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Beyond Tax Smoothing


Peter Berck


University of California, Berkeley - Department of Agricultural & Resource Economics

Jonathan Lipow


Government of the United States of America - Defense Resources Management Institute
March 9, 2011


Abstract:     
Analyses of optimal government capital structure generally follow Bohn (1990) and Barro (1995) in assuming risk neutrality or an exogenous risk premium. These analyses usually conclude that the optimal government capital structure stabilizes tax rates over time and states of nature to the greatest extent possible, something known as "tax smoothing." In this paper, we show that when an endogenous risk premium is introduced, the optimal government capital structure will no longer smooth tax rates. Under likely conditions, the optimal structure requires a larger short position in risky assets than that implied by tax smoothing.

Number of Pages in PDF File: 17

Keywords: tax smoothing, capital structure

JEL Classification: H63, H21, E63

working papers series


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Date posted: March 9, 2011  

Suggested Citation

Berck, Peter and Lipow, Jonathan, Beyond Tax Smoothing (March 9, 2011). Available at SSRN: http://ssrn.com/abstract=1782142 or http://dx.doi.org/10.2139/ssrn.1782142

Contact Information

Peter Berck (Contact Author)
University of California, Berkeley - Department of Agricultural & Resource Economics ( email )
Berkeley, CA 94720
United States
Jonathan Lipow
Government of the United States of America - Defense Resources Management Institute ( email )
United States
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