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The experience of some OECD economies on tax smoothing

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  • Ananda Jayawickrama
  • Tilak Abeysinghe

Abstract

Observed random walk behaviour of a tax rate does not necessarily support the tax smoothing hypothesis though the latter implies the former. This article presents a direct test of tax smoothing by showing that if the tax smoothing hypothesis holds then the future tax rate should cointegrate with the current permanent government expenditure rate even though the tax rate is a random walk. This test is a direct and robust test of a number of ‘random walk models’ available in the literature. This procedure also enables us to differentiate among ‘strong tax smoothing’, ‘weak tax smoothing’ and ‘no-tax smoothing’, all of which are consistent with the random walk behaviour of a tax rate. Application of this test to Australia, Canada, Italy, Japan, the Netherlands, New Zealand, the UK and the US show evidence in support of weak forms of tax smoothing.

Suggested Citation

  • Ananda Jayawickrama & Tilak Abeysinghe, 2013. "The experience of some OECD economies on tax smoothing," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2305-2313, June.
  • Handle: RePEc:taf:applec:45:y:2013:i:16:p:2305-2313
    DOI: 10.1080/00036846.2012.663472
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    File URL: http://hdl.handle.net/10.1080/00036846.2012.663472
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    References listed on IDEAS

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    Cited by:

    1. Taner Turan & Mesut Karakas & Halit Yanikkaya, 2014. "Tax Smoothing Hypothesis: A Turkish Case," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(4), pages 487-501, September.
    2. Ihtsham Padda, 2014. "On minimizing the welfare cost of fiscal policy: evidence from South Asia," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(3), pages 1553-1572, May.

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