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EMPIRICAL ANALYSIS OF THE RELATIONSHIP BETWEEN THE TAX BASE AND GOVERNMENT SPENDING: EVIDENCE FROM STATE PANEL DATA, 1977-1992

Essentially, there are two competing propositions on tax base choices. The optimal tax theory on taxation asserts that the broader the tax base the better the tax. On the other hand, some public choice proponents have argued that, at the constitutional level, we should choose to restrict the power to tax and thus limit the available base. These theories assert fundamentally different views on the state and its citizens. Within the traditional optimal tax framework, governments maximize residents utility and tax base broadening lowers the tax rate, thus there is a revenue neutral response. When, however, governments do not choose to maximize residents utility, then increases in the tax base can have an impact on governments revenues and spending. In order to determine if tax bases influence government spending data on forty-eight states were compiled for the years 1977 through 1992. A state finance system of equations was developed. Using three-stage least squares estimation in a fixed effects econometric model, the relationship between the broadness of a tax base and state government spending was estimated. The state sales tax base was the tax base used to study this relationship. The results of this estimation found that states with broader sales tax bases had higher spending, all else equal. This result suggest that governments do not act as if they maximize resident utility when making tax base and rate decisions, otherwise base broadness would have no impact on spending. An additional result from this empirical analysis, is that tax base and rates are inversely related, but the relationship does not lead to revenue-neutral adjustments.

Identiferoai:union.ndltd.org:uky.edu/oai:uknowledge.uky.edu:gradschool_diss-1336
Date01 January 2002
CreatorsBoardman, Barry Wayne
PublisherUKnowledge
Source SetsUniversity of Kentucky
Detected LanguageEnglish
Typetext
Formatapplication/pdf
SourceUniversity of Kentucky Doctoral Dissertations

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