Causality Between Taxes and Expenditures in the U.S.: A Multivariate Approach

Applying Hsiao's version of the Granger causality method, this paper reexamines the causality between nominal expenditures and revenues in the United States for the 1946-96 period in a multivariate framework. Both the Engle-Granger two-step and Johansen canonical cointegration tests are performed. This study finds that taxes, spending, and GDP are cointegrated. While this study detects no evidence of causality between revenues and expenditures, it is found that income causes both revenues and expenditures in the Granger sense in the United States.