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On the Predictability of Tax-Rate Changes

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  • Robert J. Barro

Abstract

Some previous analyses have suggested that the smoothing of tax rates over time would be a desirable guide for public debt management. One implication of this viewpoint is that future changes in tax rates would be unpredictable based on current information. This proposition is tested by examining the behavior of U.S. federal and total government tax (and "non-tax")receipts relative to GNP. The sample for the federal government goes back to1879, while that for total government starts in 1929. Some econometric problems with using time-averaged data are discussed. The main empirical results accord with the theoretical analysis -- in particular, there is first, little indication of drift in the tax rates; second, insignificant relations of tax-rate changes to the own history of changes; and third, little explanatory value for tax-rate changes from a vector of lagged variables, which include the behavior of government spending and real output. If the findings are sustained, they imply that the existing IJ.S. time series data do not isolate periods in which current overall tax rates would be perceived as high or low relative to expected future rates. Accordingly, it may be impossible to use these data to evaluate policies that entail intertemporal manipulation of aggregate tax rates.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0636.

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Date of creation: Feb 1981
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Publication status: published as Barro, Robert J. (ed.) Macroeconomic policy. Cambridge, MA and London: Harvard University Press, 1990.
Handle: RePEc:nbr:nberwo:0636

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  1. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, American Finance Association, vol. 25(2), pages 383-417, May.
  2. Sandmo, Agnar, 1974. "A Note on the Structure of Optimal Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 64(4), pages 701-06, September.
  3. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 971-87, December.
  4. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  5. Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(3), pages 598-606, May/June.
  6. Sadka, Efraim, 1977. "A theorem on uniform taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 7(3), pages 387-391, June.
  7. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  8. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
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Cited by:
  1. Marco Battaglini & Stephen Coate, 2008. "Fiscal Policy over the Real Business Cycle: A Positive Theory," NBER Working Papers 14047, National Bureau of Economic Research, Inc.
  2. Raffaella Basile & Bruno Chiarini & Elisabetta Marzano, 2011. "Can we Rely upon Fiscal Policy Estimates in Countries with Unreported Production of 15 Per Cent (or more) of GDP?," CESifo Working Paper Series 3521, CESifo Group Munich.
  3. Ananda Jayawickrama & Tilak Abeysinghe, 2013. "The experience of some OECD economies on tax smoothing," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 45(16), pages 2305-2313, June.
  4. Escanciano, J. Carlos & Velasco, Carlos, 2006. "Generalized spectral tests for the martingale difference hypothesis," Journal of Econometrics, Elsevier, Elsevier, vol. 134(1), pages 151-185, September.
  5. Huang, Chao-Hsi & Lin, Kenneth S., 1993. "Deficits, government expenditures, and tax smoothing in the United States: 1929-1988," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(3), pages 317-339, June.
  6. S. Brock Blomberg & Gregory D. Hess, 2001. "Is the Political Business Cycle for Real?," CESifo Working Paper Series 415, CESifo Group Munich.
  7. Tilak Abeysinghe & Ananda Jayawickrama, 2007. "Singapore’s Recurrent Budget Surplus The Role of Conservative Growth Forecasts," SCAPE Policy Research Working Paper Series 0704, National University of Singapore, Department of Economics, SCAPE.
  8. Durlauf, Steven N., 1991. "Spectral based testing of the martingale hypothesis," Journal of Econometrics, Elsevier, Elsevier, vol. 50(3), pages 355-376, December.
  9. Cashin, Paul & Ul Haque, Nadeem & Olekalns, Nilss, 2003. "Tax smoothing, tax tilting and fiscal sustainability in Pakistan," Economic Modelling, Elsevier, Elsevier, vol. 20(1), pages 47-67, January.
  10. Mark Strazicich, 2002. "International evidence of tax smoothing in a panel of industrial countries," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 34(18), pages 2325-2331.
  11. Willem H. Buiter, 1983. "The Theory of Optimum Deficits and Debt," NBER Working Papers 1232, National Bureau of Economic Research, Inc.

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