Blame It on the Crisis: Understanding the Political Cost of Taxation

Increasing taxes imposes significant electoral costs by reducing incumbents' popularity and the odds of re-election. We hypothesize that strategic politicians use crisis situations to increase taxes in order to temper political opposition to such policy changes. We test this prediction with novel data on tax revenues, tax innovations, tax administration, and government ideology for 33 countries in Europe and Latin America starting in 1800 (or independence) until today. First, we identify periods of large and sudden tax increases using a newly assembled dataset on the composition of central government tax revenues. Second, we code the introduction of several tax innovations. Third, we measure the ideology of heads of government to be able to identify periods ideological reversals. The findings suggest tax increases or new taxes are less likely to reduce incumbent re-election prospects when introduced in crises situations. These results hold when controlling for the need to raise new taxes, including budget deficits and military expenditures. We also find that significant increases in taxation are less likely to result in the ideological reversal of government leadership when timed to coincide with crises or external threats.