Beyond Tax Smoothing

International evidence of tax smoothing in a panel of industrial countries

A panel of industrial countries is examined for evidence of `tax smoothing’. Tax smoothing results when governments minimize tax distortions over time. The model provides a positive theory of government debt and is due primarily to Barro. Unit root tests are performed in panel data to test the null hypothesis of nonstationary tax rates. Panel regressions are then undertaken to test the null hyp...

Model uncertainty and intertemporal tax smoothing

In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and the evolution of debt in the Barro tax-smoothing model (1979). We first study how the government spending shocks are absorbed in the short run by varying taxes or through debt under RB. Furthermore, we show that introducing RB improves the model’s predictions by generating (i) t...

The Tax Smoothing Impli ations of the Federal Debt Paydown

A teaching note on the tax benefits of retirement savings

Typical textbook treatments of tax-advantaged retirement savings plans focus on legalistic characteristics such as contribution limits and early withdrawal penalties. Popular press articles on these plans often present a myriad of details on the effects of inflation, rates of return, expected tax rates, ordinary income versus capital gains treatment, and other items that tend to obscure their f...

Inertia and Overwithholding: Explaining the Prevalence of Income Tax Refunds

Every year over three-quarters of US taxpayers receive income tax refunds, indicating tax prepayments above the level of tax liability. This amounts to a zero interest loan to the government and in some cases may hinder consumption smoothing. Previous studies have suggested two main explanations for this behavior: precautionary behavior in light of tax uncertainty and/or a forced savings motive...