Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 378: The Tax-Spending Nexus: Evidence from a Panel of US State- Local Governments
Joakim Westerlund () and Saeid Mahdavi
Additional contact information
Joakim Westerlund: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 40530 GÖTEBORG
Saeid Mahdavi: University of Texas at San Antonio, Postal: United States
Abstract: We re-examine the tax-spending nexus using a panel of 50 US state-local government units between 1963 and 1997. We find that, unlike tax revenues, expenditures adjust to revert back to a long-term equilibrium relationship. The evidence on the short-term dynamics is also consistent with the tax-and-spend hypothesis. One implication of this finding is that the size of the government at the state-local level is not determined by expenditure demand, but rather by resource supply. This is consistent with the fact that many US state and local governments operate under constitutional or legislative limitations that seek to constrain deficits.
Keywords: Tax-spend; State and local government; Public finance; Panel unit root; Panel cointegration
18 pages, September 11, 2009
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