The Effects of Politics on Local Tax Setting: Evidence from France

Abstract

This paper investigates the hypothesis that local politics has an impact on local taxation in the French public sector by using a cross-sectional dataset on departments in 1999. Political variables are included in a tax-setting equation to provide empirical evidence whether local governments in France adopt business taxation behaviour closer to the Leviathan government hypothesis, with higher tax rates when political competition decreases, or to the partisan government hypothesis, with differences in tax rates according to partisan variables. It is shown that the wider the seat's margin, the lower the tax rates, and that this cut is weaker in the case of a left-wing local majority than a right-wing majority. It is therefore concluded that the partisan government hypothesis is more supported by the French data than the Leviathan one, even after controlling for tax interdependencies between departments.