Political competition, tax salience and accountability. Theory and evidence from Italy

Bracco E., Porcelli F., Redoano M., 2019 – European Journal of Political Economy

Does political competition improve or hinder political accountability?

A growing literature both in economics and political science recognizes that political competition improves governments’ efficiency and economic outcomes.  Elections are an effective instrument to promote political accountability, and to communicate voters’ preferences to politicians seeking or holding public offices. This positive effect of elections on accountability is thought to be more effective if electoral competition is stronger. Accordingly, when candidates face strong political competition, voters are better able to hold them accountable; this, in turn, reduces rent diversion and induces candidates to exert more effort.

Is this the only right way to interpret this relationship?  

The answer is no. Indeed, Emanuele Bracco, Francesco  Porcelli, and Michela Redoano  propose an alternative story: in a recently published piece of research, Political competition, tax salience and accountability. Theory and evidence from Italy, in the European Journal of Political Economy, they argue that stronger electoral competition does not necessarily imply better political accountability because when electoral competition is stronger, politicians might also have stronger incentives to weaken accountability channels.

Concentrating on a specific aspect of public policy, governments’ ability to finance public expenditures via multiple tax instruments, their study examines the different degree of salience of the available revenue sources for municipalities. Indeed, politicians are able to shape local public finance not only through the setting of the level of taxation but also the tax mix across the available instruments. Their new interpretation of the mechanism at stake is that stronger electoral competition pushes incumbent policymakers to substitute more salient taxes with the less salient ones with detrimental effects on the transparency of fiscal policy and electoral accountability.

But what is tax salience? It might be defined as visibility to the voters of a certain tax instrument or, analogously, as voters’ awareness of the costs associated with specific government revenue sources. The intuition here is that voters are generally less likely to hold politicians to account for the associated tax burden of a less salient instrument. This in turn implies that strategic politicians will more heavily rely on less salient revenue sources when electoral competition is stronger.

In order to demonstrate this idea, the authors first develop a political agency model demonstrating that politicians in more competitive jurisdictions use less salient tax instruments more intensely.

The model verifies and refines the intuitions regarding this inverse relationship focusing on the behaviour of an incumbent local policymaker (a mayor), who is responsible for providing a local public good, and has the power to make decisions regarding its funding. Two different policy instruments to collect fiscal revenue are available, each differing in their degree of salience. When elections take place, voters base their decisions both on economic grounds and on ideology. As a result, mayors facing stronger electoral competition choose to rely relatively more on less salient revenue sources to decrease the overall “electoral cost” of raising funds. On the other hand, mayors facing moderate electoral competition have less of an incentive to hide their sources of revenues from voters, and rely relatively more on salient revenue sources.

In a second step they test their theoretical predictions empirically, concentrating the Italian experience thanks to a large dataset on Italian municipal financial data, census data, and ballot data of municipal elections from 1999 to 2008. The focus is on large municipalities, i.e., those with a population of more than 15,000 residents, cumulatively accounting for over 60 percent of the Italian population.

Italian municipalities derive their main tax revenues from a property tax (denoted ICI), but they also heavily rely on many other sources of revenues, such as waste-management taxes, personal income surtaxes, and a vast array of fees and charges.

Generally speaking, property taxes are considered as a highly salient tax while other tax instruments are much less visible at the eyes of public. Indeed, taxpayers often perceive this tax as an unfair burden on a necessity (the home in which they live). What they do ignore is that taxing properties is not only widely recognized as one of the most efficient and least distorting tax instrument available for governments to raise money but also in terms of reducing long-run GDP per capita.

Voters perceive the role the mayor plays in setting “visible” taxes, but they often lack understanding of how much leverage and freedom a mayor has in setting government fees and charges.

The empirical analysis starts by distinguishing the sources of revenues in more or less salient instruments in the hands of policymakers. In particular, the sources of revenues included in the analysis are subdivided into two categories: revenues from taxes on the one hand include the property tax (ICI), the waste-disposal tax (TARSU/TIA), and the sum of municipal income surtax and the electricity surcharge, while on the other hand revenues from fees and charges, comprising fees for general services and other services.

For each of them, the authors investigate the interaction between mayors’ popularity and the types of revenue sources he or she use and find that the probability of a mayor’s re-election depends (negatively) on the extent of the property tax, the most salient tax instrument, but not on the other sources of revenues, fees and charges, the least salient.

Then they test the central theoretical model’s predictions, the link between electoral competition and tax-mix choices. Controlling for a wide array of alternative channels, ideological characteristics of the mayor and voters, samples, and estimation techniques, a main consistent result emerges: 1 percent decrease in the margin of victory (i.e., the difference in the vote share) between the elected mayor and her challenger generates a 0.53 euro drop in the per-capita tax revenue from ICI (the main property tax in Italy) and a simultaneous increase in revenues from fees for “local services” by 0.66 euro per-capita. In other words, mayors who won with a narrower margin of victory, a sign of stiffer electoral competition, were more likely to increase the proportion of revenue coming from fees, as opposed to taxes. Analogously, mayors who won with broader margin are less likely to resort to fees over taxes. This behaviour is unaffected by the political affiliation of the mayor. Consistent with the initial hypothesis, electoral cycles also play an important role in shaping tax- and fee-setting decisions. Moreover, the substitution between fees and taxes occurs mainly in the years close to elections. To put it differently, the effect is stronger when elections are approaching, and when candidates face more political competition.

To sum up, this study aims at enriching our understanding of the interplay between electoral incentives and political accountability. In general, elections are commonly seen as a positive force that improves political selection and disciplines politicians. However, the present paper challenges this interpretation by providing strong empirical evidence. Whenever policymakers can choose between an array of policy instruments with various degrees of salience, they will also disproportionately use the least salient tool when their election is at greater risk or when voters are more sensitive to policy decisions in the pre-election period. This, in turn, weakens the positive role that elections are playing in keeping politicians accountable to voters.

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