Electoral Cycles in Tax Reforms

IMF Working Papers, November 4, 2022

Source details

Study period: monthly data over the period of 1990-2018 for 22 advanced economies and emerging markets.
Research question: examination of electoral cycles in the timing of tax reform announcements.
Authors and date: Antonio David, Can Sever; November 4, 2022.
Publication: IMF Working Papers, Working Paper No. 2022/216, Pages: 30, Volume: 2022, Issue: 216, DOI: https://doi.org/10.5089/9798400223952.001, ISBN: 9798400223952, ISSN: 1018-5941.

Governments tend to avoid announcing tax reforms during the months running up to elections.
Governments become more likely to announce tax reforms in the first few months following elections, indicating that “political capital” plays a role in the timing of reforms.
The timing patterns are broad-based with respect to:
- changes in tax base and rate; and
- various types of taxes (including personal income tax and social security contributions).
The pre-election decrease in the likelihood of tax reform announcements is:
- stronger in emerging markets; and
- weaker in countries with relatively better institutional quality.
Neither fiscal rules nor IMF programs appear to have differential effects on electoral cycles in tax reforms.

Empirical approach: probit models and econometric analysis of announcement timing.
Subjects and keywords: Econometric analysis, Emerging and frontier financial markets, Financial markets, Fiscal policy, Fiscal rules, Personal income tax, Probit models, Social security contributions, Taxes, Political Economy.
Keywords emphasized in the study: announcements decrease, election dummy, election variable, elections in the sample, Electoral Cycles, Global, Institutional Quality, reform announcement, Tax Reforms.

Political timing matters: policymakers face electoral incentives that delay tax reform announcements until after elections, implying that political capital is deployed post-election to implement tax policy changes.
Institutional quality mitigates pre-election avoidance: stronger institutions are associated with a weaker pre-election decline in reform announcements, suggesting institutional reforms could reduce politically driven timing distortions.
External constraints: the absence of differential effects from fiscal rules and IMF programs implies these instruments, as observed in this study, do not systematically alter the electoral timing of tax reform announcements.

Source: IMF Working Paper “Electoral Cycles in Tax Reforms” by Antonio David and Can Sever (November 4, 2022).