The Effect of Tax Increases on Public Spending Levels

Abstract

This study replicates the research of economist Richard Vedder, who conducted a study in 1987 (and subsequently updated the data in 1991, 2007, and 2010) which reviewed four decades of empirical data on the relationship between tax increases and government expenditure. The original study published by Vedder and coauthors provided evidence of public choice theory, with newly found revenues encouraging policymakers to favor new additional constituent spending. Specifically, the study found that each dollar of new tax revenue was associated with a $1.58 increase in Federal spending.

Using standard statistical analysis that introduce variables to control for business-cycle fluctuations, wars, and inflation, the results of this study reveal that over the entire post World War II era through 2022 each dollar of new tax revenue was associated with $1.50 to $1.64 of new spending. Observing different time periods (e.g. 1951-2022 vs. 1962-2021), different lag structures, and controlling for additional variables, the alternative analyses produce different estimates of the tax-spend relationship—between $1.31 and $1.92. Regardless of how the data are configured, higher tax collections never result in less government spending, or even sustained levels of spending.

Keywords: Taxation, Government Expenditure, Public Choice Theory, Statistical Analysis, Budgets

JEL Classification: E60, E62, H20, H5, H6