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

This paper considers the decision of Pennsylvania communities whether to levy 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 opposite pattern seems to hold. One explanation is that residents may mistrust their government and fear that the new tax monies will be spent unwisely. Several implications of this credibility story are consistent with the data, and non-taxing communities tend to have low credibility (as measured by three proxies). In addition, after controlling for credibility the proportion of exempt residents is positively associated with the probability of enacting the wage tax just as the political economy model suggests.  2001 Elsevier Science B.V. All rights reserved.