Tax Revenue Prediction under Condition of Imperfect Control over Tax-Collecting Authority # Stanislav Klazar* 1 Introduction Appropriate public revenue forecasts are crucial for long term (commonly defined for period longer then decade) and middle term (longer then budgeting period, commonly one year) public budgeting. Only unbiased and accurate revenue forecasts enable government to set up effective public expenditure programs based on the equality of marginal costs and marginal benefit. Forecasting authority has to meet many difficulties during the forecasting process. It knows only uncompleted set of information about the explanatory economic and social variables which have influence on the future public revenue. It usually results in not exact (not very accurate) but still unbiased forecasts. On the other side the modern public theory (in last decade) recognizes some reasons for the biased (systematically over a long period and intentionally) forecasts. Contemporary research focuses on the study of rationale for systematically overstated or understated revenue forecasts, moreover some economists suppose that biased forecast can be more harmful then some extend of inaccuracy for the efficiency of public finance. This paper analyzes the possible reasons for biased tax revenue forecasts. We modi- fied the theoretical model derived by Danninger (2005) to test some of its implications with data for the Czech Republic. Our modification of Danninger’s theoretical model demon- strates that systematically and intentionally biased revenue forecasts can be the result of the government’s (Principal’s) attempt to increase the effort of tax-collecting authority (Agent) to collect more revenue. The remainder of this paper is structured as follows. Section 2 – Review of related lite- rature is followed by Section 3 – Model, which summarizes the main assumptions and re- sults of the proposed explanation for biased forecasts. This analysis is based on theoretical model. The other Section 4 – Empirical analysis discusses case study evidence from Czech Republic. The final section concludes. 48 Acta Oeconomica Pragensia, roè. 14, è. 3, 2006 # This article, which has been elaborated as one of the outcomes of research project registered with the Grant Agency of the Czech Republic under reg. no. 402/04/1069. I would like to thank RNDr. Avgustina Celikovská, head of Department of tax administration and tax analysis of Ministry of Finance for provision the specific data from the ADIS database and Ing. Barbora Slintáková, PhD., researcher from the Department of Public Finance, University of Economics, Prague, for her useful comments concerning the Principal-Agent theory and its application in public finance. * Ing. Stanislav Klazar, Ph.D. – senior lecturer; Department of Public Finance, Faculty of Finance and Accounting, University of Economics, Prague, nám. W. Churchilla 4, 130 67 Praha 3, Czech Republic; <klazar@vse.cz>.