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). 130 3.4.3 Empirical analysis As our data-set includes the dates when new tax regulations were adopted as well as the dates when the regulations became effective, we calculated the shares of tax reductions and increases which were implemented retrospectively and of those implemented with a time lag. Furthermore, we calculated the average number of days in between the date of adoption and implementation for all new regulations. Figure 58 shows the timing of new tax regulations based on the hypotheses of fiscal illusion. We found that the share of regulations implemented retrospectively and of regulations implemented with a time lag was nearly identical in increases and reductions (see left part of Figure 58). Furthermore, we found that the average number of days in between adoption and implementation was larger in retrospective reductions than in retrospective increases. Finally, the number of days for increases implemented with a time-lag was on average smaller than for reductions implemented with a time-lag (see right part of Figure 58). FISCAL ILLUSION AND TIMING OF REFORMS, 1964-2004 0 20 40 60 80 100 120 140 160 180 RED INCR Incr Incr Red Red 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% REGULATIONS IMPLEMENTED WITH A TIME-LAG RETROSPECTIVE REGULATIONS REGULATIONS IMPLEMENTED WITH A TIME-LAG: AVERAGE NUMBER OF DAYS BETWEEN ADOPTION AND IMPLEMENTATION SHARE OF REGULATIONS IMPLEMENTED WITH A TIME-LAG AND RETROSPECTIVE REGULATIONS IN INCREASES AND REDUCTIONS Own calculations based on: Federal Ministry of Finance (2004), Federal Statistical Office (2007). # of days -250 -200 -150 -100 -50 0 RED INCR RETROSPECTIVE REGULATIONS: AVERAGE NUMBER OF DAYS BETWEEN ADOPTION AND IMPLEMENTATION # of days Figure 58: Fiscal illusion and timing of tax reforms These empirical findings contradict our hypotheses of the timing of tax reforms based on fiscal illusion. Tax reductions and tax increases did not differ with respect to the share of regulations, which was implemented with a time lag or retrospec- 131 tively. And the timing of adoption and implementation of reforms did not improve, but worsen the revenue position of governments in the short-run. Alltogether we found therefore no evidence for governments´ attempts to create fiscal illusion via the timing of tax reforms. 3.5 Opportunistic behavior 3.5.1 General approach and related literature Public choice has always stressed that self-interest cannot be excluded with respect to politicians. Politics should be seen “without romance” (Buchanan 2003). Holding an office has mutual benefits for politicians and creates strong incentives to focus on re-election. Government policies might therefore be opportunistic in trying to increase their re-election probabilities by economic policy before elections. Tufte (1978) and Nordhaus (1975) demonstrated in their classical contributions that governments increased transfers, decreased payments and tried to stimulate economic growth before elections to manipulate the electorate. Taxation does usually play only a minor role in the study of opportunistic behavior. But this results at least partly from the fact that reliable data on the timing and the fiscal effects of tax reforms has been scarce.235 3.5.2 Hypotheses We can directly derive three testable hypotheses based on the general argument of opportunistic government behaviour. If governments behave opportunistically, we would expect that they try to increase re-election probabilities by reducing the tax burden directly before elections while tax burden increases should take place directly after federal elections (opportunism hypothesis I). As citizens are more likely to react to tax burden changes and not just to tax policy decisions, governments should try to reduce the tax burden before elections by implemented and not so much by adopted tax reforms (opportunism hypothesis II). Finally, we would expect that governments focus on manipulation in the direct taxes (like wage and income taxes) where tax burden changes are more visible than in the indirect taxes (opportunism hypothesis III). 235 Whether such a strategy is promising and leads to an increase of re-election probabilities depends on the individual voting decisions. If information is complete and voters behave rational, they should be able to detect such a maneuver. However, as we focus here on an empirical observation, we primarily want to analyze whether opportunistic government behavior is reflected in the data. In the chapter on economic voting (see part V.4) we discuss whether we can find an effect of opportunistic behavior on electoral decisions.