Testing the Positive Theory of Government Finance

31 Pages Posted: 30 Aug 2010

See all articles by David S. Bizer

David S. Bizer

Lehman Brothers

Steven N. Durlauf

University of Chicago; National Bureau of Economic Research (NBER)

Date Written: May 1990

Abstract

Researchers characterizing optimal tax policies for dynamic economies have reasoned that optimally chosen tax rates should approximately follow a random walk. We conduct a frequency-domain examination of the properties of the tax rate series and conclude that while there is a substantial smoothing role for debt, one rejects the hypothesis that the first difference in the series is white noise. This conclusion follows both from an analysis of the entire spectral distribution function of tax changes as well as from the behavior of individual frequencies. The source of the rejection is pronounced activity of tax changes at an eight year cycle which is suggestive of an electoral component to tax changes. Regression analysis confirms the finding that there is a cyclical component to tax changes corresponding to changes in political party administration. The results suggest that the positive theory of government finance needs to be refined to incorporate features of political equilibrium.

Suggested Citation

Bizer, David S. and Durlauf, Steven N., Testing the Positive Theory of Government Finance (May 1990). NBER Working Paper No. w3349. Available at SSRN: https://ssrn.com/abstract=1667354

David S. Bizer (Contact Author)

Lehman Brothers ( email )

3 World Financial Center 6th Floor
New York, NY 10285
United States
212-526-0900 (Phone)
212-526-2755 (Fax)

Steven N. Durlauf

University of Chicago ( email )

1155 East 60th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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