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Tax Smoothing in Russia

Robert J. Barro developed a theory in which the government borrows to smooth the tax rate over time and thus reduce welfare losses due to changes in the tax rate. Any positive model of fiscal policy must use tax smoothing as a benchmark. Is this so in Russia? The author of the present paper has used a sample of official data on tax and non-tax revenues and expenditures of the Russian government for 2000–2019 (79 quarterly observations) to test the tax smoothing hypothesis (TSH) by performing random walk, unit root, cointegration and Granger causality tests. The overall tax rate and permanent expenditures are found to be cointegrated only if structural breaks in the data are accounted for, and permanent expenditures Granger-cause the overall tax rate. An auxiliary finding is that the tax rate based on revenues from oil and gas exports are not found to be cointegrated with permanent expenditures, and permanent expenditures do not Granger-cause this rate. These results are interpreted as evidence in support of TSH, because (rephrasing Barro) the finding that a particular category of taxation is not cointegrated with permanent expenditures would not invalidate the central thesis. Overall, the Russian government seems has pursued tax smoothing. Permanent changes in expenditures were followed by tax rate revisions with transitory fiscal imbalances covered by combination of borrowed funds and oil and gas revenues. Lower level of cointegration seems to show that the Russian economy has incurred losses due to incomplete and inconsistent tax smoothing.