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On the political economy of national tax revenue forecasts – Evidence from OECD countries

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  • Beate Jochimsen
  • Robert Lehmann

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Abstract

Solid budgets serve as important quality signals for the electorate. Politicians might therefore face an incentive to influence tax revenue forecasts, which are widely regarded as a key element for budget setups. Looking at the time period from 1996 to 2012, in this study we systematically analyze whether national tax revenue forecasts in eighteen OECD countries are biased through political distortions. Based on several theoretical approaches drawn from the theories of political economy, we test four hypotheses using panel estimation techniques. We find strong support for partisan politics. Left-wing governments seem to produce more optimistic or less pessimistic tax revenue forecasts than right-wing ones do. 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. One reason might be that at least one of the incumbents will stay in office and will be part of the next government, too. We do not find empirical evidence for political business cycles or an influence of the reelection probability on tax revenue forecasts at all.

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  • Beate Jochimsen & Robert Lehmann, 2015. "On the political economy of national tax revenue forecasts – Evidence from OECD countries," ifo Working Paper Series 198, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
  • Handle: RePEc:ces:ifowps:_198
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    Cited by:

    1. Potrafke, Niklas, 2017. "Partisan politics: The empirical evidence from OECD panel studies," Journal of Comparative Economics, Elsevier, vol. 45(4), pages 712-750.
    2. repec:bla:ecopol:v:31:y:2019:i:1:p:43-70 is not listed on IDEAS
    3. Robert Lehmann & Timo Wolllmershäuser, 2019. "The Macroeconomic Projections of the German Government: A Comparison to an Independent Forecasting Institution," CESifo Working Paper Series 7460, CESifo Group Munich.
    4. repec:eee:jcecon:v:46:y:2018:i:4:p:1030-1045 is not listed on IDEAS

    More about this item

    Keywords

    Political economy; tax revenue forecasts; fragmentation; political business cycles; electoral cycles.;

    JEL classification:

    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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