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A Test of the Theory of Optimal Taxation for the United States, 1869-1989


  • Hess, Gregory D


A popular theory of optimal tax policies suggests that tax rates should follow a random walk. This paper extends the existing empirical literature in three ways. First, the impact on the marginal utility of consumption when the government chooses a tax plan to smooth the distorting impact of taxes is considered. Second, exogenous changes in the real rate of interest are incorporated into the government's optimal tax plan. Finally, the tax elasticity of output is not constant over time. Allowing for these changes, there is evidence that the government discounts the future, attempts to smooth the distorting impact of taxes on the marginal utility of consumption, and that the tax elasticity of output moves predictably during wars. Copyright 1993 by MIT Press.

Suggested Citation

  • Hess, Gregory D, 1993. "A Test of the Theory of Optimal Taxation for the United States, 1869-1989," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 712-716, November.
  • Handle: RePEc:tpr:restat:v:75:y:1993:i:4:p:712-16

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    References listed on IDEAS

    1. Patrick Kline & Melissa Tartari, 2016. "Bounding the Labor Supply Responses to a Randomized Welfare Experiment: A Revealed Preference Approach," American Economic Review, American Economic Association, vol. 106(4), pages 972-1014, April.
    2. Oliver Linton & Esfandiar Maasoumi & Yoon-Jae Whang, 2005. "Consistent Testing for Stochastic Dominance under General Sampling Schemes," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 735-765.
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    5. James J. Heckman & Jeffrey Smith & Nancy Clements, 1997. "Making The Most Out Of Programme Evaluations and Social Experiments: Accounting For Heterogeneity in Programme Impacts," Review of Economic Studies, Oxford University Press, vol. 64(4), pages 487-535.
    6. Sergio Firpo & Nicole M. Fortin & Thomas Lemieux, 2009. "Unconditional Quantile Regressions," Econometrica, Econometric Society, vol. 77(3), pages 953-973, May.
    7. Anderson, Michael L., 2008. "Multiple Inference and Gender Differences in the Effects of Early Intervention: A Reevaluation of the Abecedarian, Perry Preschool, and Early Training Projects," Journal of the American Statistical Association, American Statistical Association, vol. 103(484), pages 1481-1495.
    8. Dehejia, Rajeev H., 2005. "Program evaluation as a decision problem," Journal of Econometrics, Elsevier, vol. 125(1-2), pages 141-173.
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    Cited by:

    1. James M. Nason & Shaun P. Vahey, 2009. "U.K. World War I and interwar data for business cycle and growth analysis," FRB Atlanta Working Paper 2009-18, Federal Reserve Bank of Atlanta.
    2. Antje Berndt & Hanno Lustig & Şevin Yeltekin, 2012. "How Does the US Government Finance Fiscal Shocks?," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 69-104, January.
    3. Maria Cornachione Kula, 2004. "U.S. States, the Medicaid Program, and Tax Smoothing," Southern Economic Journal, Southern Economic Association, vol. 70(3), pages 490-511, January.

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