Federal Tax Policies, Congressional Voting, and the Fiscal Advantage of Natural Resources

Fidel Perez-Sebastian and Ohad Raveh
Authors registered in the RePEc Author Service: Fidel Perez Sebastian

No 182, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: What determines legislators' Â’voting behavior over federal tax policies? Conventional wisdom points primarily at party affiliation. This paper presents a novel mechanism of voting patterns across state-levels of Â…scal advantage. We construct a political economy model of Â…scal federalism with state Â…scal asymmetries that originate in heterogeneity in natural resource abundance, representing a non-mobile source of income that provides a Â…scal advantage in the inter-state Â…scal competition. The model shows that representatives of natural resource rich states are more willing to vote in favor of federal tax increases, despite the lower net Â…scal beneÂ…fits their states receive. This occurs because these states can reduce their tax rates as a response to an increase in the federal tax rate, and hence attract capital from the rest of the nation to the extent of increasing their pre-shock tax base. Data on roll-call votes in the U.S. Congress over major changes in federal tax bills in the post WW-II period support the predicted voting patterns. SpeciÂ…cally, we Â…nd that elected officials of resource rich states are more (less) supportive of capital-related federal tax increases (decreases), controlling for their party affiliation, ideology, federal transfers, and economic conditions. Our results indicate that the Â…scal advantage channel is as dominant as party affiliation in driving legislators' Â’voting decisions over federal tax policies.

Keywords: Federal tax changes; voting behaviour; federalism; natural resources (search for similar items in EconPapers)
JEL-codes: D72 H77 Q32 (search for similar items in EconPapers)
Date: 2016-11-10
New Economics Papers: this item is included in nep-cdm, nep-env, nep-pol and nep-pub
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