic. Review, 81(5), pp. 1170-1188.
Allers, M., de Haan, J. & Sterks, C. (2001). Partisan influence on the local tax burden in the Netherlands, Public Choice, 106(3-4), pp. 351-363.
Alt, J. E., & Lowry, R. C. (1994) Divided government and budget deficits: Evidence from the states, American Political Science Review, 88(4), pp. 811–828.
Arellano, M., & Bond, S. R. (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations, Review of Economic Studies, 58(2), pp. 277-297.
Ashworth, J., Geys, B. & Heyndels, B. (2005) Government Weakness and Local Public Debt Development in Flemish Municipalities International Tax and Public Finance, 12(4), pp. 395-422.
Bischoff, I., & Gohout, W. (2006) Tax projections in German states – manipulated by opportunistic incumbent parties?, FinanzwissenschaftlicheArbeitspapiere, 74, available at: http://www.econstor.eu/handle/10419/22382 (October 2, 2015).
Bischoff, I. & Gohout, W. (2010) The political economy of tax projections. International Tax and Public Finance, 17(2), pp. 133-150.
Borge, L. E. & Rattso, J. (1995) Demographic shift, relative costs and the allocation of local public consumption in Norway, Regional Science and Urban Economics, 25(6), pp. 705-726.
Brück, T. & Stephan, A. (2006). Do Eurozone Countries Cheat with their Budget Deficit Forecasts?, KYKLOS, 59(1), pp. 3-15.
Buti, M. & van den Noord, P. (2004). Fiscal Discretion and Elections in the Early Years of EMU, Journal of Common Market Studies, 39(4), pp. 737-56.
Carruthers, J. I. & Ulfarsson, G. F. (2008) Does Smart Growth Matter to Public Finance?, Urban Studies, 45(9), pp. 1791-1820.
Chatagny, F. & Soguel, N. (2012) The effect of tax revenue budgeting errors on fiscal balance: evidence from the Swiss cantons, International Tax and Public Finance, 19(3), pp. 319-337.
Cerda, R. & Vergara, R. (2007) Business cycle and political election outcomes: Evidence from the Chilean democracy, Public Choice, 132(1-2), pp. 125–136.
Couture, J. & Imbeau, L. M. (2009) Do governments manipulate their revenue forecasts? Budget speech and budget outcomes in the Canadian provinces, Studies in public choice (Berlin: Springer).
Cusack, T. R. (1997) Partisan politics and public finance: Changes in public spending in the industrialized democracies, 1955–1989, Public Choice, 91(3-4), pp. 375-395.
De Haan, J. & Sturm, J. E. (1994) Political and institutional determinants of fiscal policy in the European Community, Public Choice, 80(1-2), pp. 157-172.
Drazen, A. & Eslava, M. (2010) Electoral manipulation via voter-friendly spending: Theory and evidence, Journal of Development Economics, 92(1), pp. 39-52.
Esteller-Moré, A. (2005) Is There a Connection Between the Tax Administration and the Political Power?, International Tax and Public Finance, 12(5), pp. 639–663.
Galli, E. & Rossi, S. (2002) Political budget cycles: the case of the western German Länder, Public Choice, 110(3-4), pp. 283-303.
Goeminne, S., Geys, B. & Smolders, C. (2008) Political fragmentation and projected tax revenue: evidence from Flemish municipalities, International Tax and Public Finance, 15(3), pp. 297-315.
Grob, U. & Wolter, S. C. (2007) Demographic Change and Public Education Spending: A Conflict between Young and Old?, Education Economics, 15(3), pp. 277-292.
Hagen, T. P. & Vabo, S. I. (2005) Political characteristics, institutional procedures and fiscal performance: Panel data analyses of Norwegian local governments, 1991–1998, European Journal of Political Research, 44(1), pp. 43-64.
Holcombe, R. & Williams, D. W. (2008) The Impact of Population Density on Municipal Government Spending, Public Finance Review, 36(3), pp. 359-372.
Jones, B. D., True, J. L. & Baumgartner, F. R. (1997) Does incrementalism stem from political consensus or from institutional gridlock?, American Journal of Political Science, 41(4), pp. 1319-1339.
Krishnakumar, J., Martin, M. J. & Soguel, N. (2010) Explaining Fiscal Balances with a Simultaneous Equation Model of Revenue and Expenditure: A Case Study of Swiss Cantons Using Panel Data, Public Budgeting & Finance, 30(2), pp. 69-94.
Kukovic, S. & Hacek, M. (2013) The Re-Election of Mayors in the Slovenian Local Self-Government, Lex localis-Journal of Local Self Government, 11(2), pp. 87-99.
Ladd, H. & Yinger, J. (1991) America's Ailing Cities: Fiscal Health and the Design of Urban Policy (Baltimore: Johns Hopkins University Press).
Ladd, H. (1994) Fiscal impacts of local population growth: A conceptual and empirical analysis, Regional Science and Urban Economics, 24(6), pp. 661-686.
Lago-Peñas, I. & Lago-Peñas, S. (2004) Explaining Budget Indiscipline: Evidence From Spanish Municipalities, IEF Working Paper 21-04 (Spain: IEF).
Persson, T. & Tabellini, G. (2000) Political economics: Explaining Economic Policy (Cambridge: MIT Press).
Poterba, J. M. (1997) Demographic Structure and the Political Economy of Public Education, Journal of Policy Analysis and Management, 16(1), pp. 48-66.
Rogoff, K. & Sibert, A. (1988) Elections and macroeconomic policy cycles, Review of Economic Studies, 55(1), pp. 1-16.
Roubini, N. & Sachs, J. D. (1989a) Political and economic determinants of budget deficits in the industrial democracies, European Economic Review, 33(5), pp. 903-938.
Roubini, N. & Sachs, J. D. (1989b) Government Spending and Budget Deficits in the Industrial Countries, Economic Policy: A European Forum, 4(8), pp. 99-132.
Sakurai, S. N. & Menezes-Filho, N. A. (2008) Fiscal policy and reelection in Brazilian municipalities. Public Choice, 137(1-2), pp. 301-314.
Seitz, H. (2000) Fiscal policy, deficits and politics of subnational governments: The case of the German Laender, Public Choice, 102(3-4), pp. 183-218.
Serritzlew, S. (2005) Breaking Budgets: An Empirical Examination of Danish Municipalities, Financial Accountability and Management, 21(4), pp. 413-435.
Shi, M., & Svensson, J. (2002) Conditional political budget cycles, CEPR Discussion Paper, No. 3352 (London: CEPR).
Sol´e-Oll´e, A. & Sorribas-Navarro, P. (2008) The effects of partisan alignment on the allocation of intergovernmental transfers. Differences-in-differences estimates for Spain, Journal of Public Economics, 92(12), pp. 2302 – 2319.
Tellier, G. (2006) Public expenditures in Canadian provinces: An empirical study of politic-economic interactions, Public Choice, 126(3-4), pp 367-385.
Van der Ploeg, F. (2010) Political economy of prudent budgetary policy, International Tax and Public Finance, 17(3), 295-314.
Veiga, L. G. & Veiga, F. J. (2007) Does opportunism pay off?. Economics Letters, 96(2), pp. 177-182.
Veiga, L. G. & Veiga, F. J. (2011) Intergovernmental fiscal transfers as pork barrel, Public Choice, 155(3), pp. 335-353, doi 10.1007/s11127-011-9863-2.
Alan, G. M., Granof, M., & Giroux, G. (1991) An Analysis of Municipal Budget Variances, Accounting, Auditing and Accountability Journal. 4(1), pp. 29-50.
Alesina, A., & Rosenthal, H. (1994) Partisan Politics, Divided Governments, and the Economy (New York: Cambridge University Press).
Alesina, A., & Perotti, R. (1999) Budget deficits and budget institutions, In: Poterba, J. M. & von Hagen, J. (eds.) Fiscal institutions and fiscal performance (Chicago: Chicago Press for National Bureau of Economic Research), pp. 13–36.
Alesina, A., Hausmann, R., Hommes, R., & Stein, E. (1999) Budget Institutions and Fiscal Performance in Latin America, Journal of Development Economics, 59(2), pp. 253–273.
Alesina, A., & Drazen, A. (1991). Why are Stabilizations Delayed?, The American Economic. Review, 81(5), pp. 1170-1188.
Allers, M., de Haan, J. & Sterks, C. (2001). Partisan influence on the local tax burden in the Netherlands, Public Choice, 106(3-4), pp. 351-363.
Alt, J. E., & Lowry, R. C. (1994) Divided government and budget deficits: Evidence from the states, American Political Science Review, 88(4), pp. 811–828.
Arellano, M., & Bond, S. R. (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations, Review of Economic Studies, 58(2), pp. 277-297.
Ashworth, J., Geys, B. & Heyndels, B. (2005) Government Weakness and Local Public Debt Development in Flemish Municipalities International Tax and Public Finance, 12(4), pp. 395-422.
Bischoff, I., & Gohout, W. (2006) Tax projections in German states – manipulated by opportunistic incumbent parties?, FinanzwissenschaftlicheArbeitspapiere, 74, available at: http://www.econstor.eu/handle/10419/22382 (October 2, 2015).
Bischoff, I. & Gohout, W. (2010) The political economy of tax projections. International Tax and Public Finance, 17(2), pp. 133-150.
Borge, L. E. & Rattso, J. (1995) Demographic shift, relative costs and the allocation of local public consumption in Norway, Regional Science and Urban Economics, 25(6), pp. 705-726.
Brück, T. & Stephan, A. (2006). Do Eurozone Countries Cheat with their Budget Deficit Forecasts?, KYKLOS, 59(1), pp. 3-15.
Buti, M. & van den Noord, P. (2004). Fiscal Discretion and Elections in the Early Years of EMU, Journal of Common Market Studies, 39(4), pp. 737-56.
Carruthers, J. I. & Ulfarsson, G. F. (2008) Does Smart Growth Matter to Public Finance?, Urban Studies, 45(9), pp. 1791-1820.
Chatagny, F. & Soguel, N. (2012) The effect of tax revenue budgeting errors on fiscal balance: evidence from the Swiss cantons, International Tax and Public Finance, 19(3), pp. 319-337.
Cerda, R. & Vergara, R. (2007) Business cycle and political election outcomes: Evidence from the Chilean democracy, Public Choice, 132(1-2), pp. 125–136.
Couture, J. & Imbeau, L. M. (2009) Do governments manipulate their revenue forecasts? Budget speech and budget outcomes in the Canadian provinces, Studies in public choice (Berlin: Springer).
Cusack, T. R. (1997) Partisan politics and public finance: Changes in public spending in the industrialized democracies, 1955–1989, Public Choice, 91(3-4), pp. 375-395.
De Haan, J. & Sturm, J. E. (1994) Political and institutional determinants of fiscal policy in the European Community, Public Choice, 80(1-2), pp. 157-172.
Drazen, A. & Eslava, M. (2010) Electoral manipulation via voter-friendly spending: Theory and evidence, Journal of Development Economics, 92(1), pp. 39-52.
Esteller-Moré, A. (2005) Is There a Connection Between the Tax Administration and the Political Power?, International Tax and Public Finance, 12(5), pp. 639–663.
Galli, E. & Rossi, S. (2002) Political budget cycles: the case of the western German Länder, Public Choice, 110(3-4), pp. 283-303.
Goeminne, S., Geys, B. & Smolders, C. (2008) Political fragmentation and projected tax revenue: evidence from Flemish municipalities, International Tax and Public Finance, 15(3), pp. 297-315.
Grob, U. & Wolter, S. C. (2007) Demographic Change and Public Education Spending: A Conflict between Young and Old?, Education Economics, 15(3), pp. 277-292.
Hagen, T. P. & Vabo, S. I. (2005) Political characteristics, institutional procedures and fiscal performance: Panel data analyses of Norwegian local governments, 1991–1998, European Journal of Political Research, 44(1), pp. 43-64.
Holcombe, R. & Williams, D. W. (2008) The Impact of Population Density on Municipal Government Spending, Public Finance Review, 36(3), pp. 359-372.
Jones, B. D., True, J. L. & Baumgartner, F. R. (1997) Does incrementalism stem from political consensus or from institutional gridlock?, American Journal of Political Science, 41(4), pp. 1319-1339.
Krishnakumar, J., Martin, M. J. & Soguel, N. (2010) Explaining Fiscal Balances with a Simultaneous Equation Model of Revenue and Expenditure: A Case Study of Swiss Cantons Using Panel Data, Public Budgeting & Finance, 30(2), pp. 69-94.
Kukovic, S. & Hacek, M. (2013) The Re-Election of Mayors in the Slovenian Local Self-Government, Lex localis-Journal of Local Self Government, 11(2), pp. 87-99.
Ladd, H. & Yinger, J. (1991) America's Ailing Cities: Fiscal Health and the Design of Urban Policy (Baltimore: Johns Hopkins University Press).
Ladd, H. (1994) Fiscal impacts of local population growth: A conceptual and empirical analysis, Regional Science and Urban Economics, 24(6), pp. 661-686.
Lago-Peñas, I. & Lago-Peñas, S. (2004) Explaining Budget Indiscipline: Evidence From Spanish Municipalities, IEF Working Paper 21-04 (Spain: IEF).
Persson, T. & Tabellini, G. (2000) Political economics: Explaining Economic Policy (Cambridge: MIT Press).
Poterba, J. M. (1997) Demographic Structure and the Political Economy of Public Education, Journal of Policy Analysis and Management, 16(1), pp. 48-66.
Rogoff, K. & Sibert, A. (1988) Elections and macroeconomic policy cycles, Review of Economic Studies, 55(1), pp. 1-16.
Roubini, N. & Sachs, J. D. (1989a) Political and economic determinants of budget deficits in the industrial democracies, European Economic Review, 33(5), pp. 903-938.
Roubini, N. & Sachs, J. D. (1989b) Government Spending and Budget Deficits in the Industrial Countries, Economic Policy: A European Forum, 4(8), pp. 99-132.
Sakurai, S. N. & Menezes-Filho, N. A. (2008) Fiscal policy and reelection in Brazilian municipalities. Public Choice, 137(1-2), pp. 301-314.
Seitz, H. (2000) Fiscal policy, deficits and politics of subnational governments: The case of the German Laender, Public Choice, 102(3-4), pp. 183-218.
Serritzlew, S. (2005) Breaking Budgets: An Empirical Examination of Danish Municipalities, Financial Accountability and Management, 21(4), pp. 413-435.
Shi, M., & Svensson, J. (2002) Conditional political budget cycles, CEPR Discussion Paper, No. 3352 (London: CEPR).
Sol´e-Oll´e, A. & Sorribas-Navarro, P. (2008) The effects of partisan alignment on the allocation of intergovernmental transfers. Differences-in-differences estimates for Spain, Journal of Public Economics, 92(12), pp. 2302 – 2319.
Tellier, G. (2006) Public expenditures in Canadian provinces: An empirical study of politic-economic interactions, Public Choice, 126(3-4), pp 367-385.
Van der Ploeg, F. (2010) Political economy of prudent budgetary policy, International Tax and Public Finance, 17(3), 295-314.
Veiga, L. G. & Veiga, F. J. (2007) Does opportunism pay off?. Economics Letters, 96(2), pp. 177-182.
Veiga, L. G. & Veiga, F. J. (2011) Intergovernmental fiscal transfers as pork barrel, Public Choice, 155(3), pp. 335-353, doi 10.1007/s11127-011-9863-2.
Published
2016-04-01
Issue
Section
Article
