Essays on strategic fiscal policy in Flemish municipalities

This dissertation is about fiscal policy in Flemish municipalities in general and focuses on strategic policy in particular. As an introduction to local fiscal policy, we investigated the simultaneous role of partisan effects, of fragmentation, of interaction dynamics, of electoral cycles and of fiscal illusion effects on the Flemish local income tax rate and local property tax rate. Even though policymakers’ fiscal policy choices are assumed to bring about their re-election, policymakers may fail to achieve this aim. Aware of this failure, policymakers may change their policy from “opportunistic” to “strategic”. Policymakers expecting to lose power may pursue their fiscal policymaking to restrain their successors’ scope of policymaking. Suchlike strategic behaviour, the focal point of this dissertation, is introduced and tested in Chapter 3. We use a vote function to estimate the governments’ vote expectations and provide evidence that especially leftist and fragmented governments expecting to be defeated change debt to reduce the scope for policymaking of the next government. Debt changes in election years thus can be explained by the government’s vote expectations. One way to change debt is –ceteris paribus– changing tax rates. Indeed, in Chapter 4 we find a significant impact of the vote expectations on these changes. The lower the vote expectations, the stronger the local income tax rate cut. This is in line with expectations from strategic use of debt models. This effect cannot be retrieved for local property tax rate changes. Finally, in chapter 5, we investigated whether fragmented governments are more optimistic about tax revenues. Overestimating tax revenues allows governments to spend more than the actual revenues allow for. This expectation can be inspired by the strategic use of debt. Overestimating tax revenues can be a strategic instrument for increasing debt when a government expects not to get into office again after the upcoming elections. Also the “weak government hypothesis” and the “war of attrition” may explain higher optimism in coalition governments. We show that the level of political fragmentation indeed affects the local government’s revenue forecasting behaviour. Nonetheless, we find that coalitions with at least three parties are less optimistic.

Grantor dc:publisher

Vrije Universiteit Brussel

Year dc:date

2009

Author dc:creator

• Goeminne, Stijn

Contributors dc:contributor

• Heyndels, Bruno
• Smolders, Carine

• Business and Economics
• Flemish municipalities
• local income tax rate
• fiscal policy
• strategic debt models
• local property tax rate
• projected tax revenues

Statement dc:rights

• info:eu-repo/semantics/openAccess

Language dc:language

eng

Identifier

https://biblio.ugent.be/publication/675032
https://biblio.ugent.be/publication/675032/file/1886299

OAI identifier oai:identifier

oai:archive.ugent.be:675032