Taxation and democracy

Abstract

Using a panel-model approach, this paper investigates the relationship between the level of taxation and democracy. The dataset covers the period 2002–2008, and includes 51 countries. The study suggests that a significant increase of taxes, without a major negative reaction of taxpayers, can be implemented if the political regime is strongly democratic or, on the contrary, strongly autocratic.

Keywords:

• taxation
• democracy
• effects
• nonlinearity
• dynamic panel
• tax policy

Acknowledgments

I wish to thank Michael Connolly for his helpful suggestions. Special thanks go to Alexandru Minea, Loretti Dobrescu, Alin Andries and Seyed Mehdian for their constructive comments and to Miriam Hatoum for her professional English editing services. Any remaining errors are mine.

Notes

1. The scatter plot illustrates an ‘incomplete parabola’, with missing ‘vertex’. According to this methodology (Marshall et al., 2010), 0 is a neutral level of d, in which a country is both a democracy and an autocracy.

2. The results of fixed-effects models (cross-section and period) are available upon request.

3. According to EViews 7 users guide II, p. 661.