106
-0,8%
-0,6%
-0,4%
-0,2%
0,0%
0,2%
0,4%
0,6%
-1 -0,5 0 0,5 1 1,5 2 2,5 3 3,5 4 4,5
REAL GDP GROWTH (AVG. P.A., LEGISLATIVE PERIOD)
FI
SC
A
L
EF
FE
C
TS
O
F
TA
X
R
EF
O
R
M
S
(L
EG
IS
LA
TI
VE
P
ER
IO
D
S,
A
VG
. P
.A
.)
GDP GROWTH AND TAX REFORMS
-1990
-1980
-1972
-2002
-1987
-1976
-1994
-1998
-1983
-1969
over
GDP
%
Own calculations based on: Federal Ministry of Finance (2004)/Federal Statistical Office(2007).Data on adopted tax reforms.
Figure 49: Real GDP growth and tax reforms (based on legislative periods)
2.2 Tax reforms as a reaction to cold progression
2.2.1 General approach and hypotheses
From a normative point of view, inflation can be linked to tax reform as well. In the
progressive wage and income taxes (which are not inflation-indexed in Germany)
inflation pushes up the tax burden by “bracket creeping” or “cold progression”: the
nominal and real tax burden of individuals increases without tax policy changes, as
wage and income inflation increases the applicable tax rates. Based on this cold
progression one could expect that many tax reforms are just a reaction to inflation,
moderating or even offsetting inflationary effects on the tax burden in the progressive wage and income taxes.
Based on the mechanism of cold progression we would expect that the overall
tax burden in the progressive wage and income taxes is reduced stronger in times of
high inflation (cold progression hypothesis 1). Furthermore, we would expect that
especially tax reductions in wage and income taxes are larger in times of high inflation (cold progression hypothesis 2).
107
2.2.2 Empirical tests of tax reforms as reaction to cold progression
To test the influence of cold progression on tax reforms, we start with an examination of overall fiscal effects of tax reforms in the progressive wage and income
taxes. Based on our data-set we have calculated the average annual fiscal effects of
tax reforms in wage and income taxes and the average inflation rate (measured by
the GDP-deflator)188 for all 10 legislative periods covered in our data-set. We decided to focus on the analysis of tax policy in legislative periods and not in single
years, as these data are best suited to reflect the overall government strategy in tax
policy.189
-1,0%
-0,8%
-0,6%
-0,4%
-0,2%
0,0%
0,2%
0 1 2 3 4 5 6 7 8
INFLATION (LEGISLATIVE PERIODS, AVG. P.A. )
FI
SC
A
L
EF
FE
C
TS
O
F
TA
X
R
EF
O
R
M
S
IN
W
A
G
E
A
N
D
IN
C
O
M
E
TA
XE
S
(L
EG
IS
LA
TI
VE
P
ER
IO
D
S,
A
VG
. P
.A
.)
-1990
-1980
-1972
-2002
-1987
-1976
-1994
-1998
-1983-1969
over
GDP
%
COLD PROGRESSION AND REFORMS IN
WAGE AND INCOME TAXES
Own calculations based on: Federal Ministry of Finance (2004)/Federal Statistical Office(2007).Data on adopted tax reforms.
Figure 50: Inflation and net fiscal effects of wage and income tax reforms
Figure 50 maps the relationship in between inflation and the overall fiscal effects of
tax reforms in the progressive wage and income tax. In the graph we see that the
correlation in between tax reductions in the wage and income tax and inflation is not
strong and the relationship is reverse to the one expected based on cold progression:
188 Alternatively we have conducted the analyses by using the consumer price index to measure
inflation and have derived very similar results.
189 However, annual data shows very similar results.
108
Low and not high inflation is correlated with reductions in the overall tax burden in
wage and income taxes. Therefore, we find no evidence for our cold progression
hypothesis 1 in the data.
However, the overall development might not be the best indicator as cold progression might only have an effect on tax reductions. Therefore, we separated the
average annual extent of tax burden reductions via tax reforms (see Figure 51).
Here we find a similar relationship as before: low inflation is correlated with high
tax burden reductions in wage and income taxes. This again strongly contradicts the
hypothesis of a direct influence of cold progression on tax reforms.190
Based on our results, cold progression cannot be seen as a main driving force of
the tax reforms discussed here as inflation is not linked to tax burden reductions via
tax reforms in wage and income taxes.191
COLD PROGRESSION AND REDUCTIONS IN
WAGE AND INCOME TAXES
-0,9%
-0,8%
-0,7%
-0,6%
-0,5%
-0,4%
-0,3%
-0,2%
-0,1%
0,0%
0 1 2 3 4 5 6 7 8
INFLATION (LEGISLATIVE PERIODS, AVG. P.A. )
FI
SC
A
L
EF
FE
C
TS
O
F
TA
X
R
ED
U
C
TI
O
N
S
IN
W
A
G
E
A
N
D
IN
C
O
M
E
TA
XE
S
(L
EG
IS
LA
TI
VE
P
ER
IO
D
S,
A
VG
. P
.A
.)
-1990
-1980
-1972
-2002
-1987
-1976
-1994
-1998
-1983
-1969
over
GDP
%
Own calculations based on: Federal Ministry of Finance (2004)/Federal Statistical Office(2007).Data on adopted tax reforms.
Figure 51: Inflation and fiscal effects of tax reductions in wage and income taxes
190 An examination of the pattern of wage and income tax reforms supports our finding (see part
IV.2.1). For example, the first strong tax burden reduction in wage and income taxes took
place in 1975 while there was no substantial reduction in the high-inflation years in between
1964 and 1975.
191 Our findings are in line with the observation that there were no serious attempts to implement
inflation indexing in Germany. This shows that there was no political will to compensate tax
payers systematically for tax increases caused by cold progression.
109
2.3 Tax smoothing
Based on Barro (Barro 1979, 1986) one can argue that it is suboptimal for governments to react to transitory changes in economic growth and fiscal deficits by changing tax policy. As the excess burden of taxation and the adjustment costs – given the
same level of public revenues over time – would be substantially higher in case of
frequent changes of tax regulation, a “tax smoothing” would lead to less economic
distortion.
What pattern of tax policy would we expect to observe if governments would follow the theory of tax smoothing? First, we should not see a direct influence of economic growth or fiscal deficits on tax reforms. Furthermore, we should observe only
a very limited number of tax reforms over time as tax policy should focus on structural developments and avoid frequent changes which trigger high adjustment costs
for the economy (tax smoothing hypothesis 1).
If we look at the very stable revenue structure (see part II), we could be tempted
to believe that tax smoothing considerations played an important role in German tax
policy. And even the finding that tax reforms were not closely linked to macroeconomic developments might speak in favor of tax smoothing. But a closer inspection
of our tax reform data-set leads us to a different conclusion. Although the overall
revenue structure was very stable, the tax system was permanently changing. Based
on our data-set we found that there were more than 1,000 changes in tax regulations
within 40 years and the total cumulated fiscal effects of all tax reform changes covered here accounted for more than twice the average annual tax revenues in Germany (see part III and part V.3.2). Such a strong activity in tax policy is not at all
compatible with the theory of tax smoothing.
Therefore, we argue that our data speak strongly against the hypothesis of tax
smoothing.
2.4 Summary of findings
In this part we have analyzed the explanatory impact of normative approaches on tax
reforms in Germany from 1964 to 2004.
Based on our analyses of annual data as well as of data for each of the ten legislative periods covered in our data-set, we found only very limited support for normative approaches of tax policy.
Our data show that the stabilization function played no role in tax reforms as the
pattern of tax reforms was not linked to real GDP growth. Furthermore, we found
that high inflation did not lead to higher tax burden reductions in the progressive
wage and income tax. This indicates that German governments did not attempt to
correct for cold progression in wage and income taxes via tax reforms. Finally, the
high number and extent of tax reforms throughout the period 1964 to 2004 speaks
against the theory of tax smoothing.
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Zusammenfassung
Was bestimmt die Steuerpolitik? Welche Ziele verfolgen die Bundesregierungen bei Steuerreformen? Haben Steuererhöhungen und Steuersenkungen einen Einfluss auf die Wahlergebnisse? Auf der Basis eines neuen Datensatzes zu den fiskalischen Effekten von Steuerreformen im Zeitraum von 1964 bis 2004 zeigt das Werk Muster der Steuerpolitik auf und testet zentrale ökonomische Hypothesen. Dabei zeigt sich, dass normative ökonomische Ansätze kaum einen Erklärungsbeitrag für die zu beobachtende Steuerpolitik leisten können.
Ausgehend von wichtigen polit-ökonomischen Theorien zeigt der Autor, dass die Mehrheitskonstellationen im Bundesrat einen wichtigen Einfluss auf die Steuerpolitik haben, allerdings genau umgekehrt wie von der Blockade-Hypothese behauptet: Steuerreformen sind gemessen an ihren Fiskaleffekten bei gegenläufigen Mehrheiten in Bundestag und Bundesrat häufiger und umfangreicher. Des Weiteren gibt es keine Hinweise darauf, dass die parteipolitische Zusammensetzung der Bundesregierung einen wichtigen Einfluss auf Steuerreformen hat. Wahltaktische Terminierungen von Steuerreformen spielen aber sehr wohl eine wichtige Rolle. Eine Auswertung des Zusammenhangs von Steuerreformen und Wahlergebnissen zeigt allerdings, dass die Versuche der Bundesregierungen, ihre Wiederwahlwahrscheinlichkeit durch Steuersenkungen kurz vor der Wahl zu erhöhen, wenig erfolgreich sind: Nicht nur die Jahre unmittelbar vor den Wahlterminen, sondern die Steuerpolitik in der gesamten Legislaturperiode hat einen Einfluss auf die Bundestagswahlergebnisse der regierenden Parteien.