Tax Rates Are Not Political Party Members

WHETHER THE GOVERNMENT IS RIGHTWING OR LEFTWING, THE OVERALL AMOUNT OF TAXATION DOES NOT CHANGE, JUST ITS COMPOSITION, AS TOLD IN A PAPER BY PAOLA PROFETA

In Europe, the alternation of right-wing and left-wing governments has little bearing on the share of personal income tax. This is one of the results of The Political Economy of Taxation in Europe. The study, co-authored by Paola Profeta with Simona Scabrosetti, is part of a larger research strand on the crucial role played by political variables in shaping tax systems.

The empirical analysis collects data from different sources: from total and fiscal pressure as percentage of GDP to political indicators such as the number of seats held by parties and the concentration of power. Socio-economic and demographic data are used as control variables. “We found out some positive and statistically significant relationships”, Profeta says. “The increase of property taxes needs a broad political consensus: there is a positive relationship between the number of seats held by the largest government party and the share of property taxes over GDP. When the country’s prime minister or president is left-wing, the individual income taxes are more relevant. When he or she is right-wing, corporate income taxes become more relevant. The costs of tax administration are higher when the country’s ruling coalition is left-wing”.

Contrary to what you would expect, the timing of tax reforms seems immune to the electoral cycle: politicians avoid dealing with such a delicate issue before elections. The number of seats held by the largest government party is associated with a lower top tax rate of the personal income tax. On the contrary, competition among parties in a coalition government results in higher tax progressivity. Fiscal decentralization leads to a reduction of taxes. “The debate over tax reforms never takes into account political variables, yet they play a crucial role in the evolution of European tax systems”.
 

by Claudio Todesco