Tax Smoothing and the Cross-Country Pattern of Privatization

Abstract

Privatization generally enhances firm-level efficiency. The impact of privatization on fiscal efficiency has, however, been overlooked. Using the "tax-smoothing" ideas articulated by R. Barro (1979) [On the determination of the public debt. Journal of Political Economy, 87, 940-971] and by H. Bohn (1990) [Tax smoothing with financial instruments. American Economic Review, 80, 1217-1230], we argue that privatization may have an important impact on the welfare losses associated with tax collection. This impact can either enhance or erode the efficiency of taxation. We hypothesize that countries that benefit in terms of fiscal efficiency will privatize aggressively while countries that enjoy fiscal benefits as a result of state ownership will show little interest in privatization. Statistical tests are conducted that provide considerable support for the hypothesis.