A general theory of tax-smoothing

Anastasios Karantounias

No 2444, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: This paper extends the dynamic theory of optimal fiscal policy with a representative agent in several environments by using a generalized version of recursive preferences. I allow markets to be complete or incomplete and study optimal policy under commitment or discretion. The resulting theories are interpreted through the excess burden of taxation, a multiplier, whose evolution gives rise to different notions of “tax-smoothing.” Variants of a law of motion in terms of the inverse excess burden emerge when we allow for richer asset pricing implications through recursive preferences. I highlight a common unifying principle of taxation and debt issuance in all environments that revolves around interest rate manipulation: issue new debt and tax more in the future if this can lead to lower interest rates today.

Keywords: Excess burden; tax smoothing; recursive utility; commitment; discretion; statecontingent debt; incomplete markets; martingale; fiscal hedging (search for similar items in EconPapers)
JEL-codes: D80 E62 H21 H63 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2024-12
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-upt
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Working Paper: A general theory of tax-smoothing (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:2444

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