LOCAL GOVERNMENTS MONOPOLY POWER AND LOCAL-TAX REFORM - THEORY AND EVIDENCE FROM THE UK

This paper hypothesises the existence of several sources of monopoly p ower for local governments when the system of local taxation is reform ed, by central government. In particular we argue that information asy mmetries between tax-payers and (central and local) government at the time of reform provide opportunities for local politicians to set tax levels which differ from those expected in a full information setting. We predict that, compared to pre-reform tax levels, local tax levels post-reform will differ according to four local government characteris tics: (i) the size of the seat majority of the ruling local party; (ii ) whether the party controlling local government is the same as, or is different from, the ruling party of central government; (iii) whether the local government structure has one or two 'tiers' and whether the same party controls both 'tiers'; and (iv) the degree of indebtedness of the local authority. Testing the model on the U.K. local tax refor m of 1990, we find strong evidence consistent with the hypothesis that inter-authority differences in local tax levels reflect differences i n the degree of local political monopoly power resulting from informat ion asymmetries. This monopoly power appears to have been used general ly, but not exclusively, to raise tax levels.