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WP-01/24: Optimal public deficit and tax-smoothing in the Spanish economy,1850-2022

Emilio Congregado, Vicente Esteve y María A. Prats

ABSTRACT

Abstract In this paper, we provide a formal test of Barro´s tax-smoothing model, using Spanish data covering the period 1850-2022. First, we found that the tax-tilting component has been very important for the Spanish government and is a symptom of the existence of a public deficit bias that has existed in Spanish public finances over the sample period. Second, our empirical findings do also support the existence of tax-smoothing in Spanish fiscal policy throughout the sample period. Consequently, there is some evidence that the Spanish economy has engaged in tax-smoothing behavior over the period analyzed, as the Spanish governments responded to expected future changes in government spending by running budget imbalances, rather than altering contemporaneous government revenues.

Keywords: Optimal taxation; Public debt management; Tax-smoothing; Tax-tilting, Spain