The Perils of Tax Smoothing: Sustainable Fiscal Policy with Random Shocks to Permanent Output

November 1, 2005

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Evan C Tanner, and Kevin J Carey. The Perils of Tax Smoothing: Sustainable Fiscal Policy with Random Shocks to Permanent Output, (USA: International Monetary Fund, 2005) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Expenditure, Fiscal policy, Public debt, Tax arrears management, Vector autoregression

Keywords: Debt ratio, Objective function, Standard deviation, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/207
Stock No:

WPIEA2005207
ISBN:

9781451862263
ISSN:

1018-5941

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