Taxation and Credible Commitment: Left, Right and Partisan Turnover

Abstract

Building on the fiscal contract literature, this paper argues that taxation is partly a game of credible commitment. Using data for 18 OECD countries, it shows that partisan turnover systematically affects the long-run equilibrium mix of taxes and services. When partisan turnover is low, more right-wing influence permanently increases corporate tax revenue and the corporate share of pre-tax income; more left-wing influence, by contrast, permanently increases consumption tax revenue and social spending. When turnover is high, even powerful partisans do not increase taxes that disproportionately affect their supporters. When partisans tax their own supporters, they raise more revenue, even when we account for some plausible benefits. Our theoretical conjectures are consistent with the pattern of partisan behavior within countries, not just between them.