Taxing and spending in the long view: the causal structure of US fiscal policy, 1791-1913

Causal relations between US federal taxation and expenditureare analyzed using an approach based on the invariance of econometricrelationships in the face of structural interventions. Institutionalevidence for interventions or changes of regime and econometrictests for structural breaks are used to investigate the relativestability of conditional and marginal probability distributionsfor each variable. The patterns of stability are the productsof the underlying causal order. Consistent with earlier workon the post World War II period, we find that dominant causaldirection (with only a short-lived reversal) runs from taxesto spending in the period before World War I.