An Empirical Analysis of Tax Smoothing Hypothesis for Turkey.

Taxes lead a deadweight loss and this deadweight loss increases with the tax rate. The main objective of the government should be deciding the tax rate which minimizes the deadweight loss. The planned tax rate is constant or the expected tax rate is the same as the current tax rate. The 'random walk test' of the tax smoothing hypothesis comes out by the fact that changes in the tax rate should be unpredictable. In other words, tax smoothing hypothesis implies that a tax rate has random walk behavior, but this behavior is not sufficient condition for tax smoothing. In this paper, a direct test of tax smoothing is presented; if future tax rate is cointegrate with the current permanent government expenditure rate, the tax smoothing hypothesis holds. By using this test, it is possible to differentiate among 'strong tax smoothing', 'weak tax smoothing' and 'no-tax smoothing'. Application of this test to Turkey shows evidence in support of weak form of tax smoothing. [ABSTRACT FROM AUTHOR]