Abstract
This paper provides long and short run tax buoyancy estimates for a group of 12 Caribbean countries over the period 1991-2017. By using various panel regressions estimated by the Mean Group and Pooled Mean Group estimators, this paper finds that the long and short run tax buoyancy estimates are statistically greater than one. However, the results vary by tax categories: with respect to indirect taxes—which accounts for almost 65 percent of total tax revenues—the buoyancy of the long run coefficient significantly less than one (0.35), while for direct taxes it is significantly higher than one (1.33). It was also found that long run tax buoyancy was lower in the post global financial crisis period. With respect to short-run buoyancy, corporate taxes and trade taxes are the most buoyant in the short-run while property taxes were found to be statistically insignificant. For taxes on goods on services, the single most important tax for most countries, both long and short run buoyancy is not significantly different from one.
Highlights
Many Caribbean countries are facing fiscal and debt challenges
The results vary by tax categories: with respect to indirect taxes—which accounts for almost 65 percent of total tax revenues—the buoyancy of the long run coefficient significantly less than one (0.35), while for direct taxes it is significantly higher than one (1.33)
The Pooled Mean Group (PMG) estimator assumes that the long-run coefficients are homogeneous across panel units, while the other parameters are allowed to be heterogeneous across panel units
Summary
Many Caribbean countries are facing fiscal and debt challenges. In the aftermath of the global financial crisis and recent commodity related shocks of 2015, economic growth contracted, and fiscal deficits and debt levels significantly increased. Some countries are undertaking reform programs with the support of the International Monetary Fund (for example Barbados and Jamaica), while others such as Suriname and Trinidad and Tobago are pursuing home-grown reform programs to address their respective macroeconomic challenges Those reform programs aim to support fiscal sustainability and promote economic growth. The International Monetary Fund has projected that the region’s real GDP growth would increase to an average of 4.02 percent in the 5 years compared to 1.47 percent in the previous 5 years This raises the following question, to what extent could higher economic growth help reduce fiscal deficits in the Caribbean?
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