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Political biases despite external expert participation? An empirical analysis of tax revenue forecasts in Germany

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Abstract

This paper explores whether and how political biases arise in an institutional setting where revenue forecasting is delegated to a body that includes experts from institutions neither part of nor controlled by the government. The empirical analysis focuses on the performance of German federal tax revenue forecasts, in the preparation of which the advice of external experts has a long tradition as an institutional safeguard. While, on average, revenue forecasts turn out to be unbiased, the results show that the government exerts an influence. In particular, optimism/pessimism in the government’s GDP forecast helps to explain why the revenue forecast turns out too optimistic/pessimistic. In addition, governmental estimates of the revenue effects of tax-law changes are found to contribute to forecast errors.

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Notes

  1. The working party exists since 1955. The group is chaired by the Federal Ministry of Finance and includes the Federal Ministry of Economics, five economic research institutes, the Federal Statistical Office, the central bank (Deutsche Bundesbank), the German Council of Economic Experts, the finance ministries of the states and the associations of cities and counties.

  2. Note that the CEE differs from the US council of economic advisers (CEA) in the sense that the CEE is not part of the government but rather has an independent legal mandate.

  3. See website of the Federal Ministry of Finance  http://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Steuerschaetzungen_und_Steuereinnahmen/Steuerschaetzung/arbeitskreis-steuerschaetzungen-en.html (Accessed November 6, 2014).

  4. For details and the official government explanation, see http://dip21.bundestag.de/dip21/btd/14/098/1409811.pdf (Accessed October 3, 2014).

  5. The fiscal year of the federal budget is the calendar year. Since 2011 the fall forecast includes revenue forecasts for the current and the next five years. For a discussion of medium-term revenue forecasts in Germany, see Breuer (2015).

  6. Figure 1 points to a couple of large forecast errors: In 1991, the forecast error is associated with German reunification and the unanticipated introduction of a federal surcharge on the income tax (“solidarity surcharge”); in 1996, a reform of child allowances caused large revenue losses; in 2011, economic recovery and labor market developments turned out unexpectedly well.

  7. While the federal elections usually take place in October, the elections in 1972, 1983, and 2005 were called early and were originally scheduled for the year after.

  8. We estimated other specifications that include separate dummies describing how many years the government is in office, but do not obtain a better prediction of the forecast error model.

  9. In a strict sense, therefore, testing for tax-reform effects in the current-year forecast is a test for efficiency of the forecast.

  10. Note that at the time of the preparation of the next-year forecast, the forecast error for the current year is not yet available. In these cases, therefore, the previous revenue forecast error is computed using the current prediction at the time of the preparation of the next-year forecast rather than the final figure of revenues collected.

  11. Owing to the absence of data, the GDP forecast difference for May’s next-year forecast is not available for the years under investigation.

  12. The partial correlation coefficient between the GDP forecast difference and the revenue effects is 0.575 and 0.492 in columns (2) and (6) of Table 5 concerned with the May forecast for the current year.

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Acknowledgments

We thank three anonymous referees, Christian Breuer, Thomas Ehrmann, Gebhard Flaig, Natalie Obergruber, Ioana Petrescu, Bonnie Wilson, and seminar participants at the Annual Meetings of the IIPF 2011, Ann Arbor, the Public Choice Society 2015, San Antonio, the European Public Choice Society 2015, Groningen, and at the University of Munich for helpful comments and suggestions.

Author information

Authors and Affiliations

  1. University of Erlangen-Nuremberg, Lange Gasse 20, 90403, Nuremberg, Germany

    Thiess Buettner

  2. Ifo Institute, Poschingerstr. 5, 81679, Munich, Germany

    Bjoern Kauder

Authors
  1. Thiess Buettner
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  2. Bjoern Kauder
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Corresponding author

Correspondence to Thiess Buettner.

Appendix: Data description

Appendix: Data description

1.1 Federal tax revenue forecast (in Bill. €)

Issued by the Working Party on Tax Revenue Forecasting in May or November for the current or the next year as specified. The data cover the predictions for revenues in the period from 1971 to 2013. In current prices. Source: Press releases of the Federal Ministry of Finance.

1.2 Actual federal tax revenue (in Bill. €)

Realization of federal tax revenue. In current prices. Source: Federal Ministry of Finance.

1.3 Tax revenue forecast error (in %)

Log difference between the forecast and the actual tax revenues multiplied by 100. Source: Federal Ministry of Finance and own calculations.

1.4 Previous revenue forecast error (in %)

Revenue forecast error from the previous May forecast (in the case of considering a May forecast) or from the previous November forecast (in the case of considering a November forecast). For the next-year forecasts the forecast error for the current year is not known at the time the forecast is being prepared. In this case, the revenue prediction then available is employed. Source: Federal Ministry of Finance and own calculations.

1.5 GDP forecast difference

Difference between the GDP growth rate predicted by the government (Federal Ministry of Economics) and the growth rate predicted by the Council of Economic Experts as issued in November. In current prices. Source: Press releases of the Federal Ministry of Finance, annual reports of the Council of Economic Experts and own calculations.

1.6 GDP forecast difference (OECD)

Difference between the GDP growth rate predicted by the government (Federal Ministry of Economics) and the growth rate predicted by the OECD as issued in November/December. In current prices. Source: Press releases of the Federal Ministry of Finance, OECD Economic Outlook and own calculations.

1.7 GDP forecast error

Difference between the CEE forecast of the GDP growth rate as issued in November and the realized ex-post growth rate. Source: Federal Statistical Office, annual reports of the Council of Economic Experts and own calculations.

1.8 GDP forecast error (OECD)

Difference between the OECD forecast of the GDP growth rate as issued in November/December and the realized ex-post growth rate. Source: Federal Statistical Office, OECD Economic Outlook and own calculations.

1.9 Estimated effect of tax reforms (in %)

The revenue effect for the forecasted period as estimated by the Federal Ministry of Finance relative to total tax revenues. In current prices. Source: Christian Breuer (Working Party on Tax Revenue Forecasting).

1.10 Federal elections (dummy)

Takes a value of 1 if the forecast refers to an election year and a value of 0 for non-election years. Source: Own calculations.

1.11 Time in office (in days)

Number of days the government has been in office when a forecast is issued. Source: Own calculations.

1.12 Government ideology (left)

Takes a value of 1 if a left-wing government, a value of 0.5 if a grand coalition, and a value of 0 if a right-wing government was in office at the time the forecast was being prepared. Source: Own calculations.

Table 6 Forecasts for individual years
Full size table

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Buettner, T., Kauder, B. Political biases despite external expert participation? An empirical analysis of tax revenue forecasts in Germany. Public Choice 164, 287–307 (2015). https://doi.org/10.1007/s11127-015-0279-2

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