Tax Structure and Government Behavior: Implications for Tax Policy

22 Pages Posted: 1 Mar 2000 Last revised: 8 May 2000

See all articles by Roger H. Gordon

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

John D. Wilson

Michigan State University - Department of Economics

Date Written: July 1999

Abstract

Changes in tax policy can affect all aspects of the economy. Not only do firms and individuals change behavior, creating efficiency costs, but government expenditure choices can also change. Unless these expenditure choices had been optimal' previously, changes in response to a tax reform affect welfare and should be taken into account when designing tax policy. This paper develops a specific model of government behavior and then explores the implications of government, as well as private, behavioral responses for tax policy. In particular, we assume that government officials favor expenditure (or regulatory) choices that increase the government's budget. As a result, higher tax rates on a particular activity encourage government behavior that aids the growth of this activity. This response enables tax policy to redirect government activity in desirable directions, but it also makes Pigovian taxes on negative externalities less effective.

Suggested Citation

Gordon, Roger H. and Wilson, John D., Tax Structure and Government Behavior: Implications for Tax Policy (July 1999). NBER Working Paper No. w7244. Available at SSRN: https://ssrn.com/abstract=202437

Roger H. Gordon (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-4828 (Phone)
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Harvard University - Department of Economics ( email )

Littauer Center
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John D. Wilson

Michigan State University - Department of Economics ( email )

East Lansing, MI 48824
United States

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