Three Essays on the Political Economy of Fiscal Policy

This study focuses on different aspects of fiscal policy. The second and third chapters investigate drivers of fiscal policy whereas the fourth chapter investigates its consequences. The second chapter analyses how changes in demographic structure affects policy variables. Building on Razin, Sadka and Swagel (2002) we propose a U-shape relationship between labor income tax rates and the share of retirees. Using data from 1991-2012 for 13 OECD countries, the results related to income taxes and the size of government are found to reconcile with theory after controlling for possible endogeneity and presence of unit roots. Borrowing from Meltzer and Richard (1981) the impact of a rise in inequality on tax composition is examined in the third chapter. Based on median voter model we propose that direct (income) taxes monotonically increase with inequality, whilst indirect (expenditure) taxes exhibit a U-shaped relationship with inequality. Moreover, based on voters’ myopia, how changes in inequality affect deficits and debt is also examined. Using cross-country data for 129 countries the empirical results are found to be consistent with theory and especially in strong democracies. With panel data estimates, the findings also partially support our theory. The fourth chapter examines the Armey (1995) curve assessing the relationship between economic growth and the government size. We find strong evidence for presence of the Armey curve across non-OECD countries. Government expenditures are found to be optimized in terms of economic growth at 23.99% of GDP. Employing panel data estimation we use a recent data set for 79 countries from 1981-2010, taking five years averages. The results also hold for weak democracies whereas the OECDs and strongly democracies are found to sustain larger governments as findings related to them are mixed. Empirical analysis is also extended decomposing public expenditures, taking direct transfers and GDP per capita as policy variables

How does a democratic government with limited intervention affect environmental quality? Fresh evidence with international panel data

This paper examines the effect of democratic countries which encourage economic freedom on the environment, measured by Carbon Dioxide (2) emission. For the empirical analysis, an annual panel data sample consisting of 179 countries from 1990 to 2018 is collected. Applying the Ordinary Least Squares and Two-Step Generalized Method of Moments estimation techniques, we find that the environmental quality is enhanced with a higher degree of democracy and economic freedom. The results firmly hold for high and middle-income countries when the sample is decomposed across income levels

Inequality and the composition of taxes

This paper analyzes the political economics of the composition of taxes. Taxes may be levied on income, or on expenditure, with the median voter pivotal in the theoretical framework analyzed. As in Meltzer and Richard (1981) income taxes increase with inequality. Conversely expenditure taxes first increase and then decrease with increasing inequality. The extent to which taxes are levied on income relative to expenditure unambiguously rises with inequality. In contrast to government size evidence, cross-country data exhibit a robust positive correlation between the extent to which taxes are levied on income relative to expenditure, and inequality. Consistent with the theory this relationship holds most significantly in stronger democracies

Government Size and Economic Growth: A Panel Data Study Comparing OECD and Non-OECD Countries

This study examines the non-linear relationship between government size and economic growth following Armey (1995). Generalized Method of Moments (GMM) estimation technique is applied to panel data consisting of 89 countries from 1990 to 2018. The results show substantial evidence for Armey curve across non-OECD countries. The findings suggest that a rise in government size initially enhances economic growth but later government size reduces economic growth once the government size crosses a certain threshold. However, the findings relating to the OECD countries do not support the presence of Armey curve

Demographic Changes and Direct Tax Dynamics in OECD and Non-OECD Markets: A Revisit

This study investigates the dynamic relationship between demography and direct taxes on income, profit, and capital gains. The data, for the period 1990–2017, encompass 89 OECD and non-OECD countries. The study employs generalized method of moments (GMM) estimation to identify the relationships. The findings suggest a U-shaped correlation in OECD countries, which supports the argument that a rise in the aging population initially decreases taxes on income, profit, and capital gains. Conversely, any further rise in the aging population after reaching a certain threshold leads to increased taxes on income, profit, and capital gains. Furthermore, across non-OECD countries, the findings suggest an inverted U-shaped relationship implying that the labor income tax rate will fall with a rise in the dependency ratio until the aged population constitutes half of all voters, but the correlation between these variables becomes positive if the number of aged people reaches 50% of voters or more. The findings lead to the suggestion that other potential factors, such as empathy among family members, as opposed to political muscle only may affect voters’ behavior in a median voter model

Implicit Change Leadership, Affective Commitment to Change, and the Mediating Role of Organizational Trust

This paper aims to know the implicit change leadership schemas, the commitment of the employees towards change, and their relationship with the trust culture of academic institutions. Quantitative approach with surveys of 300 employees of academic institutions has been used in this study. SPSS software has been used to examine the relationship between variables and constructs. Findings reveal that organizational trust has a mediating effect on implicit change leadership and affective commitment to change. Moreover, a positive relationship was found between trust culture and change leadership and change leadership with a commitment to change. Furthermore, the results suggest that change leaders must take into account the trusting culture perspective of the organization to motivate the employees to make them accept change

Trade Openness and Income Inequality: Fresh Evidence Based on Different Inequality Measures

Theoretical and empirical literature on the impact of trade openness on income inequality is inconclusive. The inconsistent findings may be partly the result of biased measures of income inequality and divergent data sources. This paper improves upon the previous literature by examining the impact of trade openness on income inequality, using data from three major data sources: the Standardized World Income Inequality Database (SWIID), including disposable and market income; World Development Indicators (WDI); and the University of Texas Inequality Project (UTIP); as well as four Gini coefficients as measures of inequality. We apply a two-step system GMM estimation technique and the findings suggest a negative relationship between trade openness and income inequality. Based on the empirical results, we conclude that changing the measure of inequality from different data sources does not affect the empirical results related to the trade-inequality relationship