Partisan budget cycles and electoral accountability in the European Union using Household Tax Rates, 1996-2016

Abstract

There is good evidence that prior to a general election the government will seek to increase its chance of being re-elected by lowering taxes or by increasing public expenditure, leading to a politically-motivated cycle in fiscal policy. A potential difficulty with this literature is that few existing studies consider the actual income tax paid by different household types. This thesis uses the net Personal Average Tax Rate (PATR) for 13 different households (by marital status, family size and income) to examine the political budget cycle for 26 European Union countries. It considers the effect of the PATR on the government vote share to analyse the effect of fiscal manipulations and electoral accountability. The data are collected for political and socioeconomic variables over 1996-2016, giving 143 observations on general elections. This is regressed using techniques such as the Generalized Method of Moments and Quasi-Maximum Likelihood estimators. The thesis makes three main contributions. First, the thesis finds that there is opportunistic behaviour by all parties across the EU as both right- and left-wing parties lower the PATR in the run-up to an election, but focusing on married-coupled households with two children. Second, it finds that left-wing parties are rewarded for lower income taxes prior to an election, which is for both for married-couple and single households. However, on differentiating between the older democracies of the European Union and the Central and Eastern European countries, only the right- [left] wing parties are rewarded for an election-year cut in the PATRs in the former [latter] countries. Overall, the thesis finds that a left-wing party is rewarded for opportunistic behaviour. Finally, by analysing consecutive elections that are won by the same party, the thesis finds there is a smaller effect of PATRs on votes in the second electoral term, and this supports rational voter behaviour.