Tax smoothing hypothesis: A Turkish case

Taner Turan,Mesut Karakas,Halit Yanikkaya

doi:10.2298/pan1404487t

Taner Turan, Mesut Karakas + Show 1 more

Open Access

https://doi.org/10.2298/pan1404487t

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Abstract

We tested the tax smoothing hypothesis for Turkey using annual data for the period of 1949-2010. Although our preliminary estimation results imply the existence of the weak form of tax smoothing for Turkey, further tests indicate the violation of exogeneity of permanent government spending, which is a requirement for the tax smoothing hypothesis to hold. Our causality tests indicate that permanent government spending is not exogenous due to the causality running from lagged tax rates to permanent government spending. Therefore, we conclude that our results provide evidence against the tax smoothing hypothesis. Our results are important because the existence of random-walk behavior of the tax rates alone or some preliminary regressions do not guarantee the existence of tax smoothing.

Highlights

Because an assumption of the exogeneity of permanent government spending is violated due to the causality running from lagged tax rates to permanent government spending, we can conclude safely that our estimation results lend evidence against the tax smoothing hypothesis for Turkey
Because our results show that α1 is between -1 and zero, the weak form of tax smoothing hypothesis seems to hold for Turkey
Our paper examined whether the tax smoothing hypothesis holds for Turkey using a more direct testing method that is recently developed

Summary

Literature Review

A large number of studies have examined the tax smoothing hypothesis and have very diverse results. Lin (1993) examined the relationship between budget deficit and growth rates of national income and government expenditure and they applied vector autoregression to the US data covering the period of 1929-1988 They rejected the tax smoothing hypothesis for the full period. Fabiana Rocha (2001) applied vector autoregression to Brazilian data for the period between 1970 and 1994 His results lent evidence on the rejection of the tax smoothing hypothesis for the full sample. Because an assumption of the exogeneity of permanent government spending is violated due to the causality running from lagged tax rates to permanent government spending, we can conclude safely that our estimation results lend evidence against the tax smoothing hypothesis for Turkey

Methodology and Data

Empirical Results

Conclusion