Tax buoyancy in Jordan: Meeting the challenge after COVID-19

Abstract

Public finance in Jordan has always been poor. Indeed, not a single Jordanian government has managed to have a surplus in its budget. In addition, and within the context of the already high, and rising public debt, COVID-19 will not only exacerbate this problem even further. This is why the main purpose of this paper is to estimate tax buoyancy in Jordan. This is a timely issue to examine because once the Jordanian economy goes back to its normal growth rates (after COVID-19), the status of the fiscal deficit (and public debt) will depend, to a large extent, on tax buoyancy. To estimate the impact of Gross Domestic Product (GDP) on tax revenues (tax buoyancy), the paper uses annual data (1992 2019) and time series techniques including stationarity tests, Johnsen cointegration test, and vector error correction model (VECM). Based on the empirical estimations, one can state that tax buoyancy in Jordan is less than one. This indicates that once the Jordanian economy goes back to its pre-COVID-19 growth rates, the increase in total tax revenues will not reciprocate the increases in GDP. This is unfortunate, given the already high existing public debt level. However, what is encouraging is the fact that sales tax and corporate tax are buoyant. The only way to increase tax buoyancy (and total tax to GDP ratio) is to make the sources of tax revenues more diversified and more progressive.