Business taxes and the electoral cycle

• We provide evidence for an electoral cycle in the setting of corporate tax rates.
• Our data allows us to separate electoral effects from a common time trend.
• Growth in local business tax rates is significantly reduced in the election year.
• In the year after the election, we find a significant increase in tax rates.

The purpose of this paper is to assess whether the timing of elections affects tax policy choices. To do so, we exploit information on the German local business tax which is set autonomously by German municipalities. As the dates for local council elections vary across German states, the data allows us to disentangle effects related to the timing of elections from common trends. The findings support the notion of a political cycle in tax setting as the growth in local business tax rates is significantly reduced in the election year and the year prior to the election, while it significantly increases in the year after the election. This pattern turns out to be robust against a number of sensitivity checks.