A note on testing for tax-smoothing in general equilibrium

Abstract

Barro’s original partial equilibrium tax-smoothing model has generated a tremendous amount of empirical interest over the last several decades. However, to date, there has been no formal empirical testing of the more recent general equilibrium renditions of this model. Therefore, the purpose of this paper is to construct, and directly test, a general equilibrium model of optimal growth and endogenous fiscal policy in which policymakers find it optimal to keep the tax rate constant over time. In contrast to most of the evidence from partial equilibrium models, we find that data from 26 OECD economies uniformly reject the taxsmoothing hypothesis over the period 1960-1996.