ECONOMIC-STRUCTURE AND TAX DIVERSIFICATION

This study examines the potential economic structural impacts on the f ormation of a country's effective tax system. The fundamental theme of this paper is that a change in a country's economic structure may alt er the nature of the constraints on the government's ability to use di fferent tax instruments. The diversification of taxation is taken as t he joint result of endogenous government choices and exogenous economi c structural constraints. A behavioral model of government taxation is specified and tested, treating governments as loss minimizers in choo sing different taxes to finance public expenditure. Estimable equation s which relate effective tax rates to the structure of an economy are derived. The actual empirical tests examine the historical experience of the United States and Taiwan. The results suggest that government o bjective matters in forming the effective structure of a tax system. I t is also found that the economic structure-tax structure relationship s are more apparent for Taiwan than for the United States. Various poo ling tests are further conducted and the findings show clear inter-tax as well as inter-country diversities in the patterns Of economic stru ctural impacts on taxation.