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Do OECD countries cheat with their national tax revenue forecasts?

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  • Jochimsen, Beate Regina
  • Lehmann, Robert

Abstract

Nowadays, a solid budget serves as an important quality signal for the electorate. Therefore, politicians might 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, we systematically analyze whether national tax revenue forecasts in 18 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 governments seem to overestimate tax revenues more than right ones to satisfy their electorate with additional expenditure plans. Contrary to the theoretical prediction based on the common pool problem, we find that more fragmented governments and parliaments tend to produce more pessimistic 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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  • Jochimsen, Beate Regina & Lehmann, Robert, 2015. "Do OECD countries cheat with their national tax revenue forecasts?," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113089, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc15:113089
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    3. Ademmer, Martin & Boysen-Hogrefe, Jens, 2019. "The impact of forecast errors on fiscal planning and debt accumulation," Kiel Working Papers 2123, Kiel Institute for the World Economy (IfW).
    4. Boukari, Mamadou & Veiga, Francisco José, 2018. "Disentangling political and institutional determinants of budget forecast errors: A comparative approach," Journal of Comparative Economics, Elsevier, vol. 46(4), pages 1030-1045.
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    7. Lehmann Robert & Wollmershäuser Timo, 2020. "The macroeconomic projections of the German government: A comparison to an independent forecasting institution," German Economic Review, De Gruyter, vol. 21(2), pages 235-270, June.

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    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • 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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