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Political Budget Cycles: Evidence from Italian Cities

date Date: October 14, 2014
date Author(s): Alberto F. Alesina, Matteo Paradisi
date Affiliation: NBER
Abstract

The introduction of a new real estate tax in Italy in 2011 created a well designed natural experiment to test the strategic choice of fiscal variables (a tax rate) in relation to elections. We find substantial evidence of “political budget cycles”, with municipalities choosing lower tax rates when close to elections. The evidence on political budget cycles is stronger in localities in the South of Italy. The well documented lower level of “social capital” in this region may account for less attention and lower control of politicians. Cities with large preexisting deficits did not set lower rates before elections, presumably because the deficit was a salient political problem and incumbents did not want to look as aggravating it.

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