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The Perils of Tax Smoothing: Sustainable Fiscal Policy with Random Shocks to Permanent Output

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Author Info
Evan Tanner () (International Monetary Fund)
Kevin Carey () (World Bank)
Abstract

If permanent output is uncertain, tax smoothing can be perilous: both debt levels and tax rates are difficult to stabilize and may drift upwards. One practical remedy would be to target the debt. However, our simulations confirm that such a policy would require undesirably volatile fiscal adjustments and may inhibit countercyclical borrowing. An alternative would be to link the primary surplus not only to the debt ratio (like tax smoothing) but also to its volatility, thus preempting further adjustments while gradually reducing the debt.

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File URL: http://journal.fsv.cuni.cz/mag/article/show/id/1146
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Publisher Info
Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 58 (2008)
Issue (Month): 11-12 (December)
Pages: 502-524
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Handle: RePEc:fau:fauart:v:58:y:2008:i:11-12:p:502-524

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Related research
Keywords: tax smoothing; sustainability; forecast error;

Find related papers by JEL classification:
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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This page was last updated on 2009-12-20.

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