Abstract
This article analyses the impact of the electoral calendar on the composition of tax revenue (direct versus indirect taxes). It thus represents an extension of traditional political budget-cycle analyses assessing the impact of elections on overall revenue. We appeal to the opportunistic political budget model of Drazen and Eslava (2010) to predict the relationship between taxation structure and elections. Panel data from 56 developing countries over the 1980–2006 period reveals a clear pattern of electorally-related policy interventions. Taking the potential endogeneity of election timing into account, we find robust evidence of lower indirect taxes being applied by incumbent governments in the period just prior to an election. Indirect tax revenue in election years is estimated to be 0.3 GDP percentage points lower than in other years, corresponding to a fall of about 3.4% of the average figure in the sample countries, while there is no such relationship with direct tax revenue.
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Notes
Andrikopoulos et al. (2004) find significant election effects on indirect taxes, but only in a few EU countries. Katsimi and Sarantides (2011) find a significant relationship between elections and direct taxes in a sample of 19 OECD countries and Mikesell (1978) between election and broad-based taxes in American states. Ashworth and Heyndels (2002) find evidence of a political budget cycle in national tax structures in OECD countries, but focus on tax structure turbulence and therefore provide no information on which specific component of tax is the most affected.
As explained in Drazen and Eslava (2010), the second component should be one that politicians may value but voters do not. We can think, for instance, of politicians who value low direct taxes in order to favor companies and potentially receive contributions. However, we assume here that changes to the second component do not help influence election success.
We consider all the developing countries listed as low, lower-middle or upper-middle income in the World Bank classification, but require that they have data for at least 15 years over the 1980–2006 period to be included in our sample. Four of the remaining countries (Bhutan, Jordan, Myanmar and the Syrian Arab Republic) held no elections in the period under consideration, and are thus excluded from the sample.
The inclusion of country fixed effects helps to control for institutional heterogeneity across countries, which is greater in multi-country studies than in cross-sectional units within the same country.
Using the data from Brender and Drazen (2005).
The vast majority of the elections held in these countries, over the 1980–2006 period took place when the countries were democracies.
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Acknowledgements
The author would like to thank Gerard Chambas, Blessing Chiripanhura, Paul Collier, Jean-Louis Combes, Stuti Khemani, Gregoire Rota-Graziosi, Paul Mosley, and Yogesh Uppal, as well as participants at the 2010 Annual Conference of the Public Choice Society and the 2010 Annual CSAE Conference at Oxford University for valuable comments and suggestions. The author is also grateful to two anonymous referees and to the editor, William F. Shughart II, for their thorough comments on the paper.
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Appendices
Appendix 1: 56 Countries in the sample, type of regime and election years
Argentina (PR) | 83, 89, 95, 99, 03 | Lesotho (PA) | 93, 98, 02 |
Belize (PA) | 84, 89, 93, 98, 03 | Madagascar (PR) | 82, 89, 93, 96, 01, 06 |
Bolivia (PR) | 80, 85, 89, 93, 97, 02, 05 | Malawi (PR) | 94, 99, 04 |
Botswana (PA) | 84, 89, 94, 99, 04 | Malaysia (PA) | 82, 86, 90, 95, 99, 04 |
Burkina Faso (PR) | 91, 98, 05 | Mali (PR) | 92, 97, 02 |
Burundi (PR) | 84, 93, 05 | Mauritania (PR) | 92, 97, 03 |
Cameroon (PR) | 80, 84, 88, 92, 97, 04 | Mauritius (PA) | 82, 87, 91, 95, 00, 05 |
Cape Verde (PR) | 85, 91, 96, 01, 06 | Mexico (PR) | 82, 88, 94, 00, 06 |
Central African Rep. (PR) | 86, 93, 99, 05 | Morocco (PR) | 84, 93, 97, 02 |
Chad (PR) | 96, 01, 06 | Mozambique (PR) | 94, 99, 04 |
Chile (PR) | 89, 93, 00, 06 | Niger (PR) | 89, 93, 96, 99, 04 |
Colombia (PR) | 82, 86, 90, 94, 98, 02, 06 | Nigeria (PR) | 83, 93, 99, 03 |
Congo Rep. (PR) | 92, 02 | Pakistan (PR) | 90, 93, 97 |
Costa Rica (PR) | 82, 86, 90, 94, 98, 02, 06 | Peru (PR) | 80, 85, 90, 95, 00, 01, 06 |
Cote d’Ivoire (PR) | 80, 85, 90, 95, 00 | Philippines (PR) | 81, 86, 92, 95, 98, 04 |
Dominican Rep. (PR) | 82, 86, 90, 94, 96, 00, 04 | Rwanda (PR) | 83, 88, 03 |
Ecuador (PR) | 84, 88, 92, 96, 98, 02, 06 | St Vin. & Grenad. (PA) | 84, 89, 94, 98, 01, 05 |
Egypt Arab Rep. (PA) | 84, 87, 90, 95, 00, 05 | Senegal (PR) | 83, 88, 93, 00 |
El Salvador (PR) | 84, 89, 94, 99, 04 | Sierra Leone (PR) | 85, 96, 02 |
Ethiopia (PA) | 00, 05 | Sri Lanka (PR) | 82, 88, 94, 99, 05 |
Fiji (PA) | 82, 87, 92, 99, 01, 06 | Sudan (PR) | 80, 81, 96, 00 |
Gambia (PR) | 82, 87, 92, 96, 01, 06 | Tanzania (PR) | 80, 85, 90, 95, 00, 05 |
Ghana (PR) | 92, 96, 00, 04 | Thailand (PA) | 83, 87, 92, 95, 96, 01, 05, 06 |
Guatemala (PR) | 82, 85, 90, 95, 99, 03 | Togo (PA) | 86, 94, 99, 02 |
Guinea-Bissau (PR) | 94, 00, 05 | Tunisia (PR) | 89, 94, 99, 04 |
India (PA) | 80, 84, 89, 91, 96, 99, 04 | Uganda (PR) | 96, 01, 06 |
Iran (PR) | 89, 93, 97, 01, 05 | Uruguay (PR) | 84, 89, 94, 99, 04 |
Kenya (PR) | 83, 87, 92, 97, 02 | Zambia (PR) | 83, 88, 91, 96, 01, 06 |
Appendix 2: Summary statistics
Variable | N | Mean | Std. Dev. | Min. | Max. |
|---|---|---|---|---|---|
Indirect tax revenue (%GDP) | 1379 | 9.101 | 4.066 | 0.652 | 31.153 |
Direct tax revenue (%GDP) | 1201 | 3.795 | 1.990 | 0.174 | 12.0175 |
Election | 1512 | 0.177 | 0.382 | 0 | 1 |
Election 1st half | 1512 | 0.075 | 0.263 | 0 | 1 |
Election 2nd half | 1512 | 0.101 | 0.302 | 0 | 1 |
Election (datation 2) | 1512 | 0.176 | 0.381 | 0 | 1 |
Post-election | 1512 | 0.167 | 0.373 | 0 | 1 |
Election predetermined | 1512 | 0.1237 | 0.329 | 0 | 1 |
Election endogenous | 1512 | 0.0536 | 0.225 | 0 | 1 |
Election in democracies | 1512 | 0.1005 | 0.301 | 0 | 1 |
Election in weak democracies or autocracies | 1512 | 0.0754 | 0.264 | 0 | 1 |
GDP per capita (log) | 1492 | 7.343 | 0.979 | 5.278 | 9.475 |
Urbanization | 1456 | 39.702 | 20.110 | 4.3 | 92 |
Imports (%GDP) | 1490 | 36.608 | 20.355 | 2.982 | 130.923 |
Inflation (log) | 1444 | 4.122 | 0.413 | 3.525 | 9.376 |
Share of population below 14 | 1512 | 5.140 | 0.206 | 4.731 | 6.322 |
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Ehrhart, H. Elections and the structure of taxation in developing countries. Public Choice 156, 195–211 (2013). https://doi.org/10.1007/s11127-011-9894-8
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DOI: https://doi.org/10.1007/s11127-011-9894-8