Electoral Motives, Partisan Motives and Dynamic Optimality with Many Taxes: An International Investigation

Abstract

In this paper, we argue that tax-smoothing results based on total tax revenues may be of limited importance if in fact governments are concerned with the inter-temporal distortionary effects of many kinds of taxes, when electoral and partisan motives also have to be taken into account. We develop an inter-temporal model that predicts that tax revenue mix should follow random walks. The model is tested with international data using both time series and panel-based unit root tests. We find that during the examined period, 1973-2003, governments are not optimizing tax components in the sense of Barro.