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Summary. This paper investigates the hypothesis that local politics has an impact on local
taxation in the French public sector by using a cross-sectional dataset on departments in 1999.
Political variables are included in a tax-setting equation to provide empirical evidence whether
local governments in France adopt business taxation behaviour closer to the Leviathan
government hypothesis, with higher tax rates when political competition decreases, or to the
partisan government hypothesis, with differences in tax rates according to partisan variables. It
is shown that the wider the seats margin, the lower the tax rates, and that this cut is weaker in
the case of a left-wing local majority than a right-wing majority. It is therefore concluded that
the partisan government hypothesis is more supported by the French data than the Leviathan
one, even after controlling for tax interdependencies between departments.
1. Introduction
For at least three decades, political determinants of fiscal policy have been well identified
in the economic literature. For example, the
political system (presidential/parliamentary)
and the voting rule (majority/proportional)
may affect the size of the government
(Persson and Tabellini, 1999; Milesi-Ferretti
et al., 2002). In the same way, the degree of
centralisation of the political system also
matters: the more centralised the system is,
the better the control over spending will be
(Persson and Tabellini, 1999). The budgetary
process also plays an important role. For
example, the way the budget is voted
(agenda, etc.) or the transparency of the
rules can influence the budgetary variables
(von Hagen, 1992; de Haan and Sturm,
Eric Dubois is in the Laboratoire dEconomie Publique, Maison des Sciences Economiques, 106 112 Boulevard de lHopital,
F-75647 Paris Cedex 13, France. Fax: 33 1 44 07 81 02. E-mail: eric.dubois@univ-paris1.fr. Matthieu Leprince is in the
Faculty of Economics, University of Rennes I, 7 Place Hoche, CS 86514, F-35065 Rennes Cedex, France. E-mail: matthieu.
leprince@univ-rennes1.fr. Sonia Paty is in the Faculty of Economics, University of Lille I and INRA-CESAER, Cite Scientifique,
F-59655 Villeneuve dAscq, France. Fax: 33 3 20 43 67 68. E-mail: sonia.paty@univ-lille1.fr. The authors are grateful to two
anonymous referees and the Editor. The usual disclaimer supplier.
0042-0980 Print/1360-063X Online/07/081603 16 # 2007 The Editors of Urban Studies
DOI: 10.1080/00420980701373487
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1606
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Group I
Group II
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(2)
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the model (a spatial lag model) and the appropriate estimation method (maximum likelihood method). We finally tried to control for
cost factors by using the appropriate sociodemographic and economic control variables.
As noted above, department tax policies
also reflect the impact of differences in
economic and demographic factors grouped
in the vector X. Following the empirical literature and knowing that departments are in
charge of specific areas such as economic
development, social assistance, departmental
roads maintenance and building and secondary schools, we included two sets of control
variables.
The first set comprises economic resource
variables, such as PERSONAL INCOME
PER CAPITA and BLOCK GRANTS PER
CAPITA. PERSONAL INCOME PER
CAPITA is included to capture its positive
effect on the demand for department public
services and hence on business tax rates. The
expected sign remains uncertain, however,
because this variable is also known to be a
proxy for the business tax-base, omitted in
the estimated equation to avoid endogeneity
problems, and might thus have a negative
effect on the tax rate. The expected effect of
BLOCK GRANTS is positive on public
spending but remains an empirical question
on tax rates.
The second dataset comprises expenditure
needs variables, such as the size of the
POPULATION, the department AREA, the
URBANISATION RATE, the SHARE OF
OLD PEOPLE and the RATE OF UNEMPLOYMENT. The expected signs are somewhat controversial. Some find that the higher
these expenditure needs variables, the
heavier the fiscal burden and the higher the
tax rates. However, these variables could
alternatively exhibit a negative sign because
of the existence of economies of scale in the
supply of public goods and services. The coefficients of the variables SHARE OF OLD
PEOPLE and RATE OF UNEMPLOYMENT
are expected to be positive. They represent
two categories of people who have specific
needs in public spending and benefit from
department programmes.
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Mean
Maximum
Minimum
Standard
deviation
7.56
12.12
3.72
1.90
23.38
10.72
65.06
603 580
349.79
46 375
5 754
8.98
0.39
0.18
0.58
0.77
67.19
0.34
34.40
17.00
100.00
2 555 020
1 482.81
80 418
10 000
25
1
1
1
1
91.18
1
14.20
5.70
23.80
73 509
170.69
38 654
176
2
0
0
0
0
50.00
0
4.34
2.45
16.76
440 945
177.08
6 191
1 853
6.60
0.49
0.39
0.50
0.42
11.54
0.48
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1. MCO
DEPARTMENT
BUSINESS TAX
RATE (r)
POLITICAL
PROXIMITY
2. MV
3. MV
4. MV
5. MV
0.89
(75.4)
[0.00]
0.88
(70.5)
[0.00]
0.00
(0.05)
[0.80]
0.02
(0.90)
[0.34]
20.05
(2.18)
[0.14]
20.01
(0.09)
[0.76]
20.02
(0.63)
[0.42]
0.87
(58.7)
[0.00]
0.87
(52.8)
[0.00]
SENIORITY
SENATOR
MNA
MAYOR
20.14
(2.87)
[0.09]
0.03
(13.2)
[0.00]
MARGIN
LEFT MARGIN
LEFT
BLOCK GRANT PER
CAPITA
POPULATION
SHARE OLD
POPULATION
UNEMPLOYMENT
RATE
INCOME PER CAPITA
URBANISATION
RATE
AREA
Constant
Adjusted R2
Log likelihood
0.15
(1.7)
[0.08]
20.05
(21.1)
[0.27]
0.58
(3.5)
[0.00]
0.16
(1.4)
[0.16]
20.63
(22.4)
[0.01]
0.27
(2.41)
[0.01]
20.13
(24.2)
[0.00]
6.57
(2.21)
[0.03]
0.527
34.89
0.11
(2.55)
[0.11]
20.06
(2.11)
[0.14]
0.39
(8.01)
[0.00)
0.15
(2.58)
[0.10]
20.63
(7.98)
[0.00]
0.22
(5.38)
[0.02]
20.13
(23.0)
[0.00]
5.82
(5.22)
[0.02]
43.37
0.12
(2.64)
[0.10]
20.05
(1.42)
[0.23]
0.45
(10.1)
[0.00]
0.15
(2.63)
[0.10]
20.60
(6.36)
[0.01]
0.23
(5.72)
[0.01]
20.12
(18.5)
[0.00]
4.97
(3.32)
[0.06]
45.09
0.09
(1.89)
[0.17]
20.06
(2.48)
[0.11]
0.32
(6.06)
[0.01]
0.07
(0.59)
[0.44]
20.51
(5.97)
[0.01]
0.16
(3.11)
[0.07]
20.11
(16.9)
[0.00]
5.78
(5.76)
[0.01]
50.35
0.12
(11.6)
[0.00]
0.09
(1.62)
[0.20]
20.06
(2.47)
[0.11]
0.31
(5.52)
[0.01]
0.10
(1.31)
[0.25]
20.50
(5.53)
[0.01]
0.15
(2.53)
0.11
20.11
(16.4)
[0.00]
5.1
(4.47)
[0.03]
48.85
(Table continued)
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Table 3. Continued
Variables
LM robust test of spatial
lag dependence
LM robust test of spatial
error dependence
1. MCO
2. MV
3. MV
4. MV
5. MV
[0.00]
[0.65]
Notes: The dependent variable is the DEPARTMENT BUSINESS TAX RATE. All variables are log-transformed. Student
values (Wald statistics) are reported in parentheses with OLS (ML) estimation techniques. Probability values are given in
brackets. indicates significant at 5 per cent; significant at 10 per cent. Number of observations: 93. Year: 1999.
(see columns 4 and 5). Basically, the coefficient of the seats MARGIN exhibits a negative
sign suggesting that governments with a high
margin tend to set lower tax rates. For
example, when the seat margin increases by
10 per cent, the business tax rates in rightwing departments decrease by 1.4 per cent,
ceteris paribus.
This result also means that when party competition is low (or when MARGIN is high),
officials tend to set lower business tax rates.
Hence we interpret this evidence in the
French local public sector as suggesting that
the hypothesis of a Leviathan behaviour by
local incumbents can be rejected since this
hypothesis predicted a positive effect of
MARGIN on tax rates.
Even if the ideology of local governments
does not influence the sign of the coefficient
of the seat MARGIN, it influences its level.
Indeed, the coefficient of the variable LEFT
X MARGIN takes a positive sign which
means that the tendency to set lower tax
rates when the seat margin increases is
weaker for left-wing governments. We interpret the high significance of the coefficient
as evidence in favour of the partisan government hypothesis. Note that Sole Olle (2006)
also concludes that empirical evidence supports the partisan model in Spain, but the
sign of the effect of margin on budget outcomes is positive for left-wing governments
and negative for right-wing governments.
We therefore demonstrate that ideology in
France has a specific effect on the link
between political competition and local tax
rates: differences due to ideology exist, but
this does not lead to a different sign of the
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9.
10.
11.
B tR tD tM
2.
3.
4.
5.
6.
7.
8.
12.
13.
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