Tax Policy, Tax Competition, and Fiscal Rules: Insights from a Classroom Experiment and Surveys of Politicians

This paper reviews and extends recent attempts to better understand fiscal policy decision-making. Surveys of politicians are complementary to traditional empirical analyses and can be used to extract beliefs of policymakers. There is much heterogeneity across and also within parties. Often ideology plays an important explanatory part in the beliefs of policymakers, even for questions that appear to be nonideological. Furthermore, I report on a classroom experiment, in which student subjects play a simple tax competition game. In one treatment subjects know about the political preferences of other players. In contrast to simple Nash predictions, left-leaning students choose significantly higher tax rates on capital.