Political Determinants of Tax Policy: How Central and Local Governments Respond to Political Incentives

This study identifies how political mechanisms drive opportunistic fiscal behavior depending on whether fiscal authority is centralized or decentralized. Drawing on two theoretical mechanisms—political budget cycles and electoral competition—we investigate how the dominant mechanism of opportunism varies across levels of fiscal authority. We test these mechanisms in the context of local tax cuts in South Korea, where both central and local governments can implement tax reductions. Our findings show strong support for the political budget cycle hypothesis when the central government determines local tax cuts, with tax reductions increasing significantly as elections approach. However, electoral competition does not influence central government tax policy, likely because national policies are uniform and cannot target individual localities. In contrast, local governments exhibit heterogeneity—political opportunism is more pronounced in electorally competitive districts. These results suggest that local fiscal autonomy can either constrain or amplify political opportunism, depending on electoral incentives. Related Articles Lee, Yunsoo. 2026. “Untangling the Relationship Between Fiscal Decentralization and Citizen Participation: A Critical Revisit.” Politics & Policy 54, no. 1: e70121. https://doi.org/10.1111/polp.70121 . Oumbe, Honoré Tekam, Borice Augustin Ngounou, Edmond Noubissi Domguia, Malonne Hyppolite Ngnie, and Thierry Messie Pondie. 2025. “Does Fiscal Decentralization Kill Inclusive Growth? Evidence From African Countries.” Politics & Policy 53, no. 6: e70076. https://doi.org/10.1111/polp.70076 . Ike, Vivian. 2020. “The Impact of Veto Players on Incremental and Drastic Policy Making: Australia's Carbon Tax Policy and Its Repeal.” Politics & Policy 48, no. 2: 232–264. https://doi.org/10.1111/polp.12346 .