Researchers characterizing optimal tax policies for dynamic economies
have reasoned that optimally chosen tax rates should approximately
follow a random walk. Vve 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.
*Published:
Journal of Monetary Economics, Vol. 26, No. 1, pp. 123-141, July 1990.
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