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Machiavellian Taxation? The political economy of public service financing
1. Introduction
Nowadays, there is abundant economic literature concerning fiscal deficit policies at national,
regional and local level, within the field of Political Economics. Important references on this field
are Roubini and Sachs (1989), Persson and Svensson (1989), Edin and Ohlsson (1990), Alesina and
Tabellini (1990), Tabellini and Alesina (1990), Alt and Lowry (1994), de Haan and Sturm (1997),
Feld (2002), Galli and Padovano (2002) and Woo (2003).
In our paper, we deal with deficits that are service-specific, at the municipal level. These are not
proper deficits as they are bindingly covered thru other revenues earned by the municipality.
Hence, our issue concerns also the way in which public services are financed in a global zero-
deficit budget, i.e. the types and shares of different taxes that are to be used. Political Economics
applied to taxation is found in, among others, Norstrand (1980), Hettich and Winer (1984, 1988),
Blackley and DeBoer (1987), Biegeleisen and Sjoquist (1988), Stine (1998) and Leroy and Haurin
(2001). A particularly interesting paper is Hettich and Winer (1984), who postulate a political cost
function depending on the share of each possible tax on total revenues. Politician set shares as to
minimize political costs, in such a way that marginal costs coincide among the different shares.
This idea is formally refined in Hettich and Winer (1988), including administrative costs and
concluding that their approach is consistent with the evidence of some diversity in the types of
taxable activities.
We take a similar approach, yet we analyze a particular local public service, and we hypothesize
that political organizations do not only aim to win elections, but also to implement their
ideologically preferred policies once having won. This is in line with recent literature (Dixit and
Londregan, 1998; Ortu
ño, 2002) that put into doubt the classical paradigm that politician only aims
maintaining (or reaching) power. From our point of view, an ideological identification thru
differentiated proposals is also necessary to maintain cohesion within the political organization.
Besides, ideological considerations could enter politician
’s individual utility function.
We find that the tax structure is the result of an equilibrium between pragmatic majorities
(ruling party) and social majorities. Pragmatic majorities reflect preferences in favor of the person
who is in office, while social majorities are more related to socio-economic variables such as
wealth. When pragmatic majorities and social majorities coincide, governing party implements its
(ideologically) most preferred tax structure. When there is not such a coincidence, politician
favored by the former majority can fix a tax structure that, by being more moderate, permits him to
maintain the place in office.
Convention