Abstract
Sustainable budgets are important quality signals for the electorate. Politicians might thus have an incentive to influence tax revenue forecasts, which are widely regarded as a key element of national budget plans. Looking at the time period from 1996 to 2012, we systematically analyze whether national tax revenue forecasts in 18 OECD countries are biased due to political manipulation. Drawing on theories from the field of political economy, we test three hypotheses using panel estimation techniques. We find support for partisan politics. Left-wing governments seem to produce more optimistic, or less pessimistic, tax revenue forecasts than do right-wing ones. Contrary to the theoretical prediction based on the “common pool” problem, we find that more fragmented governments and parliaments tend to produce more pessimistic, or less optimistic, tax revenue forecasts. We find no empirical evidence that political business cycles play a role in tax revenue forecasts.
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Notes
The countries in the sample are: Australia, Austria, Belgium, Canada, France, Germany, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the United States of America. Our cross-section has 19 entries, however, since we have two competing forecasts for the United States: one from the executive and the other from the legislative.
A study on tax revenue forecasts in Swiss cantons and characteristics of the finance minister is provided by Chatagny (2015).
Note that every state has a veto on the figures published by the OECD. This veto can introduce a political bias into the OECD’s macroeconomic projections. However, if this is indeed the case, the OECD figures are even better proxies and allow us to estimate the political parameters even more precisely, since the part of the political distortion introduced via biased macroeconomic projections is now captured.
The data can be downloaded from the interactive data base at http://www.politicaldatayearbook.com.
Instead of using FEPERC as the dependent variable, we also tested the political business cycle hypothesis with the absolute percentage error. We found no significant effects. We also experimented with pre- and post-electoral year dummies. Regardless of how we defined the dummies, we found no significant effects.
One referee suggested estimating the model by splitting up the Schmidt Index into four dummies, with the baseline category SCHMIDT = 5. We performed such a regression and confirmed our findings from the baseline estimation. Additionally, we tested the joint significance of the dummies and discovered that they are jointly significantly different from zero.
The online appendix is available at the permanent link http://www.cesifo-group.de/portal/page/portal/DocBase_Service/DB_Service_Downloads/DB_more/Appendix_Jochimsen_Lehmann_PUCH_2016.pdf.
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Acknowledgements
The paper substantially improved during a research stay at the BI Norwegian Business School, Department of Economics. We especially thank Benny Geys for his great supervision. We are grateful to the BI Norwegian Business School and Espen R. Moen for their gracious hospitality. We also thank E.ON Ruhrgas and the Research Council of Norway for financially supporting this research stay (Project No. 228495). Furthermore, we are grateful to two anonymous referees and Marcel Thum for their careful readings and suggestions. We thank Michael Weber, Alexander Eck, Gunther Markwardt, Jakob Eberl, Björn Kauder, Niklas Potrafke, Alexander Fink, Marta Curto-Grau, Jan-Egbert Sturm, Florian Chatagny, Michael Berlemann, Klaus Beckmann, and Michael Bräuninger. We are also grateful to seminar participants at the Technische Universität Dresden, the ifo/CES Christmas Conference 2013, the 12th Seminar on Public Economics at the WZB Berlin Social Science Center, the 2nd CGDE Doctoral Workshop at Leipzig University, the 2014 ZEW Public Finance Conference, the 70th Annual Congress of the International Institute of Public Finance (IIPF), the Working Group “Public Finance” at the Federal Ministry of Finance, the Invited Lecture Series Economics at the Helmut-Schmidt-University Hamburg, and the 2015 Annual Congress of the German Economic Association (Verein für Socialpolitik). Technical assistance from Barbara Weigert and Antje Schubert is also gratefully acknowledged. We also thank Deborah Willow for editing this text.
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Appendix: Descriptive statistics
Appendix: Descriptive statistics
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Jochimsen, B., Lehmann, R. On the political economy of national tax revenue forecasts: evidence from OECD countries. Public Choice 170, 211–230 (2017). https://doi.org/10.1007/s11127-016-0391-y
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DOI: https://doi.org/10.1007/s11127-016-0391-y