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Model Uncertainty and Intertemporal Tax Smoothing

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  • Luo, Yulei
  • Nie, Jun
  • Young, Eric

Abstract

In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and the evolution of debt in the Barro tax-smoothing model (1979). We first study how the government spending shocks are absorbed in the short run by varying taxes or through debt under RB. Furthermore, we show that introducing RB improves the model's predictions by generating (i) the observed relative volatility of the changes in tax rates to government spending, (ii) the observed comovement between government deficits and spending, and (iii) more consistent behavior of government budget deficits in the US economy.

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  • Luo, Yulei & Nie, Jun & Young, Eric, 2014. "Model Uncertainty and Intertemporal Tax Smoothing," MPRA Paper 54268, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:54268
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    Cited by:

    1. Young, Eric R., 2012. "Robust policymaking in the face of sudden stops," Journal of Monetary Economics, Elsevier, vol. 59(5), pages 512-527.
    2. Lin, Qian & Sun, Xianming & Zhou, Chao, 2020. "Horizon-unbiased investment with ambiguity," Journal of Economic Dynamics and Control, Elsevier, vol. 114(C).
    3. Yulei Luo & Jun Nie & Eric R. Young, 2012. "Model uncertainty, state uncertainty, and state-space models," Research Working Paper RWP 12-02, Federal Reserve Bank of Kansas City.
    4. Yingjie Niu & Jinqiang Yang & Siqi Zhao, 2022. "Robust stimulus of private investment: Tax rate cut or investment subsidy?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(3), pages 339-357, September.
    5. Christopher Ball & John Creedy & Grant Scobie, 2018. "The Timing of Income Tax Changes in the Face of Projected Debt Increases," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(2), pages 191-210, June.
    6. Anastasios G. Karantounias, 2020. "Doubts about the Model and Optimal Policy," FRB Atlanta Working Paper 2020-12, Federal Reserve Bank of Atlanta.
    7. Heer, Burkhard & Scharrer, Christian, 2018. "The age-specific burdens of short-run fluctuations in government spending," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 45-75.
    8. Qian Lin & Xianming Sun & Chao Zhou, 2019. "Horizon-unbiased Investment with Ambiguity," Papers 1904.09379, arXiv.org.

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    More about this item

    Keywords

    Robustness; Model Uncertainty; Taxation Smoothing;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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