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The Perils of Tax Smoothing

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  • Evan Tanner
  • Kevin Joseph Carey

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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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/207.

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Length: 32
Date of creation: 01 Nov 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/207

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Keywords: Taxes; Economic forecasting; Production; tax rates; fiscal policy; statistics; standard deviation; statistic; tax burden; expenditure ratio; fiscal sustainability; equation; fiscal authority; budget constraint; forecasting; functional form; primary expenditure; primary expenditure ratio; random walk; fiscal adjustments; public debt; probability; fiscal rules; taxation; fiscal adjustment; equations; standard deviations; tax collection; fiscal policy decisions; optimization; logarithm; fiscal regimes; tax base; fiscal variables; government spending; government budget; fiscal stabilizers; sustainable fiscal policy; quadratic form; fiscal solvency; government budget constraint; random walks; fiscal theory; government expenditures; tax revenue; time series; primary surplus ratio; fiscal regime; fiscal shocks; skewness; statistical term; fiscal sustainability analysis; fiscal debt; simulation results; fiscal stance;

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References

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Citations

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Cited by:
  1. Philippe D Karam & Doug Hostland, 2005. "Assessing Debt Sustainability in Emerging Market Economies Using Stochastic Simulation Methods," IMF Working Papers 05/226, International Monetary Fund.
  2. Carlos Garcia & Jorge Restrepo & Evan Tanner, 2007. "Designing fiscal rules for commodity exporters," ILADES-Georgetown University Working Papers inv199, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  3. Strawczynski, Michel & Zeira, Joseph, 2009. "Cyclicality of Fiscal Policy: Permanent and Transitory Shocks," CEPR Discussion Papers 7271, C.E.P.R. Discussion Papers.

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