FRB: Political Competition, Casual Relationships Between Taxes and Spending, and Their Influence on Government Size: Evidence From State-Level Data

International Finance Discussion Papers

Political Competition, Casual Relationships Between Taxes and Spending, and Their Influence on Government Size: Evidence From State-Level Data
Diane Lim Rogers and John H. Rogers
1995-500 (February 1995)

Abstract: Theories of fiscal illusion and political competition have different implications for (i) the causal relationships between taxes and spending, and (ii) government size. These are tested using data from u.s. states from 1950 to 1990. We find evidence that greater political competition generally encourages bigger government, the Democratic Party is associated with bigger government, and state governments which "tax first, spend later" are more likely to be large. Other factors related to the fiscal illusion and political competition theories also appear to be important determinants of government size.

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