The conditional political tax cycle: The role of fiscal credibility and transparency

Abstract

Incumbent politicians tend to use fiscal instruments in order to improve their election outcome. Surprisingly, the whole tax structure can be the subject of political manipulations under certain circumstances. The aim of this paper is to evaluate the conditional political tax cycle in the OECD countries. This means evaluating whether there are conditional systematic decreases in the tax revenue before the elections in the OECD countries. We investigate whether such systematic decreases depend on the transparency and credibility of fiscal policy. We use an unbalanced cross-country time series data set, comprising 34 developed countries (the OECD members) over the period 2000– 2013. A dynamic panel linear regression model is tested in this article, while FD GMM is employed. The results are as follows. First, there is a statistically significant political tax cycle in the tax revenues in the countries with a lower level of fiscal credibility and transparency. Second, the political tax cycle is noticeable especially in the consumption taxes.