Tax Smoothing in a Financially Repressed Economy

Tax Smoothing in a Financially Repressed Economy

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India has a long history of running fiscal deficits. Two broad considerations motivate a government to run a deficit: tax smoothing and tax tilting. This paper tests a version of Barroa€™s tax-smoothing model, using Indian data for the period 1951-52 to 1996-97. The empirical results indicate that the central government of India has tax-smoothed, while the regional governments of India have not. The paper also finds evidence of tax tilting, reflected in financial repression, which has led to the accumulation of excessive public liabilities.... a large share of public expenditure may be for the provision of public goods, which could enter agentsa#39; utility functions. ... to only have one source of utility, that being the minimization of distortions caused by a system of second-best taxation.

Title:Tax Smoothing in a Financially Repressed Economy
Author: Mr. Paul Cashin, Nilss Olekalns, Ms. Ratna Sahay
Publisher:International Monetary Fund - 1998-08-01

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