Local Tax Rates, Politics and Omitted Variable Bias

Abstract

Several studies have demonstrated the impact of political and institutional characteristics on communities’ fiscal policies. Typically, these characteristics have been studied in isolation, and possible interactions with other political determinants have been ignored. Yet, fiscal policy decisions are subject to political and institutional forces contemporaneously. This study combines different models to explain the variation in the Flemish local income tax rate and the local property tax rate simultaneously. The results of the individual analyses are equated with those of the joint analysis, thereby concluding that isolated testing may suffer from specification bias.