On the Rationality of Medium-Term Tax Revenue Forecasts-Evidence from Germany

This paper examines tax revenue projections in Germany for the period 1968 to 2012 with a focus on forecasting rationality. It is shown that tax revenue forecasts for the medium-term are upward biased. Overoptimistic revenue projections are particularly pronounced after the German reunification and reflect upward-biased GDP projections in this period. The predicted tax-GDP-ratio appears to be upward biased, as well. The forecasts are likely to overestimate tax revenues if the predicted tax-GDP-ratio exceeds its structural level of approximately 22½ percentage points. The results also indicate that forecast errors of short-term projections for the current year exhibit serial correlation. It is conceivable that the non-rational behaviour can be traced back to the specific institutional setting of revenue forecasting and budgetary planning in Germany.