Abstract
This paper estimates the casual effect of political representation in local governments on tax policy in municipalities under a proportional election system. The main challenge in estimating the causal effect of parties on policy is to isolate the effect of representation from underlying voter preferences and the selection effect of parties. We use an instrumental variable approach where close elections provide the exogenous variation in our measures of representation: seat shares and voting power. Using data from German municipalities our estimation results suggest that representation does matter. The effects are mostly small, but statistically significant. Somewhat surprisingly, representation of the center-left party is found to lower the local taxes, whereas The Greens increase the property tax considerably. These effects remain robust to weighting voting power by the likelihood of coalitions and different definitions of close elections and the instrument.