Does Democracy AECT Taxation and Government Spending? Evidence from Developing Countries

Abstract

Focusing on three areas of the world (Asia, Latin America and New EU Members), which have recently experienced a democratic as well as economic transition, we explore the relation between political variables and tax revenue, public spending and their structure. We build a new dataset for the period 1990-2005 with socio-economic and political variables. We perform three sets of estimates: (i) cross-country pooled OLS regressions with region fixed effects, (ii) country fixed effects regressions and (iii) region specific regressions with country fixed effects. While the first model delivers some correlations between political variables and tax items, when controlling for country fixed effects we find that tax revenue and tax composition, except for trade and property taxes, are not significantly correlated with indices of the strength of democratic institutions and of the protection of civil liberties. A similar result applies to public spending, with the only exceptions of total outlays and defense expenditure. Moreover, especially regarding the tax structure, the sign and significance of the relevant correlations appear to be region-specific. Overall, our findings cast some doubt on the exact public policy channels through which political institutions affect economic development.