DP9054 Tax Contracts and Elections
|Author(s):||Hans Gersbach, Maik Schneider|
|Publication Date:||July 2012|
|Keyword(s):||elections, government formation, political contracts, tax promise|
|JEL(s):||D72, D82, H55|
|Programme Areas:||Public Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9054|
In this paper we examine the impact of tax contracts, a novel instrument, on elections, policies, and welfare. We consider a political game in which three parties compete to form the government and voters may behave strategically. Parties have policy preferences about the level of public-good provision and benefit from perks when in office. A government raises taxes for both purposes. We show that tax contracts yield moderate policies and lead to lower perks by avoiding the formation of grand coalitions in order to win government. Moreover, in polarized societies they unambiguously improve the welfare of the median voter.