On the political economy of national taxrevenue forecasts – Evidence from OECD countries

Solid budgets serve as important quality signals for the electorate. Politicians mighttherefore face an incentive to influence tax revenue forecasts, which are widely regardedas a key element for budget setups. Looking at the time period from 1996 to 2012, inthis study we systematically analyze whether national tax revenue forecasts in eighteenOECD countries are biased through political distortions. Based on several theoreticalapproaches drawn from the theories of political economy, we test four hypotheses usingpanel estimation techniques. We find strong support for partisan politics. Left-winggovernments seem to produce more optimistic or less pessimistic tax revenue forecaststhan right-wing ones do. Contrary to the theoretical prediction based on the "commonpool" problem, we find that more fragmented governments and parliaments tend to producemore pessimistic or less optimistic tax revenue forecasts. One reason might be that atleast one of the incumbents will stay in office and will be part of the next government,too. We do not find empirical evidence for political business cycles or an influence ofthe reelection probability on tax revenue forecasts at all.