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Tax Smoothing in a Financially Repressed Economy; Evidence from India

Author

Listed:
  • Paul Cashin
  • Nilss Olekalns
  • Ratna Sahay

Abstract

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.

Suggested Citation

  • Paul Cashin & Nilss Olekalns & Ratna Sahay, 1998. "Tax Smoothing in a Financially Repressed Economy; Evidence from India," IMF Working Papers 98/122, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:98/122
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    Cited by:

    1. Antra Bhatt & Claudio Sardoni, 2016. "Public Expenditure and Growth: The Indian Case," Working Papers 7/16, Sapienza University of Rome, DISS.
    2. Luo, Yulei & Nie, Jun & Young, Eric R., 2014. "Model uncertainty and intertemporal tax smoothing," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 289-314.
    3. Kannan, R & Singh, Bhupal, 2007. "Debt-deficit dynamics in India and macroeconomic effects: A structural approach," MPRA Paper 16480, University Library of Munich, Germany, revised 2007.
    4. Gerhard Reitschuler, 2011. "Optimal taxation and budget deficits: Evidence for the EU's New Member States," Economics Bulletin, AccessEcon, vol. 31(3), pages 2593-2602.
    5. Renu Kohli & Kenneth Kletzer, 2001. "Financial Repression and Exchange Rate Management in Developing Countries; Theory and Empirical Evidence for India," IMF Working Papers 01/103, International Monetary Fund.
    6. Cashin, P. & Haque, N. & Olekalns, N., 1999. "Spend Now, Pay Later? Tax Smoothing & Fiscal Sustainability in South Asia," Department of Economics - Working Papers Series 700, The University of Melbourne.
    7. Pastén, Roberto & Cover, James P., 2015. "Tax tilting and politics: Some theory and evidence for Latin America," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 208-218.
    8. 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.
    9. Angyridis, Constantine, 2009. "Balanced budget vs. Tax smoothing in a small open economy: A welfare comparison," Journal of Macroeconomics, Elsevier, vol. 31(3), pages 438-463, September.
    10. Johan Adler, 2006. "The Tax-smoothing Hypothesis: Evidence from Sweden, 1952-1999," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 81-95, March.
    11. Adler, Johan, 2003. "Has Sweden’s government budget policy been too discretionary? Evidence from a generalization of the tax smoothing hypothesis," Working Papers in Economics 89, University of Gothenburg, Department of Economics.

    More about this item

    Keywords

    Fiscal policy; India; Tax smoothing; financial repression; budget surplus; government expenditure; fiscal deficits; budget constraint;

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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