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The Relationship between Tax Revenues and Government Expenditures in European Union and Non-European Union OECD Countries

Listed author(s):
  • Oluwole Owoye

    (Western Connecticut State University, Danbury, CT, USA,

  • Olugbenga A. Onafowora

    (Susquehanna University, Selinsgrove, PA, USA)

Registered author(s):

    This article examines the causal relationship between tax revenues and government expenditures in twenty-two OECD countries, eleven European Union (EU) member states, and eleven non-EU. We use the Autorgressive Distributed Lag (ARDL) bounds test and the Toda-Yamamoto Granger noncausality approach to test for causality. The results show that the long-run and short-run causal patterns differ across these groups within the Organisation for Economic Co-operation and Development (OECD). For the long-run causal patterns, we find evidence to confirm the tax-and-spend hypothesis in eight of the twenty-two countries; but the evidence is more prevalent within the EU countries, where tax burdens are much higher, than in the non-EU OECD countries. In addition, the long-run causality results also confirm the institutional separation hypothesis in twelve countries, with two-thirds coming from the non-EU OECD countries. While we have no evidence to support the fiscal synchronization hypothesis in the long run, the short-run results show evidence of fiscal synchronization in five out of twenty-two countries.

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    Article provided by in its journal Public Finance Review.

    Volume (Year): 39 (2011)
    Issue (Month): 3 (May)
    Pages: 429-461

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    Handle: RePEc:sae:pubfin:v:39:y:2011:i:3:p:429-461
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