Does the Chilean government smooth taxes? This paper argues that the answer is yes, but only if one takes into account royalties from copper. During the past ten years there has been a serious debate in Chile initially regarding the sustainability of the Chilean government’s fiscal deficit and more recently regarding what to do with the budget surpluses generated by the high price of copper. The policy debates have neglected the issues of whether fiscal policy is efficient and intertemporally optimal. Tests of the intertemporal efficiency of the fiscal deficit have ignored one important feature of the fiscal process in most developing countries - that governments in these countries collect revenues not only from conventional sources but also from the exploitation of natural resources. Addressing this shortcoming in the literature, this paper develops and estimates a model that can be used to test whether Chilean fiscal policy has been optimal. The results provide strong evidence for tax smoothing when royalties from copper are incorporated into the model, but only weak evidence if they are not.