TY  - JOUR
AU  - Talvi,Ernesto
AU  - Vegh,Carlos A.
TI  - Tax Base Variability and Procyclical Fiscal Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7499
PY  - 2000
Y2  - January 2000
UR  - http://www.nber.org/papers/w7499
L1  - http://www.nber.org/papers/w7499.pdf
N1  - Author contact info:
Ernesto Talvi

Carlos A. Vegh
Department of Economics
Tydings Hall, Office 4118G
University of Maryland
College Park, MD 20742-7211
Tel: 301-405-3546
Fax: 301-405-3542
E-Mail: vegh@econ.bsos.umd.edu
AB  - Based on a sample of 56 countries, we find that while fiscal policy in the G-7 countries appears to be broadly consistent with Barro's tax smoothing proposition, in developing countries government spending and taxes are highly procyclical (i.e., government spending rises and taxes fall during expansions, while the reverse is true in recessions).  To explain this puzzle, we develop an optimal fiscal policy model in which running budget surpluses is costly because they create pressures to increase public spending.  Given this distortion, a government that faces large (and perfectly anticipated) fluctuations in the tax base will find it optimal to run a procyclical fiscal policy.  We argue that the differences in fiscal policy between the G-7 countries and developing countries can be traced back to the fact that the tax base is much more volatile in developing countries than in the G-7 countries.
ER  -