Tax then spend, or spend then tax? Evidence for Barbados

Author(s): Craigwell, Roland C; Rock, Llewyn L (1988)

Created 26 Jul, 1988
Categories Working Papers
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This paper looks at the causal relationship between government expenditure and revenues in Barbados over the period 1946-86 in the light of much debate concerning the introduction of new taxation measures to increase government revenues and purportedly, to decrease the fiscal deficit. The line of reasoning which asserts that increased revenues 'automatically' imply lower deficits clearly presupposed that revenues do not cause expenditures; expenditures do not respond at the margin to changes in revenues. However, the theoretical debate on the revenues-expenditures causal link is far from settled. For example, Buchanan and Wagner (1977) argue that increased taxation leads to a reduction in government expenditures where spending is determined by the demand of voters. On the other hand, Barro (1974, 1978) contends that increased taxes result from higher levels of government expenditures. Using the techniques of statistical causality {Granger (1969)} we find that there is two-way causality between government spending and revenues in Barbados, lending support to hypothesis of higher spending resulting from increased revenues. Thus any strategy based on simply increasing revenues so as to decrease the deficit may meet with limited success; the government must control its expenditures even when revenues increase in order to guarantee a reduction in the deficit. (Previous title: Collection of unpublished research papers)

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