The political economy of tax projections

This paper addresses the political economy of tax projections. It argues that governments face incentives to present upward biased tax projections. In election years, this may help them to increase the chance of reelection. If this chance is low, biased tax projections help governments to bring forward favorable expenditures and to burden their successors. These hypotheses are tested using West German states between 1992 and 2002. While there is only weak support for a general upward bias in tax projection and the importance of elections and partisanship, the degree of overestimation is found to be significantly higher, the less popular the incumbent party is and the poorer the state-specific economic performance.