The politics and economics of revenue growth: A cross-national analysis

Despite considerable interest in comparative fiscal policy in general, and the high salience of tax policy and tax reform in the industrialized democracies, there are relatively few cross-national studies of the economic and political correlates of revenues over time. We undertake a cross-national time series study of revenue growth in fourteen OECD countries between 1958 and 1990. We test a number of political and economic hypotheses about revenue change, including political business cycle, 'fiscal illusion', elasticity, and ideological theories. For the 1958-1990 period, we find that all countries, regardless of revenue structure, experience higher real revenue growth as a result of inflation, but that revenue growth is more responsive to unemployment in countries that rely more on direct taxes compared to countries with less direct-tax reliance. We find that this effect is most pronounced in the post-1972 period. We also find that revenue tends to increase in the years following elections, consistent with the idea that governments try to minimize the political fallout from tax increases by separating them as much as possible from election campaign periods; this effect, too, is most pronounced in the post-1972 period. We find no support for 'fiscal illusion' and ideological theories of revenue growth.