Tax Contracts and Government Formation

Hans Gersbach and Maik Schneider

No 7084, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We introduce tax contracts and examine how they affect government formation and welfare of voters in a democracy with proportional elections. A tax contract specifies a range of tax rates a party is committed to if in government. We develop a new model of party competition in which parties choose tax rates, public-good provision, and perks, and we show that the introduction of tax contracts has two effects: a perks effect and a policy-shift effect. The former plays a central role in societies with a low degree of political polarization, where it tends to reduce politicians' perks. If a society is highly polarized, tax contracts can yield more moderate political outcomes. However, there are also circumstances in which tax contracts induce more extreme policies.

Keywords: Contract theory; Government formation; Voting (search for similar items in EconPapers)
JEL-codes: D72 D82 H55 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-cdm, nep-pbe and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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