Constitutional Political Economy, 16, 5–30, 2005. 2005 Springer Science+Business Media, Inc. Printed in The Netherlands.
Judges and Taxes: Judicial Review, Judicial Independence and the Size of Government GEORGE TRIDIMAS
[email protected] School of Economics and Politics, University of Ulster, Shore Road, Newtownabbey Co. Antrim, BT37 0QB
Abstract. The study investigates how judicial review of policy and judicial independence affect the relative size of government. Judicial oversight of policy is the authority of courts to check the legality of policy measures and annul measures which are incompatible with the constitution or are enacted without following the procedures laid down by the law. Using a model of constitutional political economy, where policy making is subject to judicial oversight, it is predicted that the relative size of the public sector decreases as judicial review and judicial independence increase. The theoretical predictions are tested in an international cross section sample of 52 countries. Controlling for the effects of real income, age dependency, openness of the economy, the legal origins of a country and other socio-political variables the results show that the checks and balances provided by the judiciary lead to a smaller relative size of taxes in the economy. JEL classification: D70, D72, D74, D78, H30, K41. Key words: size of government, taxation, judicial review, judicial independence
1.
Introduction
The application of the rule law is essential for the prosperity of market economies and the welfare of citizens. A cornerstone of the rule of law is that courts enforce policy measures passed by the legislature and oversee the actions of both the legislative and the executive branches of government. Judicial review of policy, which examines the legality of policy measures passed by the legislature and enacted by the executive branch of government, has always been political in nature as it is concerned with the limits of lawful government and what the political authorities can and cannot do within the provisions of the constitutional arrangements of a country. Further, an independent judiciary fulfils its functions without regard to the identity of the litigants, be they private or public agents. The present study investigates analytically and empirically whether and how judicial review of policy and judicial independence affect the relative size of government. Judicial oversight of policy, which is part of the collective choice mechanism, may restrain government actions and therefore affect the size of resources taken up by the government. Despite the obvious relevance of the question to the size of government, the issue has been largely ignored in the literature. Using the perspective of political economy the paper explores a model of the influence of the judiciary on economic policy making and the size of tax revenue. In its empirical inquiry the study uses the indices of judicial
6
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review of policy and judicial independence recently assembled by La Porta et al. (2004, hereafter LLPS), for a large international sample. The institutions within which the political contest and the implementation of fiscal policy take place have been identified as a major factor in the determination of the size (and composition) of government. They include arrangements pertaining to both the electoral stage, like party competition and electoral rules, and the post-election institutions of governance, like the number of veto players, the relation between the executive and the legislative, and the structure of agenda setting powers.1 Judicial review of policy is an additional component of the institutional setting of policy making. However, its effects on the size of government have until recently been left unexplored. The study of Padovano et al. (2003) takes the first step towards this purpose. It analyses a theoretical model of separation of powers where the judiciary may restrict the ability of politicians to divert resources for their own private gain; however it does not attempt to study the empirical effect of the judiciary. The present paper not only adds to the theoretical analysis, but it is also the first study to offer econometric evidence on the effect of judiciary oversight on the size of government. Conceptually judicial review and judicial independence are different. Judicial review of policy is the authority of lower and higher courts to check whether or not laws and policy measures passed by the legislative are in accordance with the constitution and have been enacted according to the stipulated procedures. Measures, which are found to violate those conditions, are annulled.2 Judicial review offers a fundamental protection of individual freedoms against abuses of power by elected and/or appointed state officials. Judicial independence means that the judiciary carries out the function of dispute resolution without regard to the power and political preferences of the parties appearing before it, or the power and preferences of any other branch of government with an interest in the case. Judicial independence matters for the resolution of disputes between the state and the individual, between private parties, as well as between different government bodies. Judicial independence does not necessarily imply judicial review of policy, for the courts of a country may be politically independent but may only have limited policy review rights with the UK offering a good example of this case. LLPS offer a detailed discussion of the origins and properties of judicial review and judicial independence as components of governance. The paper proceeds as follows. Section 2 offers a short survey of the role assigned to the judiciary in the political economy literature. Section 3 presents a theoretical model of the relative size of government when the outcome of collective choice is subject to review by the judiciary. Briefly, subjecting the outcome of legislation to court scrutiny raises the spectrum that a policy measure passed by the legislature may not be enforced by the court. It is this ‘‘risk’’ of being overturned by the court which drives the drafters of policy measures to adjust the size of policy measures in comparison to the case of absence of policy review. Section 4 first discusses the empirical specification used to test the predicted effect of the judiciary on the relative size of government and presents the data from an international cross-section of 52 countries. This is followed by the presentation of the empirical findings. The evidence
JUDGES AND TAXES
7
lends support to the intuitive prediction that more judicial review results in a smaller level of tax revenue as a percentage of income. Section 5 concludes.
2.
Political Economy Models of the Judiciary
The function of the judiciary as an institution of governance, and its effect on the outcome of collective choice, has been the focus of a rapidly expanding body of political economy literature. The involvement of the judiciary in collective choice raises a fundamental dilemma. On the one hand, decision making by an independent but unelected judiciary may go against deep-seated notions of majority decision making and electoral accountability. On the other hand, appointment of a politically independent judiciary, which does not pander to short term shifts in public opinion, may be trusted to pursue the long-run interests of the citizens. Various theoretical arguments have been invoked to study this dilemma and explain the involvement of the judiciary in collective decision making. They include transaction costs and delegation theory, interest group politics and spatial decision theory. Several strands can be distinguished.3 In the first instance, the literature on the independence of courts emphasizes the efficiency gains derived when citizens as principals delegate to an independent judiciary the enforcement of the constitutional arrangements of the polity and the application of the rule of law. The constitution (which specifies how a polity is governed) and ordinary legislation (which enacts policy measures) are often incomplete contracts. This is so because of changes in technology and preferences, imperfect foresight, conflicts of rights and ambiguous language. As a result, declarations regarding citizen rights, freedoms and obligations (which are reflected in fundamental and ordinary laws) may lack credibility. An independent judiciary is a mechanism which may resolve this problem. That is, by agreeing to establish courts whose function is to interpret the law and resolve disputes, and abide by their rulings, citizens commit to the constitutional order and the rule of law. They are then able to reap the gains of the co-operative solution it represents; see amongst others, Weingast (1993), Feld and Voigt (2003), Stone Sweet (2000) and (2002). Furthermore, Mueller (1996) stresses the role of the judiciary as a protector of individual rights from abuses of power by the legislative and executive branches of governance and, more generally, the winning majority. To attain the efficiency gains from co-operation (e.g. produce public goods, etc.) citizens elect governments and grant them substantial powers of agenda setting and policy implementation. This delegation carries the risk that politicians and the winning majority may divert resources and abuse individual rights to their own benefit.4 An independent judiciary with the power to interpret the constitution and review and strike down policy measures provides an effective safeguard against the risks of abuse. In practice, various mechanisms are in place to safeguard the political independence of appointed judges. These include long terms of service and
8
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financial security for the judges, as well as rigid constitutional procedures, which make difficult to reverse judicial rulings by fresh legislation. Using the framework of interest groups politics Landes and Posner (1975) consider the judiciary, and especially the constitutional court, as providing the institution which may secure the durability of the distributional gains obtained by the original winner of the political contests in competition against other interest groups. Specifically, interest groups will support legislators who can safeguard the permanence of their gains. This permanence can be accomplished when the enacting legislature delegates review powers to the constitutional court, which then applies the ‘‘original intent’’ of the legislator and ratifies the privileges awarded to interest groups independently of democratic controls. Although perceptive, this view falls short of a general explanation of the conduct of the judiciary (Moe 1990 and 1997). For as long as the judiciary enjoys decision-making autonomy, it does not follow that it will either apply the original intent or pursue any other ideal entrusted to it. It may well try to pursue its own preferences subject to the relevant political and other constraints.5 Turning the spotlight on the benefits gained by the delegating politician (rather than the voters), Fiorina (1982) and (1986) argues that with imperfectly informed voters, delegation of decision making to the judiciary offers an office-motivated politician the opportunity to shift the blame for unpopular policy measures with unfavourable consequences for his constituents and deflect criticism. On the other hand, such delegation to the courts decreases the ability to claim credit for policies with a favourable impact. If there are circumstances, where the expected gains from shifting the blame exceed the expected losses from forgoing credit, the politician will choose to refer policy making to the judiciary. Shifting of responsibility is easier if the judiciary is perceived by the electorate as independent of the other branches of government. Note however that when voters realize that politicians may be able to introduce fresh legislation to counteract the adverse court ruling, but decide not to do so, they may stop supporting those politicians. This possibility may diminish the attraction of delegating decision making to the judiciary. Another strand of the literature focuses on modelling the effect of the judiciary in collective decision outcomes. Using the spatial decision approach it constructs game theoretic models of sequential strategic interactions between the executive, the legislative and the judiciary. Similarly to the other arms of the government, courts are assumed to have their own set of preferences over policy outcomes. Judicial preferences may, but do not need to be, substantive; they reflect neither calculations of private benefit (like profit maximising firms), nor electoral considerations (like vote-maximising politicians); rather as legal scholars would argue, judicial preferences are based on notions of justice and the rule of law. An equilibrium outcome emerges after all three sets of actors have made their choices. Thus, the executive and legislative branches are not only interested in their own decision outcomes, but also on whether their decisions will trigger the judiciary to move and reverse such decisions. See, amongst others, the papers of Ferejohn and Shipan (1990),
JUDGES AND TAXES
9
McNollGast (1990), Gely and Spiller (1990), Spiller and Spitzer (1992), Ferejohn and Weingast (1992) and Tiller and Spiller (1999). More recent contributions on the rationale of courts re-examine formally the benefits of decision making by elected (and accountable) politicians versus those of independent (but unaccountable) judges. Ramseyer (1994) generalises the logic of Landes and Posner (1975) and argues that judicial independence is associated with high political turnover. Padovano et al. (2003) show that an independent judiciary increases accountability of the executive and legislative branches to the voters by forcing politicians to maximize the provision of public goods and not to divert resources for their own private use. Maskin and Tirole (2004) show that decision making by the judiciary results in higher social welfare when (a) the issue to be decided requires technical knowledge and (b) the majority may inflict large losses on the minority. On the other hand, in their framework politicians should be given more discretion than judges, because, unlike the decisions of judges, their decisions convey useful information to the public. Hanssen (2004a) and (2004b) examines how much independence politicians would grant to the judiciary. He argues, and offers evidence based on the US to that effect, that incumbent politicians are more likely to establish independent judiciaries when (a) the probability of losing office is high and (b) the distance between their policy objectives and those of their opponents is large. On the contrary a party which enjoys strong political support and expects to stay in office is less likely to provide for strong judiciary checks. In contrast to the above studies, which seek to explain the reasons for and the determinants of judiciary independence, another branch of empirically orientated research uses judicial independence as an explanatory variable and shows its contribution to economic prosperity and political freedom. Studies of economic growth have emphasized the benefits from applying the rule of law and securing economic freedom. Knack and Keefer (1995) demonstrate the empirical importance of the rule of law and the peaceful adjudication of disputes by courts for securing property and contractual rights and thereby promoting investment and growth. Henisz (2000) obtains evidence that an increase in the degree of independence of high court justices increases the per capita rate of economic growth of a country. Feld and Voigt (2003) distinguish between two notions of judicial independence. First, de jure independence; this is described in legal texts setting up the supreme court of a country. Second, de facto independence which is independence of the supreme court of a country as it is actually implemented in practice. Using a cross-sectional sample they present evidence that only de facto judicial independence is conducive to growth. Legal theories of financial development also emphasise the importance of the legal arrangements and legal traditions of a country. Scholars distinguish between two main legal origins, the English common law, which focuses on the role of judge and precedent to resolve disputes, and the French civil law with its emphasis on statutes and legal codes for court rulings. It is then shown that different legal origins confer different degrees of protection to the rights of private property owners, shareholders and creditors, and that they have different impacts on the enforcement of law by the
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courts. In general, common law countries secure more protection and better law enforcement than civil law countries, see La Porta et al. (1998) and (1999). In turn, security of investor rights fosters the development of financial institutions and ultimately economic growth (see also Beck et al. (2003), and the literature cited therein). Using an international sample LLPS show that greater judicial independence and constitutional review are associated with greater economic and political freedom. Finally, testing the importance of judicial oversight in the context of international adjudication, Pitarakis and Tridimas (2003) show that the application of the rule of law by the European Court of Justice, the judiciary arm of the European Union, has been a driving force behind economic integration in Europe and specifically the voluminous growth of intra-EU trade.
3.
A Theoretical Framework of the Size of Government Under Judicial Oversight
This section explores the effect of the judiciary on the relative size of government. For this purpose we adopt a model of constitutional political economy suggested by Mueller (1991), (1996) and (1997), who in turn built on the Buchanan and Tullock (1962) study of efficiency and decision costs in a democracy6. For clarity it is assumed that the constitution is written to protect property rights and constrain the state from infringing on citizens rights. Next, we assume an economy where two alternative tax and expenditure policies can be pursued with outcomes A and B, and two types of individuals 1 and 2. The income of each type 1 individual is Y1 and the income of each type 2 is Y2. The proportion of type 1 individuals is M and the proportion of type 2 individuals is 1 ) M. For simplicity, but without loss of generality, we confine our attention to a pure transfer policy and abstract from the provision of public goods and incentive effects; it is then assumed that Y1, Y2 and M are exogenous. Similarly, we also abstract from the resource cost of the judiciary. Under policy outcome A, type 1 individuals emerge as the winners of the fiscal tax – transfer game and type 2 individuals end up as the net losers. Specifically, only type 1 individuals receive a transfer G, while both types pay an income tax at a rate t. The corresponding budget constraints of the two classes of individuals and the government are respectively written as Winners ¼ type 1 Y1 ð1 tÞ þ G
ð1:1Þ
Losers ¼ type 2
Y2 ð1 tÞ
ð1:2Þ
Government
MG ¼ t½MY1 þ ð1 MÞY2
ð1:3Þ
In the state of the world B, the situation is reversed. The proportion M of type 1 individuals is now the losers of the fiscal tax – transfer game, while type 2 individuals are the winners. The 1 ) M type 2 individuals receive a transfer X, while both types are assumed to pay a tax at the rate s. The respective budget constraints are now written as
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Losers ¼ type 1
Y1 ð1 sÞ
ð2:1Þ
Winners ¼ type 2
Y2 ð1 sÞ þ X
ð2:2Þ
Government
ð1 MÞX ¼ s½MY1 þ ð1 MÞY2
ð2:3Þ
From the government budget constraints (1.3) and (2.3) we obtain respectively that G ¼ tfY1 þ ½ð1 MÞ=MY2 g and X ¼ sf½M=ð1 MÞY1 þ Y2 g. Whether policy outcome A or B is enacted depends on the decision of the judicial branch. For example, outcome B can be thought as the status-quo while outcome A is the result of a new pro-type 1 policy initiated by the government. The essence of judicial review of policy by an independent court is that it is not certain whether or not the government will implement policy A, since its enactment may be challenged at the court. The independent court then checks whether or not the new policy A is compatible with the constitutional arrangements of the polity and the fundamental rights conferred to its citizens, whether or not the political authorities have the constitutional right to adopt the policy under consideration and whether or not the appropriate institutional procedures have been followed in initiating the policy, passing and implementing legislation. Only if those conditions are satisfied the policy can be implemented in practice. This additional judicial stage of the collective choice game introduces a degree of ‘‘riskiness’’ in the determination of the outcome. Let P be the probability that the judiciary enforces the new policy A. Consequently, the probability that the status-quo B survives is 1 ) P. Moreover, judicial independence implies that the probability of enforcement does not depend on the identity of the litigants, but only on the merits of the case. Algebraically, this means that P is exogenous to the problem at hand. Note that in common with what we observe in practice, the ruling of the judiciary is modelled as a binary one, that is, either the policy as decided by the political authorities is enacted, or annulled, in which case the status-quo prevails. That is, unlike the legislative and executive organs of government, the judiciary does not engage explicitly in policy making. Neither does it have agenda setting powers, nor does it vote on proposed laws. Its input to policy making consists of interpreting legislation and checking the legality of those acts of the other branches of government brought before it.7 Denoting the individual utility function by U, the expected utility of type 1 individuals from the game of judicial review of policy is written as, EðU1 Þ ¼ PUA fY1 ð1 tÞ þ Gg þ ð1 PÞUB fð1 sÞY1 g which after the relevant substitutions yields EðU1 Þ ¼ PUA fY1 þ ½ð1 MÞ=MtY2 g þ ð1 PÞUB ½ð1 sÞY1
ð3:1Þ
Similarly, the expected utility of type 2 individuals is EðU2 Þ ¼ PUA ½ð1 tÞY2 þ ð1 PÞUB fY2 þ ½M=ð1 MÞsY1 g
ð3:2Þ
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That is, the expected utility of each actor is the weighted average of the benefit and loss from the two policy alternatives. On the contrary, in the absence of judicial review of policy by an independent court, the policy maker can set its most preferred policy without being subject to the risk that the court may strike it down. Consequently, the loss suffered from the annulment of policy by the court does not enter its utility. Since the problem of type 2 individuals is symmetric to that of type 1, we focus on individuals of type 1 without loss of generality. For a systematic understanding of the effects of judicial review on the effects of public policy let the size of transfers under policy outcome A be a proportion of the size of transfers under B as in the following expression kMG ¼ ð1 MÞX where k>0, but otherwise no additional restriction is imposed on its value. Substituting from the expressions for G and X we also derive kt ¼ s
ð4Þ
In the above formulation k shows the relative size of the tax loss suffered by type 1 individual, if he ends up on the losing side of legislation. Plaguing expression (4) into equation (3.1) we have EðU1 Þ ¼ PUA fY1 þ ½ð1 MÞ=MtY2 g þ ð1 PÞUB ½ð1 ktÞY1
ð5Þ
Assume now that as a result of an election victory, or another collective decision making rule, individuals of type 1 (or rather the politician who represents their interests), set the tax-transfer policy. They will then choose the tax rate which maximizes the expected utility from the judicial review of policy game. Maximization of (5) with respect to t yields the first and second order conditions respectively (where @Ui =@Y > 0 and @ 2 Ui @Y2 < 0; i ¼ A; B, denote the marginal utility of income and its rate of change), dE=dt Et ¼ P½ð1 MÞ=MY2 ð@UA =@YÞ ð1 PÞkY1 ð@UB =@YÞ ¼ 0
ð6Þ
d2 E=dt2 Ett ¼ Pf½ð1 MÞ=MY2 g2 ð@ 2 UA =@Y2 Þ ð1 PÞðkY1 Þ2 ð@ 2 UB =@Y2 Þ2 < 0
ð7Þ
Let tJ denote the resulting politically optimum level of tax rate. Without judicial review type 1 individuals can enact the tax-transfer policy they like without worrying about the possibility of it being struck down by the judiciary, their problem is to choose t which maximizes EðU1 Þ ¼ UA fY1 þ ½ð1 MÞ=MtY2 g
ð3:10 Þ
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The first-order condition is ½ð1 MÞ=MY2 ð@UA =@YÞ ¼ 0
ð60 Þ
which yields the politically optimum tax rate tW. Equation (6) implies that ½ð1 MÞ=MY2 ð@UA =@YÞ ¼ ½ð1 PÞ=PkY1 ð@UB =@YÞ > 0
ð7Þ
which when compared to (6¢) shows that the Right-Hand-Side of (6) is greater than the R.H.S. of (6¢). Recalling the fundamental principle of diminishing marginal utility the latter inequality implies that the tax rate which solves (6) is smaller that the tax rate which solves (6¢), that is, tJ 0
ð8Þ
which is unambiguously positive. That is, as the probability of judicial enforcement of the policy A rises, so does the politically optimum tax rate favoured by type 1 individuals who gain from policy A, and accordingly, the size of the public sector. Analytically, when the tax-transfer policy pursued is consistent with the principles embodied in the constitution and enforced by the judiciary, the probability of a court ruling in favour of enforcing the policy becomes very high. Under this circumstance, the policy makers have a strong incentive to increase the size of policy which will be enforced by the judiciary. On the contrary, if the probability of a judicial reversal of the policy increases, or equivalently, the probability of the judicial enforcement of the status-quo, 1 ) P, increases, the politically optimal size of the public sector decreases.8 dtJ =dM ¼½PY1 ð1 þ qÞ=M2 ½ð@UA =@YÞ þ ðð1 MÞ=MÞtY1 ð1 þ qÞð@ 2 UB =@Y2 Þ=Ett
ð9Þ
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dtJ =dY1 ¼ fP½ð1 MÞ=Mð1 þ qÞð@UA =@YÞ ð1 PÞkð@UB =@YÞ þ P½ð1 MÞ=MY2 ½1 þ ðð1 MÞ=MÞtð1 þ qÞð@ 2 UA =@Y2 Þ ð1 PÞkY1 ð1 ktÞð@ 2 UB =@Y2 Þg=Ett dtJ =dq ¼ P½ð1 MÞ=MY1 fð@UA =@YÞ þ ð1 þ qÞ½ð1 MÞ=MtY1 ð@ 2 UB =@Y2 Þg=Ett dtJ =dk ¼ ð1 PÞY1 ½ð@UB =@YÞ ktY1 ð@ 2 UB =@Y2 Þ=Ett < 0
ð10Þ
ð11Þ
ð12Þ
With the exception of expression (12) all other comparative static results have ambiguous signs, implying that at this level of generality it is not possible to predict a priori whether the equilibrium size of government increases or decreases with the proportion of transfer recipients and the size and distribution of income. Only the sign of (12) is unambiguously negative, implying that as the relative size of the loss increases, the equilibrium size of the tax rate falls. Intuitively, as the loss suffered from an unfavourable policy rises the decision takers reduce the size of the policy measure.
4.
4.1.
Evidence on the Effect of Judicial Review and Judicial Independence on the size of Government Empirical Specification
Following the predictions of the model of the previous section, we expect a negative relationship between on the one hand the size of the public sector, measured as the ratio of tax revenue to income, and the degree of judicial review and judicial independence on the other. That is, the relative size of the government is predicted to be smaller where judicial oversight is stronger. Whether or not this prediction is supported by the data is tested in the present section. Although for an individual country judicial independence and judicial review may change little over short periods of time, both these attributes vary considerably across different countries like any other long-standing institutional arrangement. This suggests the use of crosssectional data for testing. The model of the previous section leads us to expect that the relative size of tax revenue depends on judicial review, judicial independence and the level of income and its distribution. There is nevertheless little doubt that the determination of the relative size of government is a complicated phenomenon and a host of additional
JUDGES AND TAXES
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factors contribute to it (for surveys, see Holsey and Borcherding, 1997, and Tridimas and Winer, 2005). Thus, the empirical specification is augmented to include additional explanatory variables, which aim to capture the expected effect of the structure of the economy on tax revenues and have been found as important in the literature on the growth of government size. In addition, to account for the possibility that the effects of judicial review on the size of government work through a more general institutional route, where policy decisions depend on the presence and operation of democratic procedures and political rights, an index for political rights is also included in the empirical specification. The specification used for estimation is stated next in its general form and discussed below. TAXR ¼ a0 þ aY Y þ aR JURE þ aI JIND þ aP POLR þ aA AGE þ aF FE þ aT TRA þ aU URB þ aQ INEQ
ð13Þ
The variables are defined as follows TAXR ¼ The log of the ratio of tax revenue to GDP. Y ¼ The log of real per capita income measured in dollars at 1995 prices. If the estimated coefficient is positive and significant, then an increase in per capita income increases the share of government revenue, which is consistent with the prediction of the well-known Wagner’s law. JURE ¼ The index of judicial review taken from LLPS. This is the average of two indices, (a) the rigidity of the constitution and (b) the extent to which courts check laws for their constitutionality. A rigid constitution (unlike the UK unwritten one, which is easily amended by acts of parliament) constrains the power of the legislative to pass laws which may conflict with the fundamental rights and freedoms enshrined in the constitution. Similarly, court review of laws for their compatibility with the constitution curbs the possible tendencies of politicians to pass measures which may violate constitutional provisions. The average is normalized to lie between 0 and 1. JIND ¼ The index of judicial independence as reported in LLPS. They measure judicial independence as the average of three variables, (a) the tenure of supreme court judges, (b) the tenure of administrative court judges, and (c) legal precedent, that is, how far previous judicial decisions are a source of law for court rulings. The rationale is that judges appointed for long periods of time are less vulnerable to political pressures and therefore more independent. Similarly, if previous judicial decisions constrain future ones, the ability of politicians to influence judges is restricted. As with JURE, the average takes values between 0 and 1. POLR ¼ Index of political rights in 1996 on a scale of 1 to 7, as reported in LLPS. Higher ratings indicate countries that come closer to the ideals suggested by the following questions. (1) Free and fair elections; (2) those elected rule; (3) there are competitive parties or other competitive political groupings; (4) the opposition has
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an important role and power; and (5) the entities have self-determination or an extremely high degree of autonomy. In general, the importance of the judiciary in influencing public policy will be higher in countries where political freedoms and democratic rights are exercised, but they will be lower in countries with weaker political rights. Inclusion of the political rights indicator controls for the different degree of democracy/authoritarian rule in different countries. If the influence of the judiciary operates only through this general political rights channel, then the coefficients of judicial review and independence will not be statistically significant, while that of the political rights will be significant. AGE ¼ The log of the age dependency ratio (that is, dependents to working-age population). This variable is an indicator of ‘‘social need’’. It is presumed that the larger the proportion of those who do not work because they are too young or too old, the larger the need for public spending programmes, like schools, hospitals, welfare services, pensions, etc. and accordingly the higher the relative size of tax revenue needed to finance them. FE ¼ The log of the female labour force activity rate. This follows from Kau and Rubin (1981) and (2002), who argue that higher participation of women in the formal labour market increases tax revenues. TRA ¼ The log of the ratio of international trade (imports plus exports) to GDP. This variable measures the openness of the economy and its inclusion follows the work of Rodrik (1998). His reasoning is that governments of more open economies increase their activities to protect domestic incomes from the higher risks of adverse trade effects, exchange rate fluctuations and capital movements. URB ¼ The log of the proportion of population of each country living in urban areas. Urbanization, typically as a result of industrialization, increases the valuation of public goods, like public health infrastructure, waterworks, sewage and sanitation, transportation etc, which in turn increases demand for them. Financing the latter implies higher relative tax revenue. INEQ ¼ A measure of income inequality. Its inclusion as an explanatory variable is motivated not only from the theoretical considerations of the model, but also from the distributive politics nature of government policy. Simplifying a complex link of behavioural relations, the argument runs as follows: in practice income distribution is skewed to the right, that is, the majority of voters have incomes less than mean income. Politicians seeking to maximize electoral support will then enact policies which redistribute away from the richer minority and in favour of the poorer majority, implying that a higher level of inequality is followed by a larger public sector (see the seminal work of Meltzer and Richard 1981 and 1983; see also Tridimas and Winer 2005 for a critical assessment and extensions).
4.2.
Data
The cross-sectional data set covers 52 countries; the countries and the data used are listed in the Appendix. As already explained, the scores for judicial review and
JUDGES AND TAXES
17
independence come from LLPS (2004), who assembled the relevant indices from countries covered in the Maddex (1995) Encyclopaedia of Constitutions. LLPS also report scores of political rights, taken from Freedom House (1996)9. Data for TAXR, RY, AGE, FE, TRADE and URBAN were taken from the World Bank 2001 CD-Rom of World Development Indicators. For each one of these variable the average ratio over the period 1990–99 (or closest to 1999 depending on availability) was taken. Two different measures are used for income inequality. The first is the Gini coefficient taken from Deininger and Squire (1996) and is available for 45 countries of our sample. The second is the sum of the 3rd and 4th income quintiles of the distribution of income taken from Perotti (1996) and is available for 39 countries in the sample. In what follows it is denoted by MID. Whereas a higher Gini coefficient indicates more inequality, a higher value of the latter measure reflects an improvement in the ranking of the middle class and is taken as an indication of more equality. Note however that there is no one-to-one correspondence between the income distribution variable suggested by the model and the two income inequality measures. Checking for correlation it was found that judicial review and judicial independence are not correlated with each other (correlation coefficient ) 0.05), or any other of the explanatory variables. This finding indicates that the judicial variables contain information not in the other variables (full matrix of correlation coefficients available from the author on request). Lack of correlation between, say, judicial review and real income implies that rich countries do not undertake more review than poorer countries.
4.3.
Regression Results
The results from estimating equation (13) for the largest sample size (52 observations, which excludes the income inequality variable) are presented in Table 1 (standard errors computed from heteroscedastic-consistent matrix, Robust-White). Column (1) shows the estimated coefficients from the maintained specification, that is, when all economic, judicial and political factors, are included in the set of independent determinants. For comparison, column (6) shows the results from the baseline equation which excludes judicial and political factors, while column (8) shows the estimation results from the opposite extreme of excluding the economic explanatory variables. The intermediate columns show the estimated coefficients upon omitting each one of the judicial, political and economic factors. The bottom row of the Table shows the chi-squared ratios from testing the hypothesis that the omitted judicial, political and economic variables (corresponding to the column) do not affect the size of tax revenue. It is immediately observed that at 61% (value of adjusted R2) the explanatory power of the maintained specification is larger than of its analogue without the judicial variables at 55% (column (3)). The estimated coefficient for judicial review (third row) has the predicted negative sign and is statistically significant (with
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Table 1. Judicial review, judicial independence, political rights and government size. Explanatory variable (1) Intercept Real income per capita Judicial review Judicial independence Political rights index Age dependency Female labour activity rate Trade ratio Urbanization LL AR2 SSR v2 CV0.01
)3.479y )2.285 0.261* 4.414 )0.396* )3.216 )0.217z )1.634 0.040z 1.723 0.929* 3.648 0.100 0.788 0.198* 2.961 )0.123 )0.720 2.8690 0.6068 2.7265
(2)
(3)
(4)
(5)
)3.678* )2.595 0.321* 5.343 )0.382* )2.986 )0.189 )1.475
)4.396* )2.739 0.242* 3.723
)4.910* )2.972 0.251* 4.067
)2.956y )4.563* )2.006 )2.876 0.251* 0.289* 3.940 4.281 )0.387* )3.005
0.989 3.781 0.091 0.751 0.169y 2.199 )0.178 )1.022 1.6779 0.5977 2.8543
0.030 1.141 0.930* 3.081 0.174 1.334 0.235* 2.852 )0.049 )0.269 )2.0641 0.5458 3.2961 9.86(2) 9.21
)0.200 )1.234 0.035 1.309 1.043* 3.443 0.197 1.554 0.242* 3.230 )0.488 )0.271 )1.1308 0.5518 3.1799
0.035 1.501 0.809* 3.112 0.077 0.603 0.192y 2.545 )0.122 )0.688 1.6002 0.5965 2.8628
(6)
(7)
(8)
2.063* 8.420 0.136* 4.174 )0.535* )4.408 )0.087 )0.579 0.032 1.274
2.865* 16.95
)0.584* )4.540 )0.134 )0.791 0.114* 5.431
0.985* 3.080 0.167 1.348 0.213y 2.333 )0.093 )0.500 )2.6388 )5.8930 )12.266 0.5457 0.4963 0.3696 3.3698 3.8176 4.8800 11.01(3) 17.52(4) 30.27(5) 11.34 13.28 15.09
Notes: Second row figures denote t-statistics. Standard Errors computed from heteroscedastic-consistent matrix (Robust-White). *significant at 1%; y significant at 5%; z significant at 10%. LL = Log of Likelihood Function; AR2 = Adjusted R2; SSR = Sum of squared residuals. v2: chi-squared ratio from testing the restriction that the coefficients of the omitted variables in comparison to (1) are jointly zero; degrees of freedom in brackets. CV0.01: critical value at the 1% level. OLS regression results. Sample size = 52 observations (full). Dependent variable: tax revenue share of GDP 1990–1999.
p-values of at least 1%). This is so irrespective of which other judicial, political and economic variables are included in the estimated equation. We then conclude that judicial review exerts a decreasing effect on the size of tax revenue, which operates independently of the possible effect of the rest of judicial and political factors. Turning to judicial independence, it is also observed that its estimated coefficient in the maintained specification (column (1)) displays the expected negative sign and is significant at the 10%. However, although it retains the negative sign, it is no longer significant for the rest of the specified equations shown on Table 1. For the maintained specification, the effect of political rights is positive and statistically significant at the 10% level. This accords well with intuition: competitive politics, stronger democratic representation and government according to electoral results privileges the winning majority, whose income is below the mean income, to increase tax revenue in order to finance higher redistribution. However, as with judicial
JUDGES AND TAXES
19
independence, the statistical significance of this effect falls in the more restrictive specifications shown on Table 1. With respect to the economic variables, that is, those which aim to capture the size and structure of the economy, we obtain that the coefficient of real per capita income is positive (second row) and statistically significant, a finding which is indicative of the operation of Wagner’s law. Similarly, the positive and significant coefficient of openness lends further support to the finding that the size of the public sector is larger in economies more exposed to international trade. Again, as intuition suggests and as other empirical studies have also found, the demographic composition of the population, captured by the age-dependency ratio, exerts a positive and significant effect on the size of government. On the other hand, female labour participation, although it carries the expected a priori positive sign, has a statistically insignificant effect on the relative size of tax revenue. This finding is contrary to that reported by Kau and Rubin from USA time-series evidence, but it has been encountered before for cross-sections (see Mueller and Stratmann 2003). Neither does urbanization have a significant effect.
4.3.1.
Income Distribution
Table 2 shows the estimation results when income inequality is included as an explanatory variable. As we have already mentioned due to reduced data availability we are forced to work with smaller sample sizes. Columns (1) to (5) of the Table show the estimation results when the income inequality is measured using the Gini coefficient. If an increase in inequality leads to more redistribution and therefore more taxation the expected sign of the relevant coefficient will be positive. However, this hypothesis is not supported by the data. Irrespective of which other explanatory variables are included in the regression, the Gini coefficients turn out to be negative and insignificant. Columns (6) to (10) present the results when income equality is measured by the sum of the 3rd and 4th income quintiles of the distribution of income (MID). Applying the same logic as before, as income equality rises, the poorer groups of the population climb up the distribution ladder and (other things being equal) prefer lower taxes, leading us to expect a negative sign. This is indeed the case as the relevant row of Table 2 reveals. However, the estimated parameter is statistically insignificant. For all other variables the results are the same as in Table 1. That is, real per capita income, the age-dependant section of the population and openness to international trade have a positive and significant effect on tax revenue, while neither female participation nor urbanisation do. A high score of judicial review is associated with a lower size of tax revenue, although at varying levels of significance, while judicial independence has no significant effect. Again the score of political rights enters with a positive sign, but it is only significant in the sub-sample of the 39 countries for which the MID measure of equality is available.
6.3644 0.6434 1.9856
6.2461 0.6515 1.9960
)0.7602 0.5370 2.7252 14.24(2) 9.21
)0.7753 0.5489 2.7271 14.27(3) 11.34
1.109* 3.285 0.111 0.813 0.180y 2.017 )0.072 )0.380 )0.209 )0.522
0.005 0.180 1.094* 3.441 0.117 0.851 0.184y 2.139 )0.063 )0.343 )0.200 )0.515
1.077* 4.239 )0.084 )0.693 0.117z 1.779 )0.268 )1.663 )0.025 )0.068
)4.875* )2.950 0.308* 4.301
)4.844y )2.949 0.298* 3.911
)3.198y )2.217 0.377* 7.109 )0.575* )4.627 )0.147 )1.160
)3.121y )2.052 0.355* 5.905 )0.579* )4.602 )0.151 )1.199 0.013 0.512 1.043* 3.905 )0.069 )0.577 0.127y 2.053 )0.249 )1.619 )0.005 )0.016
(4)
(3)
(2)
(1)
Number of observations = 45
6.3643 0.6533 1.9856
)3.118y )2.000 0.356* 5.980 )0.579* )4.726 )0.151 )1.232 0.014 0.509 1.042* 3.836 )0.070 )0.570 0.127y 2.051 )0.249 )1.602
(5)
Notes: See Table 1. Dependent variable: tax revenue share of GDP 1990–1999.
LL AR2 SSR v2 CV0.01
MID
Gini
Urbanization
Real income per capita Judicial review Judicial independence Political rights index Age dependency Female labour activity rate Trade ratio
Intercept
Explanatory variable
)0.749 )0.955 4.4930 0.5951 1.8135
)3.322z )1.628 0.235* 2.870 )0.243z )1.686 )0.048 )0.302 0.067z 1.797 0.808y 2.585 0.222 1.122 0.226* 2.742 )0.148 )0.766
(1)
)0.110 )0.141 3.3840 0.5857 1.9196
0.768y 2.516 0.122 0.697 0.227* 2.597 )0.186 )0.984
)2.951 )1.509 0.287* 4.011 )0.241z )1.543 )0.041 )0.249 0.066z
(2)
)0.687 )0.829 3.4214 0.5998 1.9159 2.14(2) 9.21
1.674 0.892* 2.821 0.284 1.596 0.262* 3.102 )0.077 )0.457
)4.482y )2.507 0.230* 2.742
(3)
Number of observations = 39
Table 2. Judicial review, judicial independence, political rights, income inequality and government size.
)0.040 )0.051 2.3854 0.5912 2.0205 4.21(3) 11.34
0.856* 2.764 0.185 1.203 0.263* 2.936 )0.116 )0.702
)4.125y )2.426 0.282* 3.830
(4)
4.2948 0.6046 1.8320
)3.606z )1.834 0.225* 2.803 )0.238z )1.654 )0.757 )0.472 0.057z 1.604 0.850y 2.690 0.217 1.097 0.230* 2.893 )0.143 )0.756
(10)
20 TRIDIMAS
JUDGES AND TAXES
4.3.2.
21
Rich Countries and Poor Countries Sub-sets
Delving into the possible cross-country differences in the pattern of coefficients, the maintained specification was re-estimated after splitting the countries of our sample into two groups. The first consists of ‘‘rich’’ economies (with South Korea at a per capita income just below the $10,000 mark as the lowest economy in the group). The second includes the remaining ‘‘poor’’ economies (with Argentina at $7,500 as the top country in the group). The results of the new estimation are shown on Table 3. Equation (1) shows the estimated parameters for the rich countries when income inequality is excluded from the explanatory variables, while equations (2) and (3) include the Gini coefficient and the Perotti measure respectively. Note that although the number of observations used for regressions (2) and (3) is the same, the composition of the samples is different, since different countries are included in each sample – see the Appendix for details. For the sub-set of poor countries, equations (4), (5) and (6) show respectively the estimation results without the income distribution, with the Gini and with the Perotti measures. It is immediately observed that for the rich countries sub-set, in accordance to intuition and contrary to the poorer countries, the degree of judicial independence has a statistically significant mitigating effect on the size of tax revenue for all three specifications estimated. On the other hand, the judicial review coefficient is negative and significant only in one of the regressions for the rich countries, while it is negative and significant for the poorer countries in all three regressions. This implies that, unlike rich countries, in poorer countries judicial influence operates primarily through policy review. Another difference from the results of the previous Table is worth mentioning. The Perotti measure of income distribution has now a negative and significant coefficient as predicted (but the Gini coefficient is again insignificant). Among the other control variables, political rights and the trade ratio display consistent patterns, that is, positive and significant coefficients for all specifications and both sub-sets. A cautionary note is however appropriate. The effect of real per capita is no longer as pronounced as before, it is significant only for the specifications featuring the (insignificant) Gini coefficient. Interesting as these differences and similarities between the richer and the poorer countries may be, statistical inferences may be impaired from the reduction of the sample size and the consequent loss of degrees of freedom.
4.3.3.
Legal Origins
The rather large number of control variables included in the set of determinants of the maintained specification (13) makes one reasonably confident that the estimated coefficients of judicial review and judicial independence capture the impact of these factors and do not reflect other omitted variables. However, other
a
21 11.916 0.6455 0.3952
)3.848 )1.457 0.271* 2.768 )0.400* )2.960 )0.464* )3.123 0.298* 4.188 0.275 0.426 )0.177 )0.688 0.379* 5.830 0.169 0.813 1.046 0.200
)4.738* )2.214 0.117 1.080 )0.159 )0.662 )0.662* )5.794 0.248* 5.303 0.751z 1.867 0.000 0.001 0.352* 6.209 0.334z 1.732
25 11.212 0.5902 0.5969
(2)
(1)
Rich economies sub-group
)0.029y )2.054 21 10.465 0.5265 0.4538
)6.299* )2.828 0.088 0.496 )0.045 )0.392 )0.572* )4.423 0.467y 1.895 0.658z 1.615 0.099 0.321 0.433* 6.915 0.574y 2.555
(3)
27 4.8886 0.2266 1.1005
)2.126 )1.099 0.169 1.449 )0.552y )2.264 0.003 0.037 0.010 0.389 0.701z 1.900 0.102 0.663 0.178z 1.662 )0.026 )0.115
(4)
24 5.9044 0.3438 0.8591
)2.313 )1.294 0.367y 2.226 )0.656* )3.587 )0.041 )0.332 )0.037 )1.037 1.063y 2.034 )0.151 )1.085 0.034 0.302 )0.360 )1.370 0.825 1.497
(5)
Poor economies sub-group
)0.022y )2.135 18 9.7467 0.3453 0.3568
0.350 0.101 0.133 1.019 )1.290* )2.874 )0.096 )0.531 0.100* 2.716 0.812z 1.873 0.066 0.296 0.019 0.210 )0.297y )2.087
(6)
Notes: See Table 1. aDifferent countries are included in each sample depending on data availability – see the Appendix. Dependent variable: tax revenue share of GDP 1990–1999.
Sample size LL AR2 SSR
MID
Gini
Urbanization
Real income per capita Judicial review Judicial independence Political rights index Age dependency Female labour activity rate Trade ratio
Intercept
Explanatory variable
Table 3. Judicial review, judicial independence, political rights, income inequality and government size for rich and poor countries.
22 TRIDIMAS
JUDGES AND TAXES
23
problems may cast doubt on the robustness of the estimated results. Judicial oversight may be the result of the legal origins of the country, so that judicial review and independence simply approximate the effect of long-lasting legal arrangements and traditions rather than exercising any autonomous influences. In order to check for this possibility we re-estimated the model including a dummy variable for the legal origin of each country in the sample. Although not any two different countries share the same legal system, there are enough similarities among many countries to distinguish some broad groups. Following LLPS, four legal families are distinguished; namely, French, English, German and Scandinavian (see the Appendix for individual country classification). Judicial oversight is less pronounced in the French legal tradition of codified laws, which stresses the role of the government and downplays the role of the judiciary. On the other hand, the English tradition confers to the judiciary significant discretion to interpret statutes and to keep in check the powers of the government. Although the German and the Scandinavian legal traditions have much in common with the codification of laws of the French tradition, they are more like the English tradition when it comes to the courts as a force to counterbalance the power of the government. LaPorta et al. (1998) show how the major, French, English, German and Scandinavian legal traditions spread to different countries through conquest, colonization and imitation. For example, the French civil code, written under Napoleon, was brought through military conquest to Italy, Belgium and the Netherlands. It also had a major influence on the Spanish and Portuguese legal systems. After the Spanish and Portuguese colonies gained their independence, it also inspired their legal systems. The ‘‘horse race’’ results of the estimation when the legal origins are included are shown in the first two columns of Table 4. The French legal origin is used as the reference group and is omitted from the explanatory variables. The estimated coefficients of the dummy variables therefore show the influence of the legal origin in comparison to the French one. The new set of estimates confirms the previous findings, that is, greater judicial review decreases the relative size of tax revenue, while the effect of judicial independence is negative but statistically insignificant. The legal origin dummy turns out to be negative for all three families, English, German and Scandinavian, and statistically significant for the former two. That is, in comparison to the French legal origin, and other things kept constant, countries who have adopted one of the other traditions, are characterized by smaller size government sectors. However, it is not clear whether the decreasing effect of the legal origin differs across the different legal families (column 2 of the Table). As the very low chi-squared indicates, the hypothesis that the coefficients of the English, German and Scandinavian origins are identical carries a high probability of acceptance. The rest of the coefficients display a pattern similar to the one identified in the previous Tables (positive and significant effects of per capita income, political rights, population and openness to trade). There is however one important difference; when the legal origin is
24
TRIDIMAS
Table 4. Judicial review, judicial independence, legal origins and government size. Explanatory variable
(1)
(2)
(3)
(4)
(5)
Intercept
)2.448y )2.412 0.301* 4.443 )0.337* )2.800 )0.012 )0.075
)4.653* )3.140 0.304* 4.664 )0.332* )2.785 )0.005 )0.034
)4.965* )2.705 0.297* 4.759
)5.265* )3.677 0.298* 4.913
)3.853* )2.708 0.257* 4.223
0.039z 1.720 1.042* 3.444 0.228z 1.678 0.210* 3.341 )0.217 1.202 )0.218* )2.169 )0.228z )1.610 )0.200 )1.327 5.1642[12] 0.6130 2.4961
0.039z 1.730 1.064* 4.288 0.240y 1.962 0.218* 3.382 )0.217 )1.182 )0.223* )2.485 »
)0.265y )2.241 0.039z 1.668 1.088* 3.597 0.247z 1.855 0.225* 3.657 )0.192 )1.378 )0.176y )2.278 )0.216 )1.615 )0.160 )1.330 3.887[11] 0.6034 2.6217
)0.254y )2.163 0.040z 1.736 1.131* 4.627 0.266y 2.238 0.230* 3.821 )0.188 )1.096 )0.188y )2.443 »
)0.369* )3.207 0.039z 1.662 0.936* 3.710 0.127 1.077 0.211* 3.811 )0.122 )0.707
Income per capita Judicial review Judicial independence JURE · JI Political rights index Age dependency Female labour activity rate Trade ratio Urbanization English German Scandinavian LL AR2 SSR v2
» 5.1487[10] 0.6312 2.4976 0.03
» 3.829[9] 0.6209 2.6285 0.13
1.760[8] 0.6540 2.8452
Notes: See Table 1. v2: chi-squared ratio from testing the restriction that the coefficients of the English, German and Scandinavian legal origin are identical. The critical value, CV0.01, is 9.21 with 2 degrees of freedom. Dependent variable: tax revenue share of GDP 1990–1999. Sample size = 52 observations.
taken into account, the effect of female labour participation on the relative size of tax revenue is positive and significant as Kau and Rubin predicted. A further check is in order. It may be argued that judicial review makes sense only when it is carried out by an independent judiciary. For this reason, the tax ratio equation was re-estimated by replacing the two judicial explanatory variables with their product (Judicial Review) · (Judicial Independence). The new estimates are reported in the last two columns of Table 4. The estimated parameter of the new variable is again negative and significant, that is, more
JUDGES AND TAXES
25
judicial power is again associated with a smaller government size, and so is the non-French legal origin.
5.
Conclusions
The objective of this paper has been to investigate whether the relative share of tax revenue is smaller in countries where economic policy is subject to effective judicial review. Analytically, it is first recognised that the framers of the constitution cannot bind their successors to implement their most preferred policies. They then try to at least partially tie their hands not to change the fundamental principles of the constitution, which grants inviolable rights. Establishing an independent judiciary with the power to review policy and check if it is consistent with the constitution is an effective, low-cost tool of doing so. This allows courts to overturn policy measures, including redistributive tax measures, which are ruled as incompatible with the constitution, or as enacted without following the procedures laid down by the law. The element of uncertainty introduced by judicial review forces the policy maker to take into account the reduction in income inflicted if he is on the losing side of the collective choice. As a result the size of the politically optimum redistributive measure decreases leading us to expect that stronger judicial review is associated with a smaller relative size of the public sector. This prediction was tested for an international sample of 52 countries. Of course, the tax revenue ratio depends on a host of other economic and political factors. The empirical specification therefore controlled for these determinants. The empirical results strongly support the theoretical prediction of the decreasing effect of judicial oversight on the relative size of tax revenue. In addition, and perhaps not surprisingly, the relative size of tax revenue varies positively with real per capita income, the age dependence ratio and openness of the economy. On the contrary, the evidence on the effects of female labour participation, urbanisation and income inequality is less conclusive. Moreover, the effect of judicial review persists even after controlling for political rights and the legal origin of a country. This suggests that judicial review – the check and balances provided by the judiciary – has a direct effect on the size of government.
Acknowledgements I am indebted to Dennis Mueller and Jean-Yves Pitarakis for helpful comments. The usual disclaimer applies
Age
0.63 0.49 0.48 0.50 0.60 0.47 0.56 0.64 0.48 0.73 0.74 0.49 0.53 0.45 0.93 0.49 0.55 0.67 0.61 0.58 0.64 0.46 0.44 0.85 1.01 0.65 0.66 0.68 0.85 0.46 0.53
Country
Argentina Australia* Austria* Belgium* Brazil Canada* Chile Colombia Denmark* Ecuador Egypt Finland* France* Germany* Ghana Greece* Iceland* India Indonesia Ireland* Israel* Italy* Japan* Jordan Kenya Lebanon Malaysia Mexico Nepal Netherlands* New Zealand*
Appendix of data used
23.34 42.54 36.69 32.18 31.25 47.00 24.66 30.78 51.35 18.38 20.61 47.30 37.94 40.92 47.20 30.21 50.59 28.34 36.31 25.55 32.44 32.09 41.25 12.07 45.19 18.70 29.29 24.04 37.83 36.31 41.90
FE 18.71 37.84 80.38 137.48 17.84 64.12 59.46 35.60 67.22 56.52 53.48 60.05 43.40 50.27 45.66 44.00 67.57 22.92 57.12 127.44 76.84 44.44 18.39 126.25 66.13 69.29 169.29 47.47 50.06 109.70 58.40
Trade 88.13 84.83 64.44 96.87 76.74 76.69 84.33 71.53 85.05 57.18 44.35 63.79 74.50 86.35 34.50 59.19 91.39 26.73 35.16 57.61 90.68 66.71 77.61 70.94 26.80 87.90 52.51 73.23 10.20 88.92 85.00
Urban 7448.71 20318.58 29287.11 27098.00 4185.41 19268.98 4383.88 2288.77 34163.10 1523.57 1013.88 25844.50 26549.38 29971.78 361.61 11253.28 26870.55 374.30 961.49 17344.56 15343.56 19024.64 39883.32 1565.21 339.66 2833.81 3940.02 3315.79 203.60 26368.34 15385.86
Y 10.80 21.33 33.26 42.12 18.31 18.83 18.72 10.89 33.18 15.48 19.56 27.86 37.46 26.81 12.13 19.94 25.60 9.39 15.88 31.69 33.61 38.91 17.06 19.74 21.87 12.35 19.80 13.09 7.85 42.09 32.36
Tax 0.67 0.83 0.67 0.58 0.67 0.58 0.58 0.67 0.83 0.83 0.83 0.17 0.58 0.83 0.67 0.67 1.00 0.83 0.17 0.83 0.00 0.67 1.00 0.58 0.50 0.58 0.42 0.83 0.83 0.50 0.00
JuRe 1.00 1.00 0.67 0.67 0.67 1.00 0.67 0.33 1.00 1.00 0.67 1.00 0.33 1.00 1.00 0.67 1.00 1.00 1.00 1.00 1.00 0.67 0.67 1.00 1.00 0.67 1.00 0.33 1.00 0.67 1.00
JI
0.5036 0.5383 0.3006 0.2859 0.3436
0.3493 0.3482 0.3919 0.5439
0.3255 0.3349 0.3631
0.2701 0.5732 0.3127 0.5184 0.5151 0.3209 0.4300 0.3800 0.2993 0.4311 0.3122 0.3513 0.3453
0.3788
Gini
0.39 0.39
0.29 0.31
0.22
0.40 0.40 0.38 0.39
0.35
0.37
0.40 0.35 0.38
0.30 0.41 0.31 0.31 0.42 0.23
0.33 0.41 0.42
MID 6 7 7 7 7 6 6 4 7 6 2 7 7 7 4 7 7 4 1 7 7 7 7 4 1 2 4 4 5 7 7
PolR F E G F F E F F S F F S F G E F S E F E E F G F E F E F E F E
LO
26 TRIDIMAS
0.94 0.54 0.85 0.64 0.68 0.73 0.51 0.39 0.65 0.42 0.48 0.56 0.46 0.93 0.50 0.58 0.54 0.53 0.68 0.71 0.86
24.40 46.06 19.67 27.32 20.77 30.69 41.48 39.87 28.99 38.71 29.41 51.20 41.92 15.13 54.69 33.13 42.12 44.93 25.77 49.40 40.70
74.45 72.09 38.55 75.66 30.03 82.16 66.63 355.12 44.23 60.14 41.50 68.56 69.72 67.20 86.69 41.84 53.14 22.30 51.49 88.76 65.89
53.80 73.37 34.12 54.74 70.68 53.36 54.23 100.00 49.37 76.83 76.17 83.14 65.03 51.84 19.93 68.02 89.23 75.95 85.33 19.46 30.79
434.36 32750.02 487.61 2940.03 2140.66 1093.11 10790.27 21340.89 3913.72 9923.58 14692.78 27349.52 44372.69 1106.28 2570.14 2838.70 19126.25 27501.97 3514.22 286.88 673.59
23.02 32.49 12.94 17.71 14.13 15.60 29.70 16.67 23.95 16.11 27.49 33.60 20.99 17.30 16.20 15.53 33.27 17.88 14.80 18.98 22.29
0.00 0.83 0.75 0.67 0.67 0.67 0.67 0.67 0.67 0.83 0.58 0.42 0.17 0.58 0.75 0.42 0.00 0.83 0.67 0.17 0.58
1.00 1.00 1.00 0.33 1.00 1.00 0.67 1.00 1.00 0.67 0.67 1.00 1.00 0.67 0.67 1.00 1.00 1.00 0.33 0.00 1.00 0.4548 0.5036 0.2598 0.3528 0.4442 0.3571 0.5683
0.5032 0.3421 0.3150 0.5243 0.4799 0.4762 0.3744 0.4012 0.6230 0.3419 0.2790 0.3163
0.24
0.29 0.30 0.40 0.41 0.31
0.36 0.41 0.38 0.42 0.42
0.40 0.37 0.32 0.30 0.31
4 7 5 6 3 6 7 3 7 6 7 7 7 1 5 3 7 7 5 1 3
F S E F F F F E E G F S G F E F E E F F E
Notes. *: classified as rich, Age: age dependency ratio, FE: female activity rate (%), Trade: (exports + imports)/GDP (%), Urban: ratio of population in urban areas (%), Y: GDP per capita (constant 1995 US$), Tax: Tax revenue/GDP (%), JuRe: index of judicial review of legislation, JI: index of judicial independence, Gini: Gini coefficient MID: 3rd + 4th quintile, PolR: political rights index, LO: Legal origin; E = English, F = French, G = German, S = Scandinavian.
Nicaragua Norway* Pakistan Panama Peru Philippines Portugal* Singapore* South Africa South Korea* Spain* Sweden* Switzerland* Syria Thailand Turkey UK* US* Venezuela Vietnam Zimbabwe
JUDGES AND TAXES
27
28
TRIDIMAS
Notes 1. Several recent studies offer excellent reviews of various aspects of a vast and still expanding literature. The role of voting and of political competition in the design of tax systems is analyzed at length in the work of Hettich and Winer (1999) and Baker and Gould (2002). Persson and Tabellini (2002) provide a detailed survey of the literature on political behaviour and political institutions, including electoral rules and separation of powers, and how these affect policy choices. Kirchga¨essner (2002) reviews empirical studies of the impact of fiscal institutions on policy. Besley and Case (2003) survey previous work and also present new evidence on how political institutions affect democratic representation and how both these factors influence policy outcomes. 2. Policy review appears with the setting up of the Supreme Court of the USA and the celebrated Marbury v Madison (1803) case, which established the right of the Supreme Court to strike out laws validly passed by Congress, if in the Court’s view they violated the Constitution; see also LLPS (2004). Stone Sweet (2000) and (2002) charts the expansion of policy review by constitutional courts in European parliamentary democracies, where contrary to the US the role of the judiciary in constitutional review of policy was envisaged to be limited, but in practice has expanded significantly. 3. See also Voigt and Salzberger (2002) for a useful review. 4. This problem is well known in the political economy literature since Hobbes. Mueller refers to it as the Sorcerer’s Apprentice Problem, ‘‘the spectre that government once created turns upon its creators’’ (1996, p. 3). Weingast calls it ‘‘the fundamental political dilemma of an economic system: a government strong enough to protect property rights is also strong enough to confiscate the wealth of its citizens’’ (1993, p. 287). 5. Furthermore, Mueller (1996) points out that such an explanation of judicial independence is invalid when the framers of the constitution are neither members of a sitting legislature nor are seeking political office in the future. 6. A version of this model has also been used to analyze judicial review by the European Court of Justice, see Tridimas 2004. 7. Note however that the rationale invoked in the ruling of the court may affect the policy measure introduced by the authorities in the future. 8. Since by construction the constitution protects property rights, court rulings to uphold the constitution will control the size of government. These assumptions fit the U.S. history and constitution. The central government was severely constrained by the language of the constitution and the judiciary until the 1930s, when the Supreme Court gave in and the size of government increased. If, as it is the case with the proposed EU Constitution and Charter of Rights, the constitution grants to citizens rights to ‘‘a high level of human health protection’’, ‘‘social protection’’ and so on, which are then enforced by the courts, judiciary intervention will expand the size of government. I owe this point to Dennis Mueller. 9. There have been significant changes in the political regimes of some of the countries in the sample since the mid 1990s. Indonesia, Mexico and Peru have all moved up the ladder of democratic and political freedoms after shaking off authoritarian regimes. Currently, their governments enjoy the legitimacy conferred by electoral victories. On the other hand, doubts may be raised about the democratic credentials of the current Pakistani government which ascended to power after a coup. Similarly, given the current authoritarian tendencies in Zimbabwe, it is highly unlikely that its judiciary enjoys the high degree of independence denoted by the 1995 figure.
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