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
127
additional tax burden and can be expected to oppose these tax reforms. Based on this
general trade-off there are especially three arguments in the literature which predict
a high status-quo bias and only very low activity or even inertia in tax policy.
Rose (1985) and Rose and Karran (1987) focus on the progressiveness of tax systems in modern industrialized countries (especially in the wage and income tax).
They argue that revenue increases, which result automatically from taxes with a
revenue over GDP elasticity higher than one, are not so directly linked to government policy and the government gets blamed less for these “automatic” tax burden
increases. It follows that it is attractive for governments to abstain largely from tax
reforms, which increase the tax burden, and pursue only tax burden reductions.
Therefore, governments are expected to rely on automatic tax burden increases instead of changing the tax system and do only correct “automatic increases” for example in times of very high inflation. Resulting is a situation of “inertia in tax policy” following from a “maximization of revenue while minimizing political costs”
(Rose 1985).
A similar argument can be made based on the economic theory of reform which
discusses how individual uncertainty about the individual gains and losses of reforms can lead to a strong status-quo bias prohibiting reforms (see Fernandez/Rodrick 1991). Based on this literature we would expect strong opposition to tax
reforms with unclear distributional consequences.
Finally, the argument of a grievance asymmetry, which stresses that individuals
react often far stronger to losses than to gains of the same size,231 speaks as well in
favor of a very limited activity in tax policy and especially for an avoidance of reforms that increase the tax burden.
3.3.2 Hypotheses
There are two hypotheses which follow directly from the discussed arguments for a
status-quo bias. The first is concerned with the extent of tax reforms. If there really
is a strong status-quo bias – caused for example by politicians who try to minimize
political costs of tax reform – we should see only marginal changes of the tax system (“inertia hypothesis”). The second hypothesis is related to the direction of tax
reforms. If governments rely on revenue increases via progressive taxes and refrain
from tax burden increases, we should see only a very small amount of tax burden
increases while reductions are more frequent (“dominance of tax burden reductions
hypothesis”). Both hypotheses can be tested directly based on our data-set.
231 See for general discussion of the grievance asymmetry in this context Nannestad/Paldam
(1997) or Kinder/Kiewiet (1979).
128
3.3.3 Empirical analysis
One of the stylized facts we established on the German tax system was that the
revenue structure was always relatively stable (see part II.2). Only the share of tax
revenues from income and wage taxes increased strongly. This increase resulted
especially from the high GDP elasticity of the progressive wage and income taxes.
-30%
-20%
-10%
0%
10%
20%
30%
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3
CUMULATED EFFECTS OF TAX REFORMS, 1964-2004
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3
INCREASES AND REDUCTIONS/GDP
(ABSOLUTE VALUES, CUMULATED)
TAX REVENUES/GDP
Fiscal effects of reforms
(cumulated)/GDP
Fiscal effects of reforms
(cumulated)/GDP
Cumulated
Increases/GDP
Cumulated
Reductions/GDP
Tax revenues/GDP
Tax revenues/GDP
Own calculations based on: Federal Ministry of Finance (2004)/Federal Statistical Office(2007).
Figure 57: Cumulated fiscal effects of tax reforms
At first sight this observation seems to be in line with the inertia hypothesis. But
what do we observe if we analyze tax policy based on our first-hand data? Figure 57
displays the cumulated fiscal effects of tax increases and tax reductions over GDP
from 1964 to 2004. As a yardstick, we include the annual tax revenue over GDP
ratio in the graph.232 Our graphical illustration shows that there has been a massive
change in the tax system within the period covered in our data-set. If we add up the
absolute amount of fiscal effects of tax reforms, we see that the total reductions and
the total increases equaled twice the average annual tax revenues.
232 As a yardstick for the cumulated fiscal effects of tax reductions, we display the annual tax
revenue over GDP ratio with a negative sign.
129
We think that this total change is a lot more far-reaching than we should expect
based on the inertia hypothesis. Additionally, we found that (although reductions
dominate) cumulated increases and reductions were not so very different in extent.
This contradicts our second hypothesis of the dominance of tax reductions. Therefore, we find no evidence for the inertia hypotheses in our data.
3.4 Fiscal illusion by timing of tax reforms
3.4.1 General approach
Governments can not only refrain from changes in tax policy but can as well try to
create “fiscal illusions” to camouflage the real effects of tax policy decisions to
avoid political opposition.233 For our analysis the possibility of manipulating the
citizens by the timing of tax reforms is especially important.234 If the citizens focus
on the fiscal effects of adopted new regulations of tax policy but not so much on the
dates when they become effective, the government can improve its revenue position
at least in the short run.
3.4.2 Hypotheses
From an approach of fiscal illusion with respect to the timing of new regulations in
tax policy we can directly derive two hypotheses which are testable based on our
data-set: If governments tried to camouflage the real tax burden changes and to
improve their revenue position in the short run, we should expect that a larger part of
tax burden increases was implemented retrospectively while reductions were implemented only with a time-lag (fiscal illusion hypotheses I). Citizens who just focus
on the extent of changes could be fooled by this timing of reforms. Additionally, we
would expect that retrospective increases dated back longer than retrospective reductions (fiscal illusion hypothesis II).
233 James Buchanan discusses in “Public finance in democratic process” (1967) several possibilities for governments to camouflage the costs of taxation and to stress the benefits of public
spending. An alternative treatment is Wagner (1976). A general overview of empirical work
on fiscal illusion is given in Dollery/Worthington (1996). Studies which test the relationship
in between the complexity of the tax system and fiscal illusion are for example Heyndels/Smolders (1994) or Worthington (1994).
234 We are not discussing the possibility of biased predictions of financial consequences of tax
reforms here as we have already shown that the expected fiscal effects are largely reliable
(see part III.3).
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References
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.