Elections and the structure of taxation in developing countries

This paper goes beyond traditional political budget cycles studies by considering the impact of the election calendar on the composition of tax revenue (direct taxes versus indirect taxes) rather than on the global level. We develop a theoretical model, based on Drazen and Eslava (2009) to predict how the taxation structure will be modified during election years. Using a panel of 58 developing countries over 1980-2006, our study reveals clear patterns of electorally timed interventions. We found robust evidence that indirect taxes decreases are the preferred vehicle for incumbents in developing countries to increase their popularity just before elections. On average, they are falling of 2.5 percent in an election year while the direct taxes remain unchanged. These manipulations are detrimental to enhanced indirect tax mobilization, which is crucial to finance much-needed public goods in developing economies, and point at the importance of both good fiscal institutions and fiscal discipline. JEL classification: D72, E62, O10