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

32 Pages Posted: 3 Mar 2006

See all articles by Evan Tanner

Evan Tanner

International Monetary Fund (IMF) - Research Department

Kevin Carey

World Bank Institute

Date Written: November 2005

Abstract

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.

Keywords: Tax smoothing, sustainability, and forecast error

JEL Classification: D61, E61, E62

Suggested Citation

Tanner, Evan C. and Carey, Kevin, The Perils of Tax Smoothing: Sustainable Fiscal Policy with Random Shocks to Permanent Output (November 2005). IMF Working Paper No. 05/207, Available at SSRN: https://ssrn.com/abstract=888076

Evan C. Tanner (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Kevin Carey

World Bank Institute ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
135
Abstract Views
2,000
Rank
423,555
PlumX Metrics