Abstract
While a number of different studies have explored the effects of budgetary procedures and the centralization of the budget process on government debt, deficits and spending, few of them have explored whether such fiscal institutions matter for public revenue. This article argues that centralizing the budget process raises the levels of taxation by limiting the ability of individual government officials to veto tax increases in line with common-pool-problem arguments regarding public finances. Using detailed data on budgetary procedures from 15 EU countries, the empirical analysis shows that greater centralization of the budget process increases taxation as a share of GDP and that both the type of budget centralization and level of government fractionalization matter for the size of this effect. The results suggest that further centralizing the budget process limits government debt and deficits by increasing public revenues as well as constraining public spending.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
See Alesina et al. (1999) for a study of the effects of different budgetary institutions in Latin America.
For exception to these findings, see Perotti and Kontopoulos (2002).
Or the minister responsible for preparing and implementing the public budget.
This can be represented as either an ideological preference for serving their constituency or an interest in securing future electoral support.
The finance minister is implicitly assumed to be concerned with balancing the public budget.
This line of argument resembles a situation where the government has fiscal room to implement tax cuts. Here, coalition members are incentivized to maximize cuts to their constituencies’ tax payments while freeriding on the tax payments of other constituencies. This leads to a common-pool problem, where total taxes end up lower than planned. In contrast, the finance minister takes the total budget balance into account when deciding the tax cut for each tax instrument. Consequently, the tax raised from each instrument—and the total level of taxation—will be greater when the finance minister has greater agenda-setting power than in a decentralized budget regime.
For a well-cited empirical study of the role of veto players in public budgets, see Tsebelis and Chang (2004).
These are the “old” EU countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom.
According to personal correspondence with one of the authors, the data most reliably captures actual budget practices and rules until the 2008 financial crisis, which is therefore the end year of the panel. Excluding the years after 2004 (the year of the last survey) from the analysis yields largely similar results.
In this article, the delegation centralization index is equal to the authors’ Delegation Index, while the contract centralization index is equal to the Fiscal Targets (Long-Term) index (Hallerberg et al. 2009, p. 74). The authors also construct a full Contracts Index, which includes aspects of the budget implementation. Replacing the one type of contracts index with the other yields mostly similar results (results available upon request).
As previously mentioned, the finance minister might still play an important role as “guardian” of the fiscal targets and their implementation (Hallerberg et al. 2009, p. 51), which might also include working to raise taxes to meet the financing requirements of these fiscal targets.
The index goes from 0 to 1, lower scores denoting larger government fractionalization, which should be noted when interpreting the results in Appendix C. It is also necessary to note that the government Herfindahl index only measures government size fractionalization, not ideological distances within the government.
The results are also similar if fractionalization is measured using the govfrac variable from the Database of Political Institutions, which measures the probability of two randomly picked government deputies being from different parties (Cruz et al. 2016). Results available upon request.
Source: the Comparative Political Dataset.
New theoretical and empirical studies of veto-player dynamics, which consider issues of time-extended policymaking and credible commitments (Tommasi et al. 2014; Bäck and Lindvall 2015), also generate different or amended theoretical predictions vis-à-vis the effect of veto players on government policy stability and government fiscal policy. This article can be seen as yet another contribution to the amendment of the veto-player framework in budgetary politics.
References
Alesina, A., Hausmann, R., Hommes, R., & Stein, E. (1999). Budget institutions and fiscal performance in Latin America. Journal of Development Economics, 59, 253–273.
Alesina, A., & Perotti, R. (1996). Fiscal discipline and the budget process. The American Economic Review Paper and Proceedings, 86(2), 401–407.
Armingeon, K., Isler, C., Knöpfel, L., Weisstanner, D., & Engler, S. (2015). Comparative political data set 1960–2013. Bern: Institute of Political Science, University of Berne.
Bäck, H., & Lindvall, J. (2015). Commitment problems in coalitions: a new look at the fiscal policies of multiparty governments. Political Science Research and Methods, 3(1), 53–72.
Cruz, C., Keefer, P., & Scartascini, C. (2016). Database of Political Institutions codebook, 2015 Update (DPI2015). Inter-American Development Bank. Updated version of T. Beck, G. Clarke, A. Groff, P. Keefer, & P. Walsh. 2001. New tools in comparative political economy: The database of political institutions. World Bank Economic Review, 15(1), 165–176.
de Haan, J., Jong-A-Pin, R., & Mierau, J. O. (2013). Do budgetary institutions mitigate the common pool problem? New empirical evidence for the EU. Public Choice, 156, 423–441.
Hallerberg, M., & Scartascini, C. (2015). When do governments improve fiscal institutions Lessons? Lessons from financial crisis and fiscal reforms in Latin America. Economia: Journal of the Latin American and Caribbean Economic Association, 16(1), 41–76.
Hallerberg, M., Strauch, R. R., & von Hagen, J. (2007). The design of fiscal rules and forms of governance in European Union countries. European Journal of Political Economy, 23, 338–359.
Hallerberg, M., Strauch, R. R., & von Hagen, J. (2009). Fiscal governance in Europe. New York: Cambridge University Press.
Lledó, V., Yoon, S., Fang, X., Mbaye, S., & Kim, Y. (2017). Fiscal rules at a glance. Washington D.C: International Monetary Fund.
Martin, L. W., & Vanberg, G. (2013). Multiparty government, fiscal institutions, and public spending. The Journal of Politics, 75(4), 953–967.
Nickell, S. (1981). Biases in dynamic models with fixed effects. Econometrica, 49(6), 1417–1426.
Perotti, R., & Kontopoulos, Y. (2002). Fragmented fiscal policy. Journal of Public Economics, 86, 191–222.
Slemrod, J. (2004). Are corporate tax rates, or countries, converging? Journal of Public Economics, 88, 1169–1186.
Tommasi, M., Scartascini, C., & Stein, E. (2014). Veto players and policy adaptability: An intertemporal perspective. Journal of Theoretical Politics, 26(2), 222–248.
Tsebelis, G. (2002). Veto players: How political institutions work. Princeton: Princeton University Press.
Tsebelis, G., & Chang, E. C. C. (2004). Veto players and the structure of budgets in advanced industrialized countries. European Journal of Political Research, 43(3), 449–476.
Velasco, A. (2000). Debts and deficits with fragmented fiscal policymaking. Journal of Public Economics, 76, 105–125.
von Hagen, J., & Harden, I. J. (1995). Budget processes and commitment to fiscal discipline. European Economic Review, 39, 771–779.
Wehner, J. (2010). Institutional constraints on profligate politicians: The conditional effect of partisan fragmentation on budget deficits. Comparative Political Studies, 43(2), 208–229.
Weingast, B. R., Shepsle, K. A., & Johnsen, C. (1981). The political economy of benefits and costs: A neoclassical approach to distributive politics. Journal of Political Economy, 89(4), 642–664.
Acknowledgements
I would like to thank Mathias Heinze Pedersen, Peter Kurrild-Klitgaard, Benjamin C. K. Egerod, participants at the 2017 Danish Public Choice Workshop, three anonymous reviewers and the editor of Public Choice for their help, advice and suggestions. Special thanks to Mark Hallerberg for generously sharing the data on budget procedures.
Author information
Authors and Affiliations
Corresponding author
Electronic supplementary material
Below is the link to the electronic supplementary material.
Rights and permissions
About this article
Cite this article
Aaskoven, L. Budget institutions and taxation. Public Choice 174, 335–349 (2018). https://doi.org/10.1007/s11127-018-0507-7
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11127-018-0507-7