Tax-spend theories: An empirical analysis on the G-7 countries

In this study, the validity of tax-expenditure theories was investigated by using public revenues, tax revenues and public expenditure data for the 1965-2021 period in G-7 countries. During the literature review on tax-expenditure theories, it has been determined that sometimes public revenues and sometimes tax revenues are used as variables to represent the concept of income in the hypotheses established for the determination of the causality relationship. Although the majority of public revenues consist of taxes, these two concepts do not express the same macroeconomic magnitudes proportionally. Therefore, the variables used to represent income may affect the result and lead to the development of wrong policy recommendations. It is also important to reveal temporary and permanent causality relationships between the mentioned variables. Accordingly, tax-expenditure and income-expenditure hypotheses are tested by using time domain and frequency domain causality tests on the basis of G-7 countries. According to the results obtained from the study findings, the changes in macroeconomic variables and methodological methods in the analysis process differentiate the obtained findings.