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Gerrit B. Koester, Summary of findings in:

Gerrit B. Koester

The political economy of tax reforms, page 109 - 110

An empirical analysis of new German data

1. Edition 2009, ISBN print: 978-3-8329-4131-4, ISBN online: 978-3-8452-1609-6 https://doi.org/10.5771/9783845216096

Series: Neue Studien zur Politischen Ökonomie, vol. 5

Bibliographic information
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. 110 Only the financing function could partly be supported: Deficits were correlated with tax burden increases via tax reforms. However, the correlation was not strong and the explanatory impact of the deficit variable for tax reforms was low. Therefore, we conclude that the normative approaches discussed here do not limit the room for our positive analysis as they are largely unable to contribute to our understanding of the pattern of tax reforms. 3 Polit-economic theories Positive polit-economic approaches take – in contrast to the considered normative approaches – the tax policy process (its actors and its institutions) into account. What do we expect if self-interested politicians pursue tax policy? Do parties differ in their tax policy strategies? Do elections play a role for the timing of tax policy? What is the impact of divided government on tax policy? These are important questions of polit-economic approaches which we discuss in the following. To be able to discuss these questions, we must first review the tax policy process and its most important changes in the period analyzed (part V.3.1). This serves as background for the discussion and empirical testing of different polit-economic theories (part V.3.2 to V.3.8). We start with a discussion of the development of the “financial constitution” (part V.3.1.1), which regulates tax revenue assignment and legislative competencies in taxation, and then move on to the political development in Germany (part V.3.1.2). Finally, we consider the role of the constitutional court (part V.3.1.3) and of the EU (part V.3.1.4) in the German tax policy process. 3.1 Legislative competencies in tax policy and political development 3.1.1 The financial constitution – legislative competencies in tax policy Most important for the legislative competencies in tax policy is the financial constitution (Finanzverfassung) which regulates the assignment of tax revenues and of legislative competencies to different levels of government in the Federal Republic of Germany (most importantly in between the federal government and the states). We first shortly review the roots of the German financial constitution and then move on to the development of the tax policy process after 1950. 3.1.1.1 Historical development of the German financial constitution before 1950 We can distinguish four periods in the historical development of the German financial constitution before 1950. From 1871 to 1919 the German financial constitution was very federalistic as a

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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.