The political economy of taxation in Europe

Political variables play a crucial role in shaping tax systems and tax reforms in Europe. This paper presents new evidence on the relationship between political factors and tax design in European countries. For the period 1995-2012, we find that, when the country’s ruling coalition is left-wing, income taxes become more relevant. Moreover, when the largest government party is more powerful, the share of property taxes over GDP increases, while the number of seats held by the second government party is positively associated with the level of consumption taxes over GDP. We also find that a more powerful government is associated with a lower top tax rate of the personal income tax (PIT). Building upon this evidence, we review the main arguments developed by the empirical political economy literature on taxation and discuss the role of political factors in fundamental issues of taxation: redistribution and progressivity; tax design and its impact on growth; tax complexity; tax administration; tax competition; and the need for tax reforms.