Does cabinet ideology matter for the structure of tax policies?

This paper investigates the importance of political ideology for the choice of the tax structure. In particular, we examine the effects of cabinet ideology on the distribution of the tax burden across factors of production and consumption for 16 OECD countries over the period 1970-2000 by employing four alternative cabinet ideology measures and by using the methodology of effective tax rates. There is evidence of partisan effects on tax policies. In particular, we find that left-wing governments rely more on capital relative to labor income taxation and that they tend to increase consumption taxes. The latter result suggests that left-wing governments may exploit a type of fiscal illusion on the part of taxpayers in order to obtain political benefit.

► We investigate the importance of political ideology for the tax structure. ► We examine the effects of cabinet ideology on the distribution of the tax burden. ► There is evidence of partisan effects on tax policies. ► Left-wing governments may exploit a type of fiscal illusion on the part of taxpayers.