Tax smoothing hypothesis: A Turkish case

Author:

Turan Taner1,Karakas Mesut2,Yanikkaya Halit2

Affiliation:

1. Adana Science and Technology University, Department of International Trade and Finance, Adana, Turkey

2. Gebze Institute of Technology, Department of Economics, Turkey

Abstract

We tested the tax smoothing hypothesis for Turkey using annual data for the period of 1949-2010. Although our preliminary estimation results imply the existence of the weak form of tax smoothing for Turkey, further tests indicate the violation of exogeneity of permanent government spending, which is a requirement for the tax smoothing hypothesis to hold. Our causality tests indicate that permanent government spending is not exogenous due to the causality running from lagged tax rates to permanent government spending. Therefore, we conclude that our results provide evidence against the tax smoothing hypothesis. Our results are important because the existence of random-walk behavior of the tax rates alone or some preliminary regressions do not guarantee the existence of tax smoothing.

Publisher

National Library of Serbia

Subject

General Economics, Econometrics and Finance

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