A careful analysis of the effects of fiscal policy must not only consider both sides of
the fiscal policy equation—taxes and the resulting government spending—but must
also specify the extent to which taxpayers use this equation in making decisions.
This research develops a unifying framework for both static and intertemporal
settings with which to clarify and critique a wide range of theoretical models offiscal
policy. For instance, the neutrality results obtained in the literatures on voluntary
contributions and Ricardian equivalence are shown to derive from the same implicit
and perhaps questionable assumption: that the private sector knows that taxes paid
will be returned in a form valued equally with the foregone income. And, if that
assumption is correct, even more remarkable neutrality results can be established.
More generally, what results from this examination is a much broader view of fiscal
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 .
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