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.