Political parties’ financing sources and policy changes.

Abstract

This investigation examines the impact of corporate lobbying and political financing on tax policy outcomes in European democracies. Through an extensive literature review, this study identifies key factors influencing the practice of lobbying and explores the role of different interest groups in shaping policy decisions. Empirical evidence suggests that while corporations and wealthy individuals possess a comparative advantage in exerting financial pressure, other groups, such as trade unions, also play a significant role advocating for collective interests. The objective of this research is to assess the extent to which corporate lobbying influences tax policies that favor corporations as a class and the effectiveness of political financing as a means to achieve this goal. Utilizing panel data models across five European countries over a 22-year period, the study focuses on corporate tax rates and top marginal income tax rates as key policy indicators. The analysis incorporates variables representing the ratio of private to non-private financing sources for government parties, serving as proxies for corporate lobbying through sponsorship and financial support. The findings of this empirical analysis reveal a significant relationship between the dependence on private financing by government political parties and a decrease in the corporate tax rate. This suggests that political parties aligned with business interests receive financial support from corporate lobbyists, creating an imbalance in the democratic process. Moreover, the study provides evidence of a causal effect between private financing dependence and the corporate tax rate, even when controlling for fixed effects and lags. However, the possibility of simultaneous causality bias remains, warranting further investigation and the identification of suitable instruments for analysis. Interestingly, no clear statistically significant relationship is found between private financing dependence and the top marginal income tax rate. Plausible explanations include the lower priority of business interests regarding this tax rate or the interplay of various factors influencing changes in income tax rates across different income brackets.