BUDGET BALANCE THROUGH SPENDING CUTS OR TAX ADJUSTMENTS?
Ali F. Darrat
This article explores the causal (lead/lag) relation between government spending and taxation in two developing countries (Lebanon and Tunisia). Both countries have suffered from large budget deficit and/or national debt problems, particularly since the early 1990s. Empirical results deduced from a battery of tests suggest that decisions to spend and tax are significantly interdependent in both countries. Moreover, the evidence is consistent with the notion that raising taxes (working primarily through aroused public awareness) provokes spending cuts. Thus, higher taxes seem an optimal resolution to the deficit predicament in both countries. Copyright 2002 Western Economic Association International.
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