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The goal of this paper is to study the impact of tax progressivity on the practice of political budget cycle, at the municipal level. We explore whether an increase in fiscal flexibility, i.e. the capacity of decision-maker to set different tax rates to distinct groups of tax-payers, leads to higher levels of tax manipulation. We exploit an Italian reform of the local personal income tax (PIT), flat before the intervention, allowing mayors to introduce different tax rates for distinct groups. We take advantage of the staggered timing of local elections to estimate a Diff-in-Diff model and we find that the reform consistently amplifies political budget cycle of local PIT: average pre-electoral tax rate declines by around 10% compared to tax mean. Furthermore, we estimate a Triple-Diff analysis where we use (pre-determined) income concentration level as a reform mediator and main results are confirmed. In terms of mechanisms, it emerges that flexibility plays a crucial role as mayors strategically introduce it before elections and that politicians seem to play different strategies with diverse wage groups as high income rates are subject to larger manipulation than moderate ones. These results reveal a negative side of fiscal progressivity as it may lead to higher level of tax manipulation with larger amount of diverted public resources.
