TWO CENTURIES OF TAXES AND SPENDING: A CAUSAL INVESTIGATION OF THE FEDERAL BUDGET PROCESS

Abstract

Causal relations between U.S. federal taxation and expenditure are analyzed using an approach based on the invariance of econometric relationships in the face of structural inverventions. Institutional evidence for interventions or changes of regime and econometric tests for structural breaks are used to investigate the relative stability of conditional and marginal probability distributions for each variable. The patterns of stability are the products of the underlying causal order. In keeping with earlier work on the post-World War II period, we find that causal order is not constant in the nineteenth century, but the dominant direction is from taxes to spending.