Does democracy affect taxation and government spending? Evidence from developing countries

Paola Profeta, Riccardo Puglisi and Simona Scabrosetti

Journal of Comparative Economics, 2013, vol. 41, issue 3, 684-718

Abstract: Focusing on developing countries in three geographical areas (South-East Asia, Latin America and European Union), we explore the relation between political variables and tax revenue, public spending and their structure. We build a new dataset for the 1990–2005 period with fiscal, political and socio-economic variables. Since democracy is a complex and multidimensional concept, we measure it using two variables, the political strength of democratic institutions, and the protection of civil liberties. We perform three sets of estimates: (i) cross-country pooled OLS regressions with region fixed effects, (ii) country fixed effects regressions and (iii) region specific regressions with country fixed effects. While the first model delivers some significant correlations between political variables and tax items, when controlling for country fixed effects we find that tax revenue and tax composition are in general not significantly correlated with the strength of democratic institutions and the protection of civil liberties. The only exceptions are indirect, trade and property taxes. A similar result applies to public spending, with the exception of defense expenditure. Overall, our findings cast some doubt on the exact public policy channels through which political institutions affect economic development.

Keywords: Comprehensive dataset on taxation and public expenditure; POLITY2 index; Civil liberties; Tax structure; Public spending composition (search for similar items in EconPapers)
JEL-codes: H20 O53 P16 P35 P50 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jcecon:v:41:y:2013:i:3:p:684-718

DOI: 10.1016/j.jce.2012.10.004

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