Abstract
Abstract In this paper, the author argues that democracies increase tax revenues, based on the hypothesis that democracies increase direct and indirect taxes due to increased taxpayers’ compliance, diffusion of taxes between democracies and because voters in poor democracies are in favour of import taxes. The author tests this hypothesis using data on 74 countries from 1993 to 2012. His explanatory variable is a dichotomous democracy measure, but he alters his analysis from previous research by assuming that democracy is not an exogenous variable. Instead, he uses the theory of Huntington (The third wave: Democratization in the late twentieth century, 1991) and the methodology of Acemoglu et al. (Democracy does cause growth, 2014) about democratization waves. According to this theory, democratizations occur in regional waves; consequently, diffusion of demand for or discontent with a political system is easier to happen in neighbouring countries due to economic, political and historical similarities. This measure shows us that demand for or discontent with a given political system in a geographical area, influences a country’s political system and its tax choices. Using a 2SLS fixed effects model the author finds that democratization waves positively affect democracy, and in turn democracy increases direct and indirect taxes. These results remain the same using several robustness tests.
Highlights
The role of the political system in a country – with the extremes of democracy and autocracy – has an important implication for all economic decisions that a government makes including taxation and fiscal policy in general
This approach differs from the ones mentioned before because we do not treat democracy as an exogenous index or as a variable affected only by democracy in neighbouring countries; instead, we examine how the political system in countries in the same geographical area can create regional waves of demand for or of discontent with a political system
ordinary least squares (OLS) does not control for unobserved individual effects in the countries we use in our sample nor does it control for the potential endogeneity of our main explanatory variable
Summary
The role of the political system in a country – with the extremes of democracy and autocracy – has an important implication for all economic decisions that a government makes including taxation and fiscal policy in general. We will alter our estimation strategy from that of previous authors by using the methodology of regional waves of democratization seen in Acemoglu et al (2014) based on the theory of Huntington (1991) This approach differs from the ones mentioned before because we do not treat democracy as an exogenous index or as a variable affected only by democracy in neighbouring countries; instead, we examine how the political system in countries in the same geographical area can create regional waves of demand for or of discontent with a political system.
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