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Reconsidering the Effects of Fiscal Policy On Private Sector Behavior: a Unifying View of Neutrality

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  • Karen Smith Conway

    (University of New Hampshire)

Abstract

A careful analysis of the effects of fiscal policy must not only consider both sides of the fiscal policy equation—taxes and the resulting government spending—but must also specify the extent to which taxpayers use this equation in making decisions. This research develops a unifying framework for both static and intertemporal settings with which to clarify and critique a wide range of theoretical models offiscal policy. For instance, the neutrality results obtained in the literatures on voluntary contributions and Ricardian equivalence are shown to derive from the same implicit and perhaps questionable assumption: that the private sector knows that taxes paid will be returned in a form valued equally with the foregone income. And, if that assumption is correct, even more remarkable neutrality results can be established. More generally, what results from this examination is a much broader view of fiscal policy, a better understanding of when and why such policy will be neutral, and suggestions for ways to better explore empirically its effects on private sector behavior .

Suggested Citation

  • Karen Smith Conway, 1994. "Reconsidering the Effects of Fiscal Policy On Private Sector Behavior: a Unifying View of Neutrality," Public Finance Review, , vol. 22(2), pages 195-221, April.
    • Handle: RePEc:sae:pubfin:v:22:y:1994:i:2:p:195-221
    DOI: 10.1177/109114219402200203
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    References listed on IDEAS

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