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4 Economic voting: The influence of tax policy on elections
While we have concentrated on the effects of political considerations and institutional factors on tax reforms so far, part V.4 analyzes the effects of tax reforms on
the voting decision. We first shortly review theoretical approaches in the literature
and discuss main findings. Then we derive hypotheses from the theory of economic
voting with respect to the possible influence of tax policy on voting decisions. Finally, we test the hypotheses empirically based on our data-set.
4.1 Economic voting and tax policy – general approach and related literature
The theory of economic voting argues that the individual and the aggregated vote in
elections is influenced by economic developments as well as by economic policy.
One early example is Tufte (1978, p. 113) who demonstrated a strong influence of
economic growth on the results of US midterm elections.272 Since then a relatively
broad literature has developed.273
The main questions discussed in this literature are which economic factors are affecting the vote, whether voting decisions are more influenced by past policy decisions (retrospective voting) or by expectations on future policy decisions (prospective voting) and whether there is an asymmetry in the reaction to policies with positive or negative effects (grievance asymmetry).
Most of the studies in the field follow an empirical approach. The central problem
is that the influence of economic conditions on the decision-making of individual
voters cannot be observed directly but is often analyzed based on aggregated variables like macroeconomic conditions and total vote share changes. Policy decisions
are most of the time integrated only indirectly (via an assumed/stated effect of policy on macroeconomic conditions).
Based on the existing literature some stylized facts can be distilled: retrospective
voting is in most cases more important than prospective voting, the macroeconomic
variables GDP growth (which is linked to unemployment) and inflation account for
roughly ? of vote share changes, and there is a grievance asymmetry in that negative changes lead to stronger electoral reactions.274
272 An analysis with respect to the effects of economic conditions on the US presidential vote can
be found in Erikson (1989) or Kinder et al. (1989) and of the congressional vote in Erikson
(1990). Fiorina (1981) researches retrospective voting in US elections, Levitt and Snyder
(1997) search for the impact of federal spending on house elections in the US. Besley/Case
(1995) analyze the relationship in between tax competition, tax rate setting and re-election
probabilities of incumbent governments.
273 Lewis-Beck and Paldam (2000), pp. 113 ff., were aware of approximately 200 books and
papers in the field in 1998.
274 See for a discussion: Lewis-Beck and Paldam (2000), pp. 113 ff. Empirical results for Western European elections from 1960 to 1997 can be found in Chappell and Veiga (2000).
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4.1.1 Economic voting and tax policy
Electoral motives play an important role in many studies of tax policy. Large parts
of the polit-economic literature, which try to explain why real world tax systems
differ strongly from welfare-optimal taxation and why welfare-enhancing reforms
fail to be implemented, refer to the importance of electoral motivation of governments.275 We were able to confirm the importance of opportunistic behavior and
showed strong evidence for electoral motivation in the timing of tax policy (see part
V.3). But although there is wide agreement on the importance of electoral motivation in tax policy, barely any studies exist which actually really analyze the effects
of tax policy on the voting decision.276 Is it really worthwhile for governments to
reduce the overall tax burden before elections? Or are voters completely unconcerned about these changes in tax policy? The number of existing studies asking
these questions is very limited.277 One of the few existing studies is Johnson, Lynch
and Walker (2005) who showed for British data that marginal and standard rates of
income taxes had no influence on election results (1950-2001), but effective tax
rates278 had an important and much larger effect on vote share changes than changes
in unemployment and economic growth.279 Landon and Ryan (1997) studied the
effects of different kinds of taxes on the vote in Canadian provincial elections. For
Germany we are not aware of a well-founded study which analyzes the effects of tax
policy on the electoral vote for a longer time period.
One important reason for the lack of studies on the effects of taxation on voting
decisions results from problems to quantify tax policy. We can overcome these
problems at least partly by testing hypotheses of economic voting based on our new
data-set of fiscal effects of tax reforms.
275 See for example the discussion in Findling (1995).
276 One could argue that the influence of taxation on the vote cannot be studied without taking
expenditure (and public good provision) into account as taxation might not be a separate independent variable but closely linked to expenditure. If tax increases lead to an additional
burden the possible effect on the vote might depend crucially on the kind of spending that is
financed with that tax increase. However, we do not find this argument to be convincing.
First, there is – with only some minor exceptions – not a clear linkage in between spending
and taxing decisions as tax revenues are usually not earmarked for special uses. Second, and
most important, we have found that there exists no clear link in between tax reforms and expenditure developments (see part V.2). Therefore, taxation and expenditure are in practice not
really linked too closely and can be studied separately.
277 Most of the literature is concerned with macroeconomic variables like unemployment, GDP
growth or inflation. For a discussion see Mueller (2003), pp. 429 ff.
278 Measured as the proportion of the total income an average individual pays as taxes.
279 This is contrary to Rose and Karran (1987) who find that taxation had no significant impact
on election results in Britain.
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4.1.2 Economic voting and tax reforms – hypotheses
How can we analyze the relationship in between tax policy and the voting decision?
Which hypotheses should we test? The best case for an analysis of the electoral
consequences of tax policies would be if we could use detailed data on the distributional consequences of tax policy on a micro-level. Then we could calculate who
profits from tax policy changes, who loses and how these welfare changes affect the
vote. However, we are far from disposing of these data.280 Based on the data-set we
employ here we have to put the question differently. The most important variables
we have are the extent of tax increases and of tax reductions and the net fiscal effects of reforms (increases minus reductions). Nonetheless, we argue that these variables allow us to test important and previously inaccessible hypotheses.281 Most
importantly we can analyze whether the fiscal effects of tax reforms in the legislative period previous to the election play a role in the voting decision.
Based on the main questions discussed in the literature on economic voting we
can test several important hypotheses based on the fiscal effects of tax reforms:
As we have only data on past policies and not on voters´ expectations at the time
of the elections, our first hypothesis is concerned with the general importance of past
policies (retrospective voting). Do we observe an important influence of past tax
policies on the re-election probabilities of incumbent governments (and how strong
is it)? A sub-hypothesis is whether voters focus on tax policy decisions (reflected by
the adoption of tax reforms by the chambers of parliament) or on reforms being
implemented (reflecting the effective change in the tax burden).
If we find evidence for retrospective voting we can ask: What is the time horizon
of tax policies in the consideration of voters? Does just tax policy in election years
matter, or do voters take the policy record in the whole legislative period before an
election into account?
Finally, we can address the question of a grievance asymmetry: Do voters punish
governments more heavily for past tax increases than they reward tax reductions?
4.2 The influence of tax reforms on elections – empirical analysis
To test the derived main hypotheses on tax policy and economic voting, we discuss
first how to measure the independent variables in the analysis: changes in voting
decisions affected by tax policies. Then we move on to the empirical analysis of
economic voting which integrates macroeconomic variables and tax policy.
280 Examples for studies that analyze the consequences of a tax reform for different income
deciles are Haan and Steiner (2005) or Corneo (2003). However these studies are limited to
only one income tax reform.
281 See description and discussion of the data-set in part III and IV.
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References
Zusammenfassung
Was bestimmt die Steuerpolitik? Welche Ziele verfolgen die Bundesregierungen bei Steuerreformen? Haben Steuererhöhungen und Steuersenkungen einen Einfluss auf die Wahlergebnisse? Auf der Basis eines neuen Datensatzes zu den fiskalischen Effekten von Steuerreformen im Zeitraum von 1964 bis 2004 zeigt das Werk Muster der Steuerpolitik auf und testet zentrale ökonomische Hypothesen. Dabei zeigt sich, dass normative ökonomische Ansätze kaum einen Erklärungsbeitrag für die zu beobachtende Steuerpolitik leisten können.
Ausgehend von wichtigen polit-ökonomischen Theorien zeigt der Autor, dass die Mehrheitskonstellationen im Bundesrat einen wichtigen Einfluss auf die Steuerpolitik haben, allerdings genau umgekehrt wie von der Blockade-Hypothese behauptet: Steuerreformen sind gemessen an ihren Fiskaleffekten bei gegenläufigen Mehrheiten in Bundestag und Bundesrat häufiger und umfangreicher. Des Weiteren gibt es keine Hinweise darauf, dass die parteipolitische Zusammensetzung der Bundesregierung einen wichtigen Einfluss auf Steuerreformen hat. Wahltaktische Terminierungen von Steuerreformen spielen aber sehr wohl eine wichtige Rolle. Eine Auswertung des Zusammenhangs von Steuerreformen und Wahlergebnissen zeigt allerdings, dass die Versuche der Bundesregierungen, ihre Wiederwahlwahrscheinlichkeit durch Steuersenkungen kurz vor der Wahl zu erhöhen, wenig erfolgreich sind: Nicht nur die Jahre unmittelbar vor den Wahlterminen, sondern die Steuerpolitik in der gesamten Legislaturperiode hat einen Einfluss auf die Bundestagswahlergebnisse der regierenden Parteien.