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Gerrit B. Koester, Summary in:

Gerrit B. Koester

The political economy of tax reforms, page 153 - 154

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

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153 3.9 Summary The most important advantage of our data-set of fiscal effects of tax reforms from 1964 to 2004 is the unique opportunity to test important polit-economic hypotheses on tax policy and tax reform directly and quantitatively. Our empirical analyses showed that inertia did not play a role in tax policy in Germany. Although the revenue structure was very stable, tax reforms were very frequent and cumulated absolute fiscal effects of tax reforms over GDP between 1965 and 2003 accounted for twice the average annual tax over GDP ratio. For the second polit-economic approach – fiscal illusion by the timing of tax burden increases and reductions – we were not able to find any support either. Instead, we observed that federal governments behaved opportunistically: they tried to increase their re-election probabilities by scheduling tax burden increases directly after, and tax burden reductions in the year before the elections. Thereby governments focused on the timing of implemented reforms and not of adopted reforms. As predicted by the theory of opportunistic government behavior, wage and income taxes were most important for electoral manipulation while the timing of reforms in most indirect and less visible taxes (especially VAT and the tobacco tax) showed no sign of opportunistic behavior. While opportunistic motivation came out very clearly in our analyses, we were not able to find any empirical support for our hypotheses on differences in tax policy depending on the partisan orientation of governments. Most surprising were our findings with respect to the importance of divided government. Instead of legislative gridlock, which plays a prominent role especially in the case-study based literature on tax reform in Germany, we found by far more and higher fiscal effects of tax reforms under divided than under undivided government. In our data there was no indication that a majority of the opposition effectively blocked tax reforms, nor that tax reforms were larger and more frequent in case of undivided government. Furthermore, there was no evidence that divided federal governments were concentrating on reforms of taxes which did not need approval of the second chamber. Finally, there was only very limited evidence for a stronger role of partisan preferences in case of undivided government. Instead, we found that especially tax burden increases were substantially lower in case of undivided governments. This shows that especially undivided governments restrained from tax burden increases as they feared to be blamed exclusively for tax burden increases in the next elections. 154 4 Economic voting: The influence of tax policy on elections While we have concentrated on the effects of political considerations and institutional factors on tax reforms so far, part V.4 analyzes the effects of tax reforms on the voting decision. We first shortly review theoretical approaches in the literature and discuss main findings. Then we derive hypotheses from the theory of economic voting with respect to the possible influence of tax policy on voting decisions. Finally, we test the hypotheses empirically based on our data-set. 4.1 Economic voting and tax policy – general approach and related literature The theory of economic voting argues that the individual and the aggregated vote in elections is influenced by economic developments as well as by economic policy. One early example is Tufte (1978, p. 113) who demonstrated a strong influence of economic growth on the results of US midterm elections.272 Since then a relatively broad literature has developed.273 The main questions discussed in this literature are which economic factors are affecting the vote, whether voting decisions are more influenced by past policy decisions (retrospective voting) or by expectations on future policy decisions (prospective voting) and whether there is an asymmetry in the reaction to policies with positive or negative effects (grievance asymmetry). Most of the studies in the field follow an empirical approach. The central problem is that the influence of economic conditions on the decision-making of individual voters cannot be observed directly but is often analyzed based on aggregated variables like macroeconomic conditions and total vote share changes. Policy decisions are most of the time integrated only indirectly (via an assumed/stated effect of policy on macroeconomic conditions). Based on the existing literature some stylized facts can be distilled: retrospective voting is in most cases more important than prospective voting, the macroeconomic variables GDP growth (which is linked to unemployment) and inflation account for roughly ? of vote share changes, and there is a grievance asymmetry in that negative changes lead to stronger electoral reactions.274 272 An analysis with respect to the effects of economic conditions on the US presidential vote can be found in Erikson (1989) or Kinder et al. (1989) and of the congressional vote in Erikson (1990). Fiorina (1981) researches retrospective voting in US elections, Levitt and Snyder (1997) search for the impact of federal spending on house elections in the US. Besley/Case (1995) analyze the relationship in between tax competition, tax rate setting and re-election probabilities of incumbent governments. 273 Lewis-Beck and Paldam (2000), pp. 113 ff., were aware of approximately 200 books and papers in the field in 1998. 274 See for a discussion: Lewis-Beck and Paldam (2000), pp. 113 ff. Empirical results for Western European elections from 1960 to 1997 can be found in Chappell and Veiga (2000).

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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.