Government credibility and policy choice: evidence from the Pennsylvania earned income tax

This paper considers the decision of Pennsylvania communities whether to le vy a 1% wage tax. While a simple political economy model suggests this tax should be enacted when many residents are exempted from the tax, the opposi te pattern seems to hold. One explanation is that residents may mistrust th eir government and fear that the new tax monies will be spent unwisely. Sev eral implications of this credibility story are consistent with the data, a nd non-taxing communities tend to have low credibility las measured by thre e proxies). In addition, after controlling for credibility the proportion o f exempt, residents is positively associated with the probability of enacti ng the wage tax just as the political economy model suggests. (C) 2001 Else vier Science B.V. All rights reserved.