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Government spending and economic activity: Regression discontinuity evidence from voting on renewals of tax levies

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  • David M. Brasington
  • Marios Zachariadis

Abstract

We estimate the impact of plausibly exogenous changes in taxes and government spending on income by utilizing regional data and a regression discontinuity design. More specifically, we identify an exogenous cut in local taxes accompanied by an equivalent reduction in local government spending by exploiting voting on renewals of tax levies of local governments in Ohio from 1991 to 2018, using a unique database that tracks city and village-level incomes and local election outcomes over time for the complete census of cities and villages in the state. We find that such “balanced budget†reductions in taxes and spending cause a large drop in local incomes that persists for two or three years before petering out. Importantly, this effect of local tax-financed government spending is present in locations with above average income inequality but not in those with low income inequality. Our results regarding the effect of locally tax-financed government spending on income are suggestive of the importance of mechanisms related to the prevalence of income heterogeneity and liquidity constrained agents in the local economy.

Suggested Citation

  • David M. Brasington & Marios Zachariadis, 2021. "Government spending and economic activity: Regression discontinuity evidence from voting on renewals of tax levies," University of Cyprus Working Papers in Economics 06-2021, University of Cyprus Department of Economics, revised 06 Dec 2020.
    • Handle: RePEc:ucy:cypeua:06-2021
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    More about this item

    Keywords

    Fiscal policy; balanced budget; redistribution; inequality;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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