Year of Publication

2016

Degree Name

Doctor of Philosophy (PhD)

Document Type

Doctoral Dissertation

College

Graduate School

Department

Public Policy and Administration

First Advisor

Dr. Eugenia F. Toma

Abstract

This dissertation seeks to make significant progress in the quantitative study of public revenue diversification. In the past, this phenomenon has been studied in various and disparate contexts, using a variety of empirical methods. In particular, two different hypotheses, from different subfields of public finance, have been advanced. One of these perspectives, coming from political economy, holds that revenue diversification is a tool for opportunistic policymakers to artificially expand public revenues (and thus expenditures) for electoral gain. The other, from a public financial management tradition, holds that revenue diversification is a constructive management tool which facilitates greater revenue stability for the sake of more efficient and effective budgeting processes.

Utilizing a deep panel of public revenue data from the U.S. states, this dissertation seeks to offer contextualization and explanation of divergent results in the extant literature. Three different empirical issues are specifically addressed, in each of the major substantive chapters: inconsistency in the measurement of revenue diversity, under-consideration of endogeneity in the existent models of diversification, and the underlying revenue volatility inherent to the reliance on particular revenue mechanisms. The results of this dissertation suggest that the existing theoretical expectations (and their resultant empirical results) are substantially oversimplified, and do not adequately address the empirical advanced propositions within.

While each chapter reaches its own individual conclusion in response to the limitations of the existent literature, the main takeaway from the dissertation is that the starting point for revenue diversification must be considered. Diversifying from an instable status quo to a more stable mix of revenues would logically result in a more stable revenue stream. But if the governmental entity is diversifying away from a reliance on stable tax and revenue instruments, as seems to be the case with most U.S. states, diversification is likely to lead to increased volatility. This is the opposite result predicted by most of the existent literature, but is empirically verified here, with substantial rigor.

A large part of the problem seems to be the inconsistency and incompleteness of the standard measure of revenue diversity (a Herfindahl-Hirschman Index of concentration). This dissertation offers pointed suggestions of how this measurement could be amended, reconsidered, and alternately employed in the future. However, the major theoretical and empirical contribution is that revenue diversity must be considered as part of a full revenue system, and that isolating it as only part of said yields results which cannot be fully trusted. Expecting such endogeneity, the simultaneously derived results are often the very opposite of theoretical expectations.

Most importantly, the results of the revenue-complexity hypothesis are subverted, offering an alternative explanation by which revenue diversification is a rational response to the external demand for greater government spending. Additionally, while there is evidence that policymakers respond to greater volatility by diversifying the revenue stream, it appears that this diversification does not lead to greater revenue stability at the state level.

Digital Object Identifier (DOI)

https://doi.org/10.13023/ETD.2016.519

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