Essays on Politics, Fiscal Institutions, and Public Finance

Essay 1 (with Mikael Elinder): We show that house prices in general did not respond to a large cut in the property tax in Sweden. Our estimates are based on rich register data covering more than 100,000 sales over a time period of two and a half years. Because the Swedish property tax is national and thus unrelated to local public goods, our setting is ideal for causal identification of the property tax on house prices. Our result that house prices did not respond to the tax cut at the time of implementation cannot be explained by early capitalization at the time of announcement. Two other stories appear to explain our results. First, it is possible that house buyers expect an offsetting increase in the supply of housing. Second, house buyers might simply not understand how the tax cut affects total future costs of owning a house. Unfortunately, it has proven difficult to disentangle the two mechanisms, and we must therefore conclude that both may be relevant. Essay 2: I investigate government consumption smoothing (sensitivity) under a balanced budget rule in Swedish municipalities. In general, I find Swedish municipalities to be highly consumption sensitive. Municipalities consume 87.6% out of predicted current revenues in the time period leading up to the implementation of the balanced budget rule, and they consume 76.3% out of predicted current revenue in thetime period following the implementation. Fiscally weak municipalities are found to be more consumption sensitive than fiscally strong municipalities. Very weak municipalities have become more consumption sensitive compared with very strong municipalities since the implementation of the balanced budget rule. Thus, I find indicative evidence that both credit market constraints and formal budget rules such as balanced budget rules increase municipal consumption sensitivity Essay 3: Using the Swedish municipal sector as my political laboratory, I study the effect of a coalition partner on policy outcomes. I use a version of Regression-Discontinuity Design (RDD) specifically suited to proportional systems to define close elections, which can be used for identifying the effect of the Left Party as coalition partner to the Social Democrats. The Left Party is found to have a positive and medium sized effect on the municipal income tax rate. The positive effect is in line with what we expect given the policy preferences of Left Party representatives, but also given the predictions from political fragmentation theory. I find no effects on expenditures or debt, and the negative result for investments is not robust. Essay 4 (with Linuz Aggeborn): In a model where voters and politicians have different preferences for how much to spend on basic welfare services contra immigration, we conclude that established politicians that are challenged by right-wing populists will implement a policy with no spending on immigration if the cost of immigration is high enough. Additionally, adjustment to right-wing populist policy is more likely when the economy is in a recession. Voters differ in their level of private consumption in such a way that lower private consumption implies higher demand for basic welfare services at the expense of immigration, and thus stronger disposition to support right-wing populist policies. We propose that this within-budget-distributional conflict can arise as an electorally decisive conflict dimension if parties have converged to the median voter on the size-of-government issue.Felaktigt isbn: 978-91-85519-61-3