Political Costs of Tax-Based Consolidations
IMF Working Papers, December 27, 2019
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Bibliographic details
- Authors: Chuling Chen, Era Dabla-Norris, Jay Rappaport, Aleksandra Zdzienicka
- Published: December 27, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513521534.001
Overview
- Authors: Chuling Chen, Era Dabla-Norris, Jay Rappaport, Aleksandra Zdzienicka
- Date: December 27, 2019
- Paper type: IMF Working Papers, Working Paper No. 2019/298
- Scope: Panel of 10 OECD countries over the last 40 years
- Pages: 31
- DOI: https://doi.org/10.5089/9781513521534.001
- ISBN: 9781513521534
- ISSN: 1018-5941
Key Findings
- Tax reforms are politically costly, but costs vary by design and purpose.
- Measures aimed primarily at reducing existing deficits and debt are costlier than tax consolidation policies aimed at improving long-term growth prospects.
- Electoral costs are particularly high for broad-based indirect tax and corporate tax reforms.
- Voters tend to penalize governments less if tax consolidations are announced early in the government’s term or if the government has a strong political mandate.
- Favorable economic conditions increase public support for tax-based consolidations.
- Personal income tax reforms are electorally salient if the reforms are frontloaded, announced during recessions, and in less progressive tax systems.
Electoral Dynamics and Timing
- Announcement timing matters:
- Early-in-term announcements reduce electoral penalties.
- Announcements during recessions increase salience for personal income tax reforms.
- Political mandate:
- Strong political mandates reduce voter punishment for tax consolidations.
Tax-Type Effects
- Broad-based indirect tax reforms: particularly high electoral costs.
- Corporate tax reforms: particularly high electoral costs.
- Personal income tax reforms: electorally salient under specific conditions (frontloaded, recession announcements, less progressive tax systems).
Economic Conditions
- Favorable economic conditions increase public support for tax-based consolidations.
- The macroeconomic context shapes voter responses and the political feasibility of consolidation measures.
Policy Implications (inferred from findings)
- Policymakers aiming for politically sustainable consolidation should consider:
- Emphasizing long-term growth–oriented tax measures over purely deficit-reduction measures where politically feasible.
- Timing announcements early in the government term when possible.
- Building a strong political mandate prior to implementing politically costly tax reforms.
- Avoiding broad-based indirect tax increases and large corporate tax changes when political costs are prohibitive, or pairing them with measures that mitigate perceived burden.
- Considering the macroeconomic backdrop—favorables conditions improve public acceptance.
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