RECONSIDERING THE EFFECTS OF FISCAL-POLICY ON PRIVATE-SECTOR BEHAVIOR- A UNIFYING VIEW OF NEUTRALITY

A careful analysis of the effects of fiscal policy must not only consi der both sides of the fiscal policy equation-taxes and the resulting g overnment spending-but must also specify the extent to which taxpayers use this equation in making decisions. This research develops a unify ing framework for both static and intertemporal settings with which to clarify and critique a wide range of theoretical models offiscal poli cy. For instance, the neutrality results obtained in the literatures o n voluntary contributions and Ricardian equivalence are shown to deriv e from the same implicit and perhaps questionable assumption: that the private sector knows that taxes paid will be returned in a form value d equally with the foregone income. And, if that assumption is correct , even more remarkable neutrality results can be established. More gen erally, what results from this examination is a much broader view of f iscal 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.