Does Tax Smoothing Differ by the Level of Government? Time Series Evidence from Canada and the United States

The tax smoothing theory is examined for Canada and the United States. A distinction is made between federal and local levels of government. Mobility of taxable resources at the state and local levels may constrain the ability of these governments to smooth tax rates. Testing is undertaken in the frequency domain to see if the cumulated periodogram of the first differenced tax rate series differs from white noise. Testing is undertaken with and without correction for time averaging. Results generally support tax smoothing by both federal governments and the Canadian provinces. Tax smoothing is rejected for state and local governments.