Political fragmentation and projected tax revenues: evidence from Flemish municipalities

Abstract

The level of revenues pocketed by a government during the fiscal year often deviates from that projected by this government in its budget. Despite a flourishing literature on, for example, the technical or procedural determinants of such forecast errors, little is yet known about how political stratagems may affect forecast errors. In the present paper, we analyse whether differences in the level of government fragmentation are useful in explaining local government tax revenue forecast errors —controlling for various other factors. Using data on 242 Flemish municipalities for the period 1992–2002, we find that two-party governments are more optimistic than single-party governments. In contrast to our initial expectations, governments with at least three parties are significantly more careful (or less optimistic) in their revenue projections than single- or two-party governments

On the political economy of national tax revenue forecasts: evidence from OECD countries

“…In total, fragmentation seems to have a negative non-linear impact on tax revenue forecast errors. Similar results have also been found by Goeminne et al (2008) for Flemish municipalities.…”

“…The effect of legislative fragmentation shows the opposite sign as theoretically predicted from Hypothesis 3, although it is in line with our Hypothesis 4 and the existing literature (see Goeminne et al, 2008). A higher level of fragmentation leads to less optimistic or more pessimistic revenue forecasts.…”

“…Our sample has countries with a very small number of inhabitants (e.g., Iceland) and countries with a very large population (e.g., the United States). As mentioned by Goeminne et al (2008), the sign of the coefficient of P OP s,t is not unambiguous. Rising complexity -and therefore more difficult forecasts -leads to overoptimism in tax projections (Duru and Reeb, 2002;Goeminne et al, 2008).…”

“…As mentioned by Goeminne et al (2008), the sign of the coefficient of P OP s,t is not unambiguous. Rising complexity -and therefore more difficult forecasts -leads to overoptimism in tax projections (Duru and Reeb, 2002;Goeminne et al, 2008). This causes a positive effect of population.…”

“…For the United States, some studies mention the influence of political ideology on forecast accuracy of tax revenues (see, e.g., Bretschneider et al, 1989;Cassidy et al, 1989;Mocan and Azad, 1995;Vorhees, 2004;Paleologou, 2005). Although Serritzlew (2005) and Goeminne et al (2008) are -to the best of our knowledge -the only studies that analyze political fragmentation, they concentrate on local governments only.…”