Taxes, government spending and endogenous growth: A theoretical analysis with an empirical application to North Carolina

This study is designed to analyze the simultaneous effects of taxes and government spending on long-run economic growth.; A two-sector theoretical model in an endogenous growth framework is utilized to explain how government spending and taxes simultaneously affect long-run economic growth. The main theoretical innovations of this model are the inclusion of household durable goods and the comprehensive treatment of government. In contrast to the existing literature, the model includes both government expenditures and taxes. Expenditures are divided into several categories, and several types of taxes are included. One kind of government capital (roads) enters in the physical output sector. Another kind (schools) enters in the human capital accumulation sector. In addition, government operating expenditures for schools enter in the human capital accumulation sector. There are several taxes: personal income, corporate income, property, sales and gasoline taxes. The property tax is especially interesting because it is a major source of revenue for local government but has heretofore been ignored in the growth literature.; An extensive collection of county-level annual data from the state of North Carolina has been assembled to estimate the relationships between growth and fiscal variables emerging from the theoretical model. The estimation of the model with county-level data suggests that local fiscal variables have no effects on growth whereas statewide fiscal variables do. However these results are very sensitive to exclusion of any fiscal variable from the growth regression associated with omitted variables biases.