Abstract
If government financing policy aims at reducing the distortionary cost of taxation over time as Barro's tax smoothing hypothesis suggested, then the government tends to run a “surplus” whenever the growth rate of its expenditure is expected to increase or the growth rate of aggregate income is expected to decline. We examine whether Taiwan's tax policy was consistent with this prediction of the hypothesis for the period between 1966 and 1988. Our formal tests and informal evaluations accord well with such prediction. One implication is that if Taiwan's “six year national development plan” results in a permanent increase in government spending, then the government will raise taxes to finance the increased spending. Copyright © 1991, Wiley Blackwell. All rights reserved