Tax Smoothing Research Articles

Spend Now, Pay Later? Tax Smoothing and Fiscal Sustainability in South Asia

Spend Now, Pay Later? Tax Smoothing and Fiscal Sustainability in South Asia

Signaling Fiscal Regime Sustainability

This paper proposes a signaling model that offers a new perspective on why governments deviate from optimal tax smoothing and delay debt stabilization. In our model, dependable - but not fully credible - governments have an incentive to tighten the fiscal regime when the signaling effect on credit ratings is larger (that is, when a sufficiently large stock of debt has been accumulated). At this point, they may deviate from tax smoothing not to be mimicked by weak governments. The model predicts that primary balances and debt stocks are complementary inputs in the credit rating function as tests on Italian, Irish, Belgian, and Danish data show.

Public Debt Management and Bailouts

This paper addresses how public debt should be managed to reduce the cost of private sector bailouts. It uses a tax smoothing model to show that bailouts affect the timing of government deficits and surpluses as well as the composition of public debt. In general, public debt managers will have to monitor the private sector’s leverage and portfolio composition in order to design the tax smoothing policy. This contrasts with Ricardian models where households monitor the government’s debt. The moral hazard aspect of defaults is also shown to be important in determining an optimal government debt strategy.

Signaling Fiscal Regime Sustainability

This paper proposes a signaling model that offers a new perspective on why governments deviate from optimal tax smoothing and delay debt stabilization. In our model, dependable—but not fully credible—governments have an incentive to tighten the fiscal regime when the signaling effect on credit ratings is larger (that is, when a sufficiently large stock of debt has been accumulated). At this point, they may deviate from tax smoothing not to be mimicked by weak governments. The model predicts that primary balances and debt stocks are complementary inputs in the credit rating function as tests on Italian, Irish, Belgian, and Danish data show.

Seigniorage and tax smoothing in developing countries

This paper tests the extended tax‐smoothing model for a sample of 32 developing countries. Importantly, the testable implications employed relax the assumption of constant money velocity. Although seigniorage is an important source of revenue in developing countries, all the evidence indicates that the principles of optimal taxation have not been used when developing countries raise revenue from inflation.

The Optimal Public Debt Portfolios for Nine OECD Countries: A Tax Smoothing Approach

Within the context of currency and maturity choice, and indexation, this paper seeks to find the policy implications of a tax smoothing approach to public debt management. This objective is achieved in two ways. Firstly, the tax smoothing approach of Bohn (1990) is adapted to incorporate realistic constraints on public debt management. Secondly, this adapted methodology is applied to data on nine OECD countries. Results suggest that, for eight out of the nine countries, short-term domestic debt should be the dominant security issued and that tax smoothing can be further enhanced by the government purchasing, rather than issuing, some other securities. The paper provides a rationale for why the hedging benefits of short-term domestic currency debt dominate those of the other forms of debt considered.

Tax Smoothing in a Financially Repressed Economy: Evidence from India

India has a long history of running fiscal deficits. Two broad considerations motivate a government to run a deficit: tax smoothing and tax tilting. This paper tests a version of Barro`s tax-smoothing model, using Indian data for the period 1951-52 to 1996-97. The empirical results indicate that the central government of India has tax-smoothed, while the regional governments of India have not. The paper also finds evidence of tax tilting, reflected in financial repression, which has led to the accumulation of excessive public liabilities.

Tax Smoothing in a Financially Repressed Economy: Evidence From India

India has a long history of running fiscal deficits. Two broad considerations motivate a government to run a deficit: tax smoothing and tax tilting. This paper tests a version of Barro’s tax-smoothing model, using Indian data for the period 1951-52 to 1996-97. The empirical results indicate that the central government of India has tax-smoothed, while the regional governments of India have not. The paper also finds evidence of tax tilting, reflected in financial repression, which has led to the accumulation of excessive public liabilities.

Increasing Dependency Ratios, Pensions, and Tax Smoothing

The implication of increasing dependency ratios for pay-as-you-go, defined-benefit pension programs are examined. Modifications aimed at smoothing contributions while maintaining benefits intact are analyzed for both open and closed economies.

Increasing Dependency Ratios, Pensions, and Tax Smoothing

The implication of increasing dependency ratios for pay-as-you-go, defined-benefit pension programs are examined. Modifications aimed at smoothing contributions while maintaining benefits intact are analyzed for both open and closed economies.

Australian Evidence on Tax Smoothing and the Optimal Budget Surplus*

This paper tests a version of Barro's tax smoothing hypothesis using Australian data for the period 1964*65 to 1994/95. The model assumes intertemporal optimization by a government seeking to minimize the distortionary effects of tax collection. The model predicts that the budget surplus is stationary, even if government expenditure and tax collections are nonstationary. In addition, the surplus should be a linear function of expected future changes to government expenditure. The results indicate that Australian fiscal policy has been too volatile to be consistent with optimal tax smoothing.

Does Tax Smoothing Differ by the Level of Government? Time Series Evidence from Canada and the United States

The tax smoothing theory is examined for Canada and the United States. A distinction is made between federal and local levels of government. Mobility of taxable resources at the state and local levels may constrain the ability of these governments to smooth tax rates. Testing is undertaken in the frequency domain to see if the cumulated periodogram of the first differenced tax rate series differs from white noise. Testing is undertaken with and without correction for time averaging. Results generally support tax smoothing by both federal governments and the Canadian provinces. Tax smoothing is rejected for state and local governments.

The role of tax bases and collections costs in the determination of income tax rates, seigniorage and inflation

A growing theoretical literature on optimal taxation predicts that governments will set the tax rates on money holdings and on more traditional tax bases to minimize the deadweight losses of collecting government revenue. Under the presumption that relative collection costs and tax bases have not changed significantly over time, the empirical time-series seigniorage literature has focused on the theory's tax smoothing implication, finding only weak support. We show that changes in collections costs and tax bases played an important role in the determination of tax composition and find stronger support for tax smoothing when this is taken into account.

Seigniorage and tax smoothing: Testing the extended tax-smoothing model

This paper tests the extended tax-smoothing model for 12 industrialized countries. A key feature of the version of the model utilized here is that velocity is modeled as a non-stationary process, and not as a constant. The evidence is not only that velocity is non-stationary in all 12 countries. but also that, when this is allowed for, the testable implications of the theory are rejected. It seems that tax-smoothing considerations have not been significant elements in determining the behavior of seigniorage in these countries.

Government finance and endogenous growth

A crucial assumption for the solution of the endogenous growth model with government intervention is a balanced budget along the perpetual steady state. This assumption is unreal once we are interested to test the model using government data, given that in most countries the budget is not balanced. In this letter we adopt the well–known rule of ‘tax smoothing’ in order to make this assumption a realistic one. According to our approach the relevant variable for the implementation of a balanced budget is permanent government expenses. The empirical performance of the model is characterized using Israeli data.

Endogenous tax determination and the distribution of wealth

In this paper a dynamic model is constructed in which labor and capital taxes are determined endogenously through majority voting. The wealth distribution of the economy is shown to influence the voting behavior and hence the equilibrium levels of the tax rates, which in turn affect the future distribution of wealth. It is shown that the economy exhibits a unique dynamic behavior. Because the tax rates are endogenously determined, asset prices, wealth distribution, and the tax rates can display persistent fluctuations or cycles in reaction to exogenous disturbances, or even due to initial conditions. “Tax smoothing” does not necessarily appear to arise naturally in such an environment. The features in the model that can produce these fluctuations are studied in detail.

Are State and Provincial Governments Tax Smoothing? Evidence from Panel Data

The theory of debt examined here is known variously as taxation over time, optimal taxation over time, the equilibrium approach to fiscal policy, or smoothing. Tax smoothing results when an efficient government fixes tax rates today to minimize the costs of taxation over time. Given the long-run constraint of a balanced budget, if the marginal costs of taxation are an increasing function of the amount of resources taxed (i.e., the rate), then minimization of the total costs of taxation implies that the planned tax rate will be constant over time. Tax rate changes will be unpredictable and the tax rate will behave as a random walk. Efficient governments will not adjust tax rates to accommodate temporary changes in expenditures and revenues. Instead, governments will minimize tax rate changes by smoothing. Smoothing tax rates implies that temporary changes in government spending and output result in deficits and surpluses. Therefore, tax smoothing provides a theory of government The model is primarily due to Barro [1]. The goal of this paper is to contribute to our understanding of government The focus of this paper is on and provincial debt, or what is generally referred to as state and local debt. Nearly every government in the United States has a balanced budget rule. However, balanced budget rules are not sufficient to rule out tax smoothing, as governments could build up budget surpluses in good times to smooth budgets over the business cycle. If governments are smoothing tax rates, then their budget surpluses are endogenous. Contrary to the governments, provincial governments in Canada have no balanced budget rules. If provincial governments are smoothing tax rates, it could explain the behavior of their budget deficits and surpluses. As shown by Barro, tax smoothing implies that the (overall) tax rate behaves as a random walk and the tax rate would be a nonstationary time series with a unit root. This study examines the tax smoothing hypothesis in two ways. First, the random walk implication is examined directly by testing the null hypothesis that the tax rate time series has a unit root. Second, if the tax rate behaves as a random walk, then changes in the tax rate should be unpredictable from past information. If past information can predict tax rate changes, this would provide evidence in favor of an alternative hypothesis. A rejection of tax smoothing suggests that and provincial tax rates respond to current

Influences on Deficit Spending in Industrialized Democracies

ABSTRACTSince 1945, there has been substantial variation among the OECD countries and within them over time in central-government deficits. This paper surveys and assesses the literature on deficit spending in these industrialized democracies, emphasizing positive theories and the empirical support, or lack thereof, for each of them. We begin by considering the degree to which theories about the size of government and empirical tests of these theories about the level of overall government spending can explain deficits. We then survey theories pertaining to the political economy of fiscal deficits per se, including the ‘tax smoothing’ hypothesis, the neo-Keynesian countercyclical hypothesis, the public choice perspective, the ‘left-right ideology’ hypothesis, Roubini and Sachs' (1989) ‘strength of government’ hypothesis, and the importance of divided government in non-parliamentary systems.

The Political Economy of Budget Deficits

This paper provides a critical survey of the literature on politico-institutional determinants of the government budget. We organize our discussion around two questions: Why did certain OECD countries, but not others, accumulate large public debts? Why did these imbalances appear in the last twenty years rather than sooner? We begin by discussing the tax smoothing model and conclude that this approach alone cannot provide complete answers to these questions. We then proceed to a discussion of political economy models, which we organize into six groups: (1) models based upon opportunistic policy makers and naive voters with fiscal illusion; (2) models of intergenerational redistributions; (3) models of debt as a strategic variable, linking the current government with the next one; (4) models of coalition governments; (5) models of geographically dispersed interests; and (6) models emphasizing the effects of budgetary institutions. We conclude by briefly discussing policy implications.

The Political Economy of Budget Deficits

This paper provides a critical survey of the literature on politico-institutional determinants of the government budget. We organize our discussion around two questions: Why did certain OECD countries, but not others, accumulate large public debts? Why did these fiscal imbalances appear in the last 20 years rather than before? We begin by discussing the “tax smoothing” model and conclude that this approach alone cannot provide complete answers to these questions. We will then proceed to a discussion of political economy models, which we organize in six groups: (i) models based upon opportunistic policymakers and naive voters with “fiscal illusion;” (ii) models of intergenerational redistributions; (iii) models of debt as a strategic variable, linking the current government with the next one; (iv) models of coalition governments; (v) models of geographically dispersed interests; and (vi) models emphasizing the effects of budgetary institutions. We conclude by briefly discussing policy implications.