Can cooperation limit tax competition? Three lessons from Switzerland

This post is co-authored with Fabio Wasserfallen and is cross-posted (with a different title) at the LSE European Politics and Policy Blog.

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The creation of the single market is widely believed to have strengthened tax competition among European countries; with few remaining barriers to the movement of capital and people, some member states reduce levels of tax to attract more investment at the expense of others. Despite several efforts, policy makers have not been able to agree on effective political actions constraining this dynamic, which many consider to be harmful. Evidence from tax competition in Switzerland suggests that institutional cooperation in fiscal affairs between selected countries in the EU might help to limit the negative externalities of tax competition.

Tax competition is a key characteristic of Swiss federalism. Switzerland’s twenty-six cantons enjoy almost unlimited freedom to set taxes and the general consensus is that they compete with one another to attract tax payers. There is disagreement on whether tax competition is a good or a bad thing, but all agree that it is an important phenomenon. In our study of tax competition between Swiss cantons, we started from this premise but then looked at the factors constraining competition. In particular, we analysed how institutionalised forms of cooperation between cantons limit the extent of competition between those cantons that participate in them.

In the Swiss context, an important role is played by the so-called regional conferences of cantonal ministers. These institutions have been in place for several decades and serve as a forum for discussing policy problems and elaborating common positions for negotiations with the federal government. An important goal of these conferences is the defense of cantonal autonomy. Therefore, they do not pursue stronger cooperation in tax policy. However, constraints on tax competition emerge as a byproduct of cooperation on other issues. The fact that finance ministers work together on a regular basis and develop personal relations makes them more sensitive to how their tax policies affect their colleagues. By no means does this form of socialization erase tax competition. However, it sets limit to it.

Our statistical analysis shows that, controlling for many other factors, tax competition is stronger between cantons that do not work together in the same regional conference. Specifically, we measured the extent to which two cantons are in competition with one another by looking at the commuting patterns between them (that is, how many people live in one canton but work in another). Most studies assume that competition occurs between neighbours. Our approach is similar but, we argue, more precise. In effect, in some cases using neighbourhood as a measure does not accurately show the connections between two cantons; moreover, the binary nature of neighbourhood (either two cantons are neighbours, or they are not) gives no information on the scale of connectedness. By contrast, commuting patterns give a fine-grained picture of the extent to which cantons compete with one another for taxpayers. An intuitive way to read the results of the statistical analysis is that, if a canton has two comparable competitors, it will react more strongly to the tax policies of the one with which it does not work together in the regional conference. Our interpretation of this pattern in terms of socialisation is consistent with the information we obtained in interviews with policy makers. For instance, they explained to us that, while the regional conferences strive to project a public image of consensus, in fact policy makers can be quite outspoken about their dissatisfaction with the policies of their colleagues.

Our research suggests that, in the Swiss case, cooperation can limit tax competition. What can the EU learn from the Swiss example? While there are enormous differences between these two political systems, we think that three conclusions may be helpful:

1) Most importantly, cooperation should take place between the relevant subgroup of countries. One reason why the Swiss regional conferences help to limit tax competition is that they bring together precisely those cantons that are most likely to compete with one another. In the EU, a more clustered and specialised structure of intergovernmental relations might increase the effectiveness of cooperation also in other policy areas.

2) Less intense tax competition does not have to be the goal of cooperation. It can emerge as a byproduct of cooperation on other issues because working together fosters social influence.

3) The unintended benefits of cooperation likely emerge only in the long term. Cantons have a prolonged history of cooperation and know exactly with whom they will have to work in the future. Newly established institutions cannot be expected to lead immediately to similar outcomes.

All in all, these lessons do not suggest that tax competition within the EU can be reshaped simply by enhancing a few cooperative arrangements. Nor would such a claim be credible. What our research implies, however, is that, over time, effective constraints on tax competition can emerge, provided that the structure of cooperation matches that of competition. Whether policy makers want to foster competition or rein it in, this conclusion can inform their choices.

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Are Albanians smarter than Germans?

Campaign for vote-splitting in GermanyIf there was a catwalk for political institutions, mixed electoral systems would be the newest fashion trend. They are incredibly popular among politicians, pressure groups, and academics all around the world. Mixed electoral systems combine proportional representation with local representation in single-seat districts. Now, just a few weeks before the Constitutional Court of Germany is debating (again) about loopholes in mixed electoral systems, my article about strategic manipulation under these systems has been published online in the International Political Science Review.

In fact, the German electoral system is the best-known example of mixed electoral system, with voters voting simultaneously for a local candidate and for a national party list. Overall (surplus mandates apart), the allocated seats are exactly proportional to the parties’ vote share.

Almost the same electoral system has ended up in chaos in Albania, Italy, Lesotho and Venezuela. As my article shows, political parties can easily organise in a special pattern of strategic voting, which puts the electoral system completely out of order. More precisely, large parties can achieve over-representation by encouraging their voters to split their votes. They vote with the candidate vote (Germany: “Erststimme”) for their favourite party, but cast their list vote (“Zweitstimme”) for a different party, which is allied to their favourite party. If many voters follow this recommendation, then they outsmart the electoral system mechanism which is designed to lead to proportional results. Instead, the parties applying such a strategy will be massively over-represented.

I have simulated the consequences of such electoral strategies, and showed that there is no solution that would prevent them. Interesting enough, however, in 60 years of application of this electoral system in Germany, there is no known instance where such a strategy would have been used at large-scale. My tests (not published) for several recent elections show no sign that vote-splitting between CDU and FDP or between SPD and Greens has anything to do with such a strategy. In contrast, in young democracies, voters and parties have quickly learned how to abuse the electoral system.

De Borda: a wise manThis opens the question whether German-style mixed electoral systems with a compensatory mechanism are of any use at all. Note that there are many seemingly genius electoral systems discussed in the theoretical literature, which nobody would ever use in a real-world democracy, because they have very nice outcomes if everybody votes sincerely, but have devastating results, once actors start playing them strategically. This is why, for instance, the father of the Borda Count, Jean-Charles de Borda, told that his system was “intended only for honest men”.

I do not think that politicians and voters will ever be honest (except for Germans). Therefore, I am wondering whether German-style mixed electoral systems should be on the catwalk, or rather in the trash bin.

PS: At the NCCR Democracy, we have just started a new research project on mixed electoral systems, jointly with Christian Rubba who has joined us this month. New results coming soon.

“Sell your islands, you bankrupt Greeks!” – Exploring Public Opinion Towards International Financial Bailouts

Priding itself on openly saying what “the man on the street” thinks, the German tabloid Bild suggested a seemingly simple strategy to deal with Greece’s debt problems: rather than relying on other countries’ financial assistance, Greece should instead sell some of its islands and, if necessary, the Acropolis as well. Perhaps unsurprisingly, European finance ministers ignored this recommendation and instead set up an EU bailout fund of €800 billion. Although the IMF, the European Commission, and others demanded an increase of the fund upward of €1 trillion, German finance minister Wolfgang Schäuble opposed further expansion, deeming it unacceptable to the German public. Indeed, several snap polls reported that about two thirds of the German citizens oppose such bailouts for over-indebted Euro countries.

Although public opinion is widely regarded as a major constraint on governments’ actions in the ongoing debate over the bailouts, scholars know very little about the factors that underlie voters’ attitudes towards such international transfers. In particular, it is unclear whether voters’ opinions reflect their assessments of how the bailouts would affect their own well-being, that of their country, or perhaps that of their fellow Europeans. In a new paper, Jens Hainmueller, Yotam Margalit, and I begin addressing this question. We conducted two large-scale surveys in Germany, the country shouldering the largest share of the EU’s financial rescue fund. Our results show that while the economic features of the bailout package itself strongly affect voters’ willingness to support the bailouts, individuals’ own economic standing has limited explanatory power in accounting for their position on the issue. In contrast, social dispositions such as altruism and cosmopolitanism are robustly associated with support for the bailouts. This suggests that the current divide in public opinion towards the bailouts is generally not along distributive lines between domestic winners and losers. Instead, the divide is better understood as a foreign policy issue that pits economic nationalist sentiments versus greater cosmopolitan affinity and other-regarding preferences.

Gaddafi’s Demise Is Not The Only Reason for The Military Coup in Mali

A guest post by Jonathan van Eerd, a PhD candidate at the University of Zurich. He recently completed field work in Mali’s capital city, Bamako, and is currently a visiting scholar at Cornell University.

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Mali was considered to be one of the few functioning democracies in West Africa. It never experienced a military coup since the introduction of multiparty democracy in 1992. Considering that, last Wednesday’s coup comes as a surprise.

The group under the lead of so far unknown Capt. Amadou Sonago claims that they have overthrown the democratically elected government of Amadou Toumani Touré (short: ATT) because of its “incompetence” in handling the Tuareg Rebellion in Mali’s North.

The Malian army was indeed poorly prepared for its newest task of defending the nation’s unity. The soldiers are badly trained, have outdated weaponry and not enough supply. There were failures in informing soldier’s families about fatalities in combat.

Mali is one of West Africa’s few fairly working democracies. Why was there no national or international political force that pleaded for the strengthening of the Malian forces in the combat against the rebellion?

Being one of the least developed countries in the world, the internationally supported downfall of the Gaddafi’s regime in Libya caught Mali on the wrong foot. Many of Gaddafi’s former Tuareg-soldiers became jobless and went back to the Sahel region, of which Mali’s North is a part. They have not been disarmed by anyone. And in January of this year they started a new Tuareg-rebellion in Mali’s North. Its goal is the independence of Mali’s northern regions.

Mali has experienced recurring Tuareg-rebellions since the sixties. However, the intensity of this new rebellion was unprecedented. Along with that appeared a new generation of well-armed Tuareg-fighters, which came back from Libya. Together with some factions of older Tuareg-rebellions, they formed the National Movement for the Liberation of Azawad (MNLA).

The Malian government and its army were taken by surprise. They were ill-prepared because the peace treaty they have signed after the last Tuareg-rebellion in 2008 with the old generation of Tuareg-rebells and the generous “development aid” of the Malian government for the Tuareg to keep them at ease gave the government a misleading feeling of security. Additionally, the foreign, most notably French, diplomatic and military aid for Mali was rather weak or even counterproductive: The French engaged in direct talks with the MNLA, because they hoped to gain their help in France’s battle against the terror-organization Al-Qaeda Organization in the Islamic Maghreb
(AQMI), which kidnapped and murdered French and other Western tourists and expats in the region. This boosted the MNLA’s self-confidence and led to diplomatic tension between France and its former colony.

But these are not the only causes of the coup. One important cause lies in the nature of ATT’s governing style and Mali’s political culture itself. ATT, who was without any partisan affiliation, preferred to govern with a consensual-styled all-party cabinet. Since his re-election in 2007 he included every important party – with one exception – in one way or another in his government: Out of 160 parliamentarians, only 4 of a small socialist party were in the opposition before the coup.

In such an ethnically heterogeneous country like Mali the inclusion of every important power-base has many advantages. The fact that Mali experienced relative stability or no ethnic conflicts in contrast to its neighbors Ivory Coast, Niger or other West African countries in the last 20 years proves this point.

However, Mali’s financially and organizationally weak political parties are not only in ATT’s all-party government due to political sanity, but also for their very political survival: In most African democracies and semi-democracies, access to state resources is crucial to win important client’s favor with gifts and other privileges, in order to make sure that they give support in elections. Consequently, no Malian political party was willing to occasionally play the indispensable part of the opposition, meaning that no important party pointed out to the deficiencies and failures of the ATT government in its handling of the newest Tuareg-rebellion. The parties did not want to risk their participation in the government and the consequential loss of access to state resources.

Switzerland is the world’s most famous example of a functioning consensus democracy. However, in contrast to Mali and most other democracies in the world, Switzerland’s democracy features extensive direct-democratic rights for Swiss citizens. This ensures that the citizens itself occasionally play the missing part of the opposition to a consensus government.

As no party wanted to harm its share in the Malian government, they criticized ATT only off the record for his lack of foresight on the fallout of the conflict in Libya, his hesitant diplomatic and military reaction, as well as his almost non-existent information policy regarding the rebellion in the North.

On the contrary, all political parties awaited ATT’s orderly replacement in April’s presidential elections. The unexpressed consensus was to first await the new president and only after that to strive for a solution of the conflict in the North. Until then, the parties concentrated on their preparations for the elections. Yet even while doing that, they did not consider to raise the issue of the Tuareg-rebellion as a topic for their individual election campaigns; again for the sake of the all-party consensus.

As a result, one part of the Malian army decided to take matters, or respectively, the part of the opposition in their own hands. In a drastic and non-democratic manner they pointed out the deficiencies and grievances of their army.

Prediction Markets and the Ballot of March 11: A First Evaluation

A guest post by Oliver Strijbis, Sveinung Arnesen, Kjetil Thuen, and Lucas Rachow. Oliver Strijbis is a postdoctoral researcher at the University of Hamburg, Sveinung Arnesen is a postdoctoral researcher at the University of Bergen. Together with Kjetil Thuen and Lucas Rachow they are founders of politikprognosen.ch.

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Shortly before the voters went to the polls on March 11 we published on this blog the predictions taken from our prediction market. In short, the accuracy of our forecasts were mixed. Whether the predictions were accurate or not largely depended on the proposal. But let’s look at it in detail.

The good news is that the predictions for the ballot on the “Buchpreisbindung” and the “Bauspar-Initiative” were strikes. The prediction from March 7 (the latest prediction we published) was that the share of Yes-votes for the Buchpreisbindung would be 45.5% while it was 43.9% (1.6% deviation). The share of Yes-votes for the Bauspar-Initiative was expected to be 46.7% while it was 44.2% (2.5%).

Our predictions for the other proposals were less accurate. For the ballot on the “Zweitwohnungen” we predicted 45.5% of Yes-votes – deviating 5.1% from the final result of 50.6%. Hence, we did not predict the right winner in this instance. Our predictions for the referendum on the law on “Geldspiele” and the “6 Wochen Ferien für alle” initiative have foreseen the winner but were rather far off from the final results: while our prediction was 70.5% of “Yes” for the Geldspiele the result was 87.1%, and while we foresaw the share of Yes-votes for “6 Wochen Ferien für alle” to be 39.9% it was only 33.5%.

Why have our predictions concerning some ballots been far more accurate than others? It is generally argued that the accuracy of the predictions depend on what kind of relevant information the traders possess about the topic, and to which degree the traders are motivated and able to express their beliefs in the prediction market framework (e.g. Sunstein 2006). Based on these theoretical assumptions we would like to discuss a couple of points that might explain variance in the accuracy of the predictions of the March 11 ballots.

The proposals. Predictions are easier if there is abundant information on a proposal and if the campaign follows a well-known pattern. The fact that not less than five proposals were voted on at the same day had the effect that media coverage on some of the proposals was scarce. Furthermore, the initiative on the “Zweitwohnungen” and to some degree also the referendum on the law on “Geldspiele” did not produce constellations of political alliances which are typical for direct democratic decisions in Switzerland. Hence, experience helped only partially for the formation of well-informed expectations. However, in the case of the initiative on “6 Wochen Ferien für alle” the pattern followed a clear left-right division that has been experienced in many cases in the past. This means that also features concerning the topic and the number of the proposals can only partly explain the variance in the accuracy of our predictions.

The participants. Prediction markets work on the basis of the relevant information accumulated by the participants. We have tried to guarantee that our market profits from well-informed participants by recruiting mainly among social scientists in general and political scientists in particular. However, for many of them the mechanisms of a prediction market might be new. Furthermore, some of them might participate more out of goodwill than intrinsic motivation.

While some of our predictions have pointed to the potential of prediction markets for forecasting the results of direct democratic decisions in Switzerland, there remains room for improvement. Although, due to the often very short and spiritless campaigns, predictions on Swiss direct democratic decisions might always be fraught with risk, we think that this improvement is possible. Since the participants are undergoing a learning process and since in the future participants can be substituted we are confident that we can achieve more accurate predictions in a not too distant future. Even more, competent traders will also over time accumulate wealth in the market and thus become more powerful than those making wrong trades. In other words, we expect more influence to be transferred to those with good judgment, and less to those with bad judgment. Much will now depend on our ability to gain the most informed and motivated participants.

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Predictions for the Ballots on March 11

A guest post by Oliver Strijbis, Sveinung Arnesen, Kjetil Thuen, and Lucas Rachow. Oliver Strijbis is a postdoctoral researcher at the University of Hamburg, Sveinung Arnesen is a postdoctoral researcher at the University of Bergen. Together with Kjetil Thuen and Lucas Rachow they are founders of politikprognosen.ch.

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Who thinks in predictions of election and referenda outcomes thinks in surveys. However, an alternative method for forecasting has made its way into political science the last years. So called “prediction markets” are designed to aggregate information and produce predictions about future events. Prediction markets are markets for contracts that yield payments based on the outcome of an uncertain future event, such as an election or a referendum. A considerable bulk of literature has shown that prediction markets can easily compete with surveys in forecasting election outcomes. This has also been shown for the Swiss parliamentary elections in 2011 where the forecasts of the prediction markets were more accurate than those of the surveys (Tagesanzeiger online, 27th october 2011).

In an attempt to apply prediction markets in the context of Switzerland’s direct democracy we set up prediction markets for the ballots of March 11. We arrive at forecasts by setting up a market for each of the proposals. This means that on each of five markets the outcome of one proposal is treated as an asset. At voting day an asset pays the share of votes the proposal has received. For instance if the proposal “Schluss mit uferlosem Bau von Zweitwohnungen!” gets 45% of the votes, the final price of an asset of this proposal pays 45 units. Hence, a participant on the prediction market has an incentive to buy assets if the price is below 45 units and an incentive to sell if it is above. Consequently, rational players will buy assets if the current price is below the expected outcome and sell if it is above.

With the assistance of colleagues from various Swiss universities (special thanks to Laurent Bernhard) we were able to recruit 124 individuals of which 87 turned out to be active participants. In an attempt to recruit only the most talented players we were primarily approaching political scientists (students and professionals) and individuals trained in a related field. From the 87 participants 27% were political scientists, 21% economists, and 22% were trained social scientists from other disciplines. The participants are compensated with a small salary depending on their performance.

While theory tells us that our proceeding should yield accurate forecasts, only empirics can demonstrate it. So what do the prediction markets tell us for the ballots on March 11? Here are our predictions from March 3 (see Figure): 46.7% yes for the “Bauspar-Initiative”, 45.5% yes for the law on the “Buchpreisbindung”, 39.9% yes for the initiative “6 Wochen Ferien für alle!”, 70.5% yes for law on the “Neuregelung der Geldspiele”, and 45.5% yes for the initiative “Schluss mit uferlosem Bau von Zweitwohnungen!”. Hence, for all three proposals where a close race is expected we anticipate a narrow defeat.

Ethno-Nationalist Conflict in Iran?

A guest post by Nils-Christian Bormann.

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On a recent Daily Show episode, former FBI special agent Ali Soufan discussed Iranian internal politics with regard to its ethno-nationalist minorities and their linkages in the wider Middle Eastern & Caucasian region. Manuel Vogt, Lars-Erik Cederman and I have discussed the challenge of ethno-nationalism in the context of the Arab Spring in a new NCCR working paper. Our analysis of ethnic group conflict risk takes into consideration factors such as government inclusion of ethnic elites, a recent downgrade in power status, ethnic group size, a prior history of conflict, GDP and population size. Our model predicts that most groups in Iran have a conflict probability that is above the sample median (the sample average of all conflict probabilities is heavily influenced by actual conflicts – our model predicts an almost 100% Probability of insurgency for the Kurds within the decade from 2010-2019 – and Kurdish rebels were actually fighting the Iranian government in 2010). Interestingly enough, the Azeris – the Turkic group that Soufan is talking about the most have a much smaller conflict probability than most of Iran’s minorities (about a third). This is due to fact that in our data set Azerian elites are coded as having access to executive power in Iran and the Azeris have never experienced a civil war with the Iranian government. However, if Azeri elites were denied to the Iranian government in, for example, 2014 their 10-year cumulative probability of civil war onset would rise to 34% – a rather high probability in civil war studies. The probabilities underline that it is not ethno-nationalism per se that increase the likelihood of civil war but its meaning in the political system. Put differently, when a government can accommodate ethnic elites by offering them de facto access to executive positions, civil war risk is greatly reduced.

Soufan, however, refers explicitly to regional dynamics and ethno-national linkages of Turkic groups in the Middle East, the Caucusus and all the way to China. I therefore estimated a new model with a different sample (including the Middle East and the Caucasus but no Northern African countries) and three new dummy variables that indicate whether an ethnic group has any kin group in a neighboring country that has access to governmental power, that is excluded from executive power, or that is currently fighting a war (these data were just collected by Seraina Ruegger at ETH Zurich but are not yet published). The model (figure below) again underlines the importance of ethnic politics and its dynamic changes in explaining civil war onset. Moreover, having a kin group that is excluded from government power in the region is likely to increase conflict risk while having a kin group that is included does not (at least not significantly). Having a kin group that is involved in conflict raises the risk of civil war as well. The cases doing most of the work here will be the Kurds in Iran, Iraq, and Turkey. Indeed, if the Kurds are dropped from the sample, the excluded kin and conflict parameters turn out to be insignificant and the included kin variable raises the risk of conflict as Soufan suggested they would for Turkish kin groups.

However, neither model 1 nor 2 predict a higher risk of civil war in Iran. Arabs and Baloch along with the Kurds are still quite likely to be involved in a civil war in the next decade but Azeris and other Iranian minorities actually have a lower risk of conflict onset in these models. Model 2 does not change the dynamics in Iran very much. Indeed, the Turkish Kin connection hardly affects the conflict risk for Azeris in Iran. Even in the counterfactual case of a domestic war in which one of the Turkish kin groups of the Azeri were involved, conflict risk would not rise to levels that the Iranian leadership would have to worry about much according to the model.

All of these results have to be taken with a grain of salt. The current coding of the kin connection is solely based on ethnic affinity (shared language or religious adherence would result in a kin link) and does not capture Turkey’s geo-strategic interests. Moreover, it is also not geared towards prediction. However, it is suggestive of the fact that domestic ethnic power relations seem to play a bigger role than international linkages. Very different dynamics could open up if Iran’s army was involved in a costly conflict with Israel and opportunities for rebellion would open up. However, as long as Iranian Azeri elites have de facto executive access, a domestic uprising seems unlikely.