LONG-RUN IMPACT OF TAX RATE CHANGES ON GOVERNMENT RECEIPTS

Taxes are believed to have adverse effects on economic activity, work effort, consumption, savings, and capital formation. Although higher m arginal tax rates are expected to yield an increase in government reve nues in the short run, their long-run effects are not as certain. in t he long run, the taxpayers alter their behavior to avoid paying more t axes. Using the unit root methodology the authors examine whether tax rate changes during the past half century had a permanent or temporary impact on various revenues collected by the federal and state and bea t governments as a percentage of gross domestic product (GDP) (revenue /GDP ratios). Our results show that past shacks to tax rates did not a lter the long-run levels of most federal revenue/GDP ratios. In the ca se of state and local governments, although permanent changes in the l evels of the ratios are indicated, the authors explain that this occur s only under some special circumstances.