Re-examining the Tax-spending Hypothesis in G7 Countries: Evidence from Time and Frequency Domain Causality Approaches

Burcu Balsever Erim and Hasim Akca

Politická ekonomie, 2025, vol. 2025, issue 3, 471-499

Abstract: In the literature, it is still thought that to combat budget deficits, the state struggles to adjust the relationship between government revenues and spending. Accordingly, the causality relationship between government revenues and spending is generally explained through four main hypotheses: tax-spending, spending-tax, fiscal synchronization and institutional separation hypotheses. In addition to the doubt that the first and the only step in the fight against the budget deficit is government revenues and government expenditures, there are various uncertainties in the studies on this subject in the literature. There is no consensus on the subject due to the differences in methodological methods in previous studies, the inability to determine the macroeconomic size used to represent the revenue variable and differences in the revenue composition of countries. This situation causes the findings obtained from empirical studies in this field to vary and misleading policy recommendations to be made. For this reason, in this study, the causality relationship between government revenues, tax and spending data in the G7 countries for the period 1965-2021 is examined within the framework of two different models, using both time domain and frequency domain causality tests. We draw attention to the effect of differences in methodological methods on the results obtained. The complex results obtained, in addition to shedding empirical light on the complexity arising from the methodological methods available in the literature, also show that it is not healthy to explain studies on combating budget deficits only with the causality relationship between government revenues and spending or tax and spending.

Keywords: Budget deficit; tax-spending hypothesis; time and frequency domain causality (search for similar items in EconPapers)
JEL-codes: H20 H50 H61 H62 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.18267/j.polek.1455

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