Beyond Tax Smoothing

Berck, Peter; Lipow, Jonathan

doi:10.2139/ssrn.1782142

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Beyond Tax Smoothing

17 Pages Posted: 9 Mar 2011

See all articles by Peter Berck

Peter Berck

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

Jonathan Lipow

Government of the United States of America - Defense Resources Management Institute

Date Written: 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.

Keywords: tax smoothing, capital structure

JEL Classification: H63, H21, E63

Suggested Citation: Suggested Citation

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