Testing the Relationship between Democracy and the Ratio of Governments’ Taxes to Expenditures: A Cross- Country Survey

Abstract

From the perspective of political economy, the majority vote rule is a base for taxing, financing and supplying public goods. It is obvious that the citizens’ satisfaction is the determining factor in public acceptance of paying taxes and supplying public goods with regards to the extent and method of supply public goods. However, if democracy (the majority vote) is related to the size of tax burden relative to public services, it is implied by the cost-benefit model that citizens evaluate the costs of financing the government budget by their received benefits. By applying this model, this paper examines the effect of democracy on the ratio of governments’ tax to expenditures by cross-country panel data for the period of 1996-2010. The results indicate that this tax-to-expenditure ratio depends on the public political participation and tax level increase can be observed robustly in democratic systems.

Keywords

• political participation
• democracy
• tax
• cost-benefit model
• majority vote