Policy Article

Does the medium-term tax estimate fit the financial planning of the federal states? (original publication in German)

Kiel Policy Briefs, 78

Official tax projections often exhibit increasing tax ratios in the medium term. However, such tendencies cannot be observed in actual tax revenues. Jens Boysen-Hogrefe, the fiscal expert of the Kiel Institute, assumes that this phenomenon may be due to the combination of two circumstances. First, the fiscal drag and second the convention to apply current law in official tax projections, only. Future tax reforms are not anticipated. Therefore, results of the official tax projections may be misleading for fiscal planning, especially for the “Länder” that have only poor possibilities to influence the tax code. Therefore, a suitable scaling down is proposed. An even better—but maybe hard to achieve—solution is the abolition of the fiscal drag.