The political economy of tax reforms

What determines tax policy? What motivations do governments follow in tax reforms? Do voters react to tax reductions and tax increases? Based on a new data-set of the fiscal effects of tax reforms in Germany from 1964 to 2004, the book offers new insights on the pattern of tax reforms and test economic hypotheses of tax policy. It shows that normative approaches are largely unable to contribute to the explanation of tax reforms in Germany.
With respect to polit-economic theories the author finds that divided government matters, but in the opposite direction of the “gridlock-hypothesis”: tax reforms are larger and more frequent in times of divided government. He does not find evidence for partisan politics but for opportunistic behavior of governments. However, the governments’ attempts to manipulate re-election probabilities by tax reductions before elections largely fail: his analyses show that voters react strongly to tax burden changes but take the direction of tax reforms within the whole legislative period (and not just in election years) into account.