An Analysis of the Tax Smoothing and Fiscal policy Sustainability in Iranian Economy (The Role of the Financial Repression and Natural Resources)

Increasing considerations on the sustainability of fiscal policy and tax smoothing hypothesis have been acquired a significant position in the theoretical background. On the one hand, the sustainability of fiscal policy requires convergence of government expenditure and its revenues in the long- run and on the other, tax smoothing indicates that the government should take action to minimize administrative costs and the welfare loss due to tax variations. So, this paper, by focusing on both challenges, aimed at investigating if the government had performed tax smoothing and/or fiscal policy sustainability in the sample period (1971-2008). After correction of the Barro's model (1979) to recover oil revenues and testing tax smoothing hypothesis, we recognized the financial repression as a main obstacle on the tax smoothing path. Also, our findings based on FMOLS method, in spite of imposing tax tilting condition to the model, reveal that the smart performing of tax tilting can be rejected. This result, i.e. no evidence of tax smoothing, provided a doubtful consequence about sustainability of fiscal policy in Iran’s economy. Therefore, using multicointegration approach, TARCH model and finally simultaneous equation system, we investigated the hypothesis of sustainability of fiscal policy. But outcomes show that there is no tract of sustainability between expenditure and tax revenues of government. Albeit, we can see a weak evidence of sustainability between government expenditure and total revenues.