124
3.2 Polit-economic approaches to tax policy – overview
There is not one unifying theory of the political economy of taxation but many different approaches that try to explain tax policy. Some of these approaches can be
combined, but some are also competing. Furthermore, the approaches differ largely
in their scope. While some are only focusing on one aspect of tax policy (for example the government’s motivation to try to influence re-election probabilities), others
are far more encompassing. This makes the models are often hard to compare. Furthermore, there are barely any empirical tests which compare the theories and their
empirical relevance directly. This is probably the decisive reason, why the field has
stayed so fragmented. Therefore, the opportunities for empirical testing based on our
new data-set are especially valuable for comparing the empirical relevance of different approaches.
In this section we review five major approaches from which we can directly derive testable hypotheses. We start with the theory of inertia, followed by a discussion of the concept of fiscal illusion. Then we move on to approaches with opportunistic and partisan motivation in tax policy and analyze the effects of divided government within the German bicameral legislature. Finally, we test combinations of
several hypotheses statistically (part V.3.8) and summarize our results.
Overview – polit-economic theories of tax policy and tax reform
Opportunistic
behavior
Governments try
to increase their
re-election
probabilities by
tax policy
Tax burden
increases will
take place after,
tax burden
reductions
before elections
Can be tested
directly based on
tax reform data
Alternative
approaches
Fiscal Illusion
by timing of
tax reforms
Governments
use timing of tax
reforms to
camouflage real
tax burden
changes
A larger share of
tax increases
(compared to tax
reductions) will
be enacted
retrospectively
(and with a
larger time-lag)
Can be tested
directly based on
tax reform data
Inertia/theory
of reform
Incentive to
avoid tax
reforms (and
especially tax
increases)
because of high
political costs
Minimize political
costs and maximize revenue by
self-restriction to
automatic tax
revenue increases based
on cold progression (inertia
in tax policy)
Can be tested
directly based on
tax reform data
Partisan
behavior
Ideologically
motivated
redistribution via
tax reforms
Right wing:
Reduce the tax
burden and shift
it to regressive
taxation
Left-wing:
Increase the tax
burden and shift
it to progressive
taxation
Can be tested
directly based on
tax reform data
Institutional
factors
(divided
government)
Divided
government
leads to political
gridlock
Extent and
frequency of tax
reform activity
will be larger in
times of
undivided
government
M
ec
ha
ni
sm
Pr
ed
ic
tio
ns
Te
st
in
g
Can be tested
directly based on
tax reform data
Models of
bureaucracy
Interest group
models
Probabilistic
voting on taxation
Median voter
model
Leviathan
model
Table 8: Polit-economic approaches to the study of tax reform
125
Our analysis leaves out important approaches from the scientific literature on the
political economy of taxation as the median voter model,225 the Hettich-Winer
model,226 interest groups models,227 approaches which analyze the role of the bureaucracy for tax policy,228 and the Leviathan model229. Our decision to leave these
approaches out should not be mistaken as a statement against the relevance of these
approaches. Instead we are only less able to derive hypotheses from these approaches which would be directly testable based on our data-base of fiscal effects of
tax reforms.
Before we start to discuss and test hypotheses, we shortly review some descriptive statistics of tax reforms depending on political variables.
Table 9 shows descriptive statistics of tax reforms from 1965 to 2003230 depending on political variables. We see that the number of new regulations was lower in
election years than in average years. This resulted largely from a lower number of
tax increases. In case of undivided government the numbers look very similar to
those in election years. With respect to partisan politics, the most important observations is that there was a lower number of tax burden increases in case of undivided
right government. Furthermore, the grand coalition (governing from the end of 1966
225 See for the basic model Black (1948) or Downs (1957). For a general application to taxation
see Meltzer/Richard (1981), for a special application Sjoquist (1981) and for an encompassing discussion of the model Congleton (2002).
226 See e.g. the comprehensive discussion in Hettich and Winer (1999). Hettich and Winer model
tax policy based on a probabilistic voting model as the equilibrium outcome of a political and
economic system. In their model tax policy leads to an equalization of marginal political costs
and marginal political benefits for all citizens. This equalization predicts a complex tax system with a large number of tax bases, tax exemptions and group specific treatments. Tax reforms reflect responses of political decision makers to exogenous shocks (see Hettich/Winer
2004) affecting political influence of different groups, changes in administrative costs or
changes in the Laffer-curves triggered by shifts in between tax bases or the occurrence of new
prevention possibilities. Empirical tests of the model are still scarce. Hettich and Winer (Hettich and Winer 1999, chpt. 11) themselves demonstrate in a comparative study that the lower
transaction costs in terms of lobbying and coordination in the Canadian compared to the US-
American system allowed for a more rapid and faster adjustment of the tax system. Kenny
and Winer (2001) apply the model in a cross-country study and try to explain tax structures
based on variables like real GDP per worker, women in the labor force, oil extraction, magnitude of international trade, urbanization, population density, educational attainment, secondary enrollment and socialist government. However, with respect to tax reform the model is
not sufficiently spelled out yet (see Hettich and Winer 2004).
227 For the interest group approach see Becker (1983) and with respect to taxation Holcombe
(1997) or Witte (1985). For a textbook treatment see Mueller (2003), chpt. 20.
228 See for the general approach Niskanen (1971). The role of bureaucracy in tax reform is discussed in Bird (2003 and 2003a), administrative issues are analyzed in Sandford et al. (1989).
See for the role of bureaucracy as well Hettich/Winer (2004) and for applications Findling
(1995) or Mann (1987).
229 See for the approach Buchanan (1975), Nelson (1986/1987) and Oates (1989). Applications
to taxation are Kau/Rubin (1981) and Breeden/Hunter (1985).
230 We have excluded 1964 and 2004 because our data covers only parts of these years.
126
to the end of 1969) was – based on the number of reforms and new regulations – less
active in tax policy.
However, these observations are only preliminary. In the following parts we analyze the developments in more detail based on the fiscal effects of reforms, which
are far better suited for a comparative analysis of tax policy under different political
constellations than just the number of reforms and regulations.
Descriptive Statistics – Adopted German tax reforms (1965-2003)
Constellation
AVERAGE
(All years)
Election year*
Right
Right and
undivided
Partisan
Left
Undivided
Government**
Grand Coalition
5.2
# of
reforms
p.a.
5.6
6.5
4.5
4.9
6.7
6
5.9
10.3
# of
reductions
p.a.
12.8
10.6
15.3
11.4
11.4
6.7
14.1
2.8
# of
increases
p.a.
10.1
3.3
9.0
2.8
12.3
2.7
13.7
14.3
# of
new regulations
p.a.
26.2
16.1
25.9
15.8
29.3
9.3
32.2
13
# of
years
39
11
18
10
18
3
26
Extent of
increases/
GDP p.a.
0.20%
0.44%
0.19%
0.44%
0.18%
0.46%
0.28%
0.56%
Total fiscal
effects/
GDP p.a.
-0.21%
-0.13%
-0.13%
0.09%
-0.31%
-0.20%
0.12%
-0.08%
Extent of
Reductions/
GDP p.a.
-0.42%
-0.57%
-0.32%
-0.64%
-0.53%
-0.49%
-0.66%
-0.16%
Note: Number of new regulations without fiscal effect not displayed.
1965, 1969, 1972, 1976, 1980, 1982 (election in March 1983), 1986 (election in January 1987), 1990, 1994, 1998, 2002;.
** Including grand coalition. Own calculations based on: Federal Ministry of Finance (2004)/Federal Statistical Office(2007).
Divided
Government
Table 9: Descriptive statistics of tax reforms by political constellation
3.3 Status quo bias and inertia in tax policy
3.3.1 General approach and related literature
How much activity are we expecting if we chose a polit-economic perspective including self-interested politicians. From a polit-economic point of view tax reforms,
which increase the tax burden, are attractive for governments because of the additional public goods and redistributive programs which can be financed with the
additional tax revenues. These might help to increase the re-election probabilities.
On the other hand, almost all changes in the tax system and especially overall tax
burden increases create not only winners but as well losers who have to bear the
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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.