Kurniawan, Rudi (2011): Tax Smoothing: Tests on Indonesian Data. Published in: International Journal of Economics and Finance Studies , Vol. 3, No. 1 (2011)
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Abstract
This paper contributes to the literature of public debt management by testing for tax smoothing behaviour in Indonesia. Tax smoothing means that the government smooths the tax rate across all future time periods to minimize the distortionary costs of taxation over time for a given path of government spending. In a stochastic economy with an incomplete bond market, tax smoothing implies that the tax rate approximates a random walk and changes in the tax rate are nearly unpredictable. For that purpose, two tests were performed. First, random walk behaviour of the tax rate was examined by undertaking unit root tests. The null hypothesis of unit root cannot be rejected, indicating that the tax rate is nonstationary and, hence, it follows a random walk. Second, the predictability of the tax rate was examined by regressing changes in the tax rate on its own lagged values and also on lagged values of changes in the goverment expenditure ratio, and growth of real output. They are found to be not significant in predicting changes in the tax rate. Taken together, the present evidence seems to be consistent with the tax smoothing, therefore provides support to this theory.
Item Type: | MPRA Paper |
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Original Title: | Tax Smoothing: Tests on Indonesian Data |
English Title: | Tax Smoothing: Tests on Indonesian Data |
Language: | English |
Keywords: | Tax smoothing, Indonesia |
Subjects: | C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy |
Item ID: | 65884 |
Depositing User: | Rudi Kurniawan |
Date Deposited: | 02 Aug 2015 16:07 |
Last Modified: | 01 Oct 2019 17:31 |
References: | Barro, R. J. (1979). On the determination of the public debt, Journal of Political Economy 87(5): 940-971. Barro, R. J. (1981), On the predictability of tax-rate changes, NBER Working Paper 636; reprinted in Barro, R. (1990), Macroeconomic policy, Harvard University Press, Cambridge, MA. Ghosh, A. R. (1995), Intertemporal tax-smoothing and the government budget surplus: Canada and the United States, Journal of Money, Credit, and Banking 27, 1033—1045. Huang, C. H. and K. S. Lin (1993), Deficits, government expenditure, and tax smoothing in the United States: 1929 1998, Journal of Monetary Economics 31, 317—339. Kingston, G. H. and A. P. Layton (1986). Tax smoothing and Australian fiscal policy. Research paper (Macquarie University. School of Economic and FinancialStudies), no. 308. Sahasakul, C. (1986), The U.S. evidence on optimal taxation over time, Journal of Monetary Economics 18, 251 75. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/65884 |