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

Author/Editor:

Evan C Tanner ; Kevin J Carey

Publication Date:

November 1, 2005

Electronic Access:

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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.

Series:

Working Paper No. 2005/207

Subject:

Expenditure Fiscal policy Public debt Tax arrears management Vector autoregression

English

Publication Date:

November 1, 2005

ISBN/ISSN:

9781451862263/1018-5941

Stock No:

WPIEA2005207

Pages:

32

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