Tax Buoyancy Research Articles

Tax Buoyancy in OECD Countries

Tax Buoyancy in OECD Countries

An empirical investigation of tax buoyancy in Kenya

Revenue mobilization is an important goal of tax reform. Thus, tax buoyancy constitutes an essential ingredient for tax policy formulation. This paper utilized a time series approach to estimate tax buoyancy for Kenya for the period 1999/2000 to 2010/2011. Tax buoyancies were computed for income, import, excise, Value Added Tax (VAT) and total taxes. Specifically, the paper examined the buoyancies of tax revenues to changes in economic growth (GDP) and proxy bases using quarterly data instead of annual data of GDP and tax revenues and their bases. This was because tax revenue data are collected and reported as per fiscal year, which starts on 1st July each calendar year and ends on 30th June the following year. We also analyzed the tax buoyancy of Pay as You Earn (PAYE), other income tax, as components of income tax and local and import VAT as components of total VAT. This was done to ascertain the response of these specific taxes to their bases. Empirical evidence showed that the total tax was buoyant with a buoyancy value of 2.58 while the individual taxes were not buoyant except the excise duty which was buoyant with respect to the base. Tax bases were found to respond well to economic changes with buoyancy values greater than unity, with an exception of excise duty base to income buoyancy coefficient being less than unity. Based on these findings, we recommend constant review of the tax system as the economic structure changes. Reasons for tax evasion should also be analyzed to help minimize noncompliance. Key words: Value added tax, excise tax, tax revenue, buoyancy.

IMPACT OF POPULATION AGEING ON INDIA'S PUBLIC FINANCE

This paper integrates the methodology of the National Transfer Accounts and Budget Forecasting Model to compute and forecast the impact of population ageing on India's public finance from 2005 through 2050, based on the fiscal structure in 2004–2005. The empirical results are new and have useful policy implications. The forecasted increase in the share of total public expenditure on elderly individuals is largely accounted for by expenditure on civilian pensions and other cash transfers, government services, and poverty and other social protection. Elderly individuals are found to be not very expensive in terms of public health expenditure. Tax revenues increase and result in a decline of debt-to-GDP ratio because population ageing does not lower tax buoyancy in the long run. Overall, the increasing total budget surplus and fiscal support ratio implies that the long-term impact of population ageing may be fiscally sustainable.

Fiscal Deficit and the Productivity of the Nigeria Tax System, 1970-2010

This study evaluates the link between fiscal deficit and the productivity of the Nigeria tax system between 1970 - 2010 using tax buoyancy and elasticity as indexes. It also examines some major tax reforms within the period. Overall the analysis shows that for most of the tax sources, the elasticity indexes were significantly less than 0.5 while for 3 out of the 10 equations the elasticity fell between 0.5 and 0.9. This indicates a relatively weak productive tax system. The study also indicates that unlike the overall equation the result for the oil boom period, the elasticity of petroleum profit tax was unity. The other results followed the general results. The results for the period of the Structural Adjustment Programme (SAP) were not significantly different from those of the ‘oil boom’ and the entire period. The study concludes that administrative lags may have affected the remittance of tax revenues to government which may be responsible for the low productivity observed. We recommend that government should broaden the tax base and improve on administration of tax collection.

Direct Tax Code (DTC) – Panacea to Tax Induced Distortion

International presence of corporate world along with increase of cross boarder transactions has necessitated revisiting the archaic IT Act 1961. Besides, India, a member of both G-20 and Financial Action Task Force (FATF) requires aligning her tax principles with those followed and accepted internationally. India’s low tax-to-GDP ratio was recognised as “central feature of India’s fiscal problem”. The pervasive structure of exemptions and special clauses in the tax code has distorted resource allocation and adversely affected GDP growth keeping revenue deficit at the bay over the years. So over the years endeavours were centered on widening the tax base and rationalization of rates. The paper discussed some issues related to savings, investment and tax buoyancy in the context of DTC. It was viewed that tax slabs should steadily be widened in a sustainable and pragmatic manner leading to greater revenue collection through Laffer curve effect. The proposed marginal concession of the code to both individual and corporate tax payers may have impact on the deficit, in the short run, but in the long term it would incentivize investments and increase economic productivity leading to grater tax buoyancy. However, correction of tax to GDP ratio will not be seen independently without considering the interest to GDP, debts to GDP, size of the subsidies inter-alia large number tax exemptions because the burden of interest and subsidies would erode total revenue pushing the country further into the debt trap. The long –awaited goods and service tax (GST) is still to be rolled out.

THE ESTIMATING OF TAX BUOYANCY AND ELASTICITY ACCORDING TO THE DATA OF TURKEY

Tax elasticity and tax buoyancy are similar terms and usually used instead of each other in literature. In fact, these terms are different and it is very important to use these terms correctly. Thus, the criter that diversify these terms is depending on the governmental operations. In this article, for the purpose of indicating the difference between tax buoyancy and elasticity, the effects of governmental operations are analysed with an econometric model. In this model, total tax revenues, corporate tax revenues and value added tax revenues are used for the estimation.

Corporation tax buoyancy and revenue elasticity in the UK

Observed changes in corporation tax revenues from year to year, which include the effects of changes in tax rates, deductions and compliance, appear to be highly volatile relative to profits, the tax base. This paper examines whether the ‘built-in’ fiscal drag properties of corporation tax can be expected to display similar properties. Simple, conceptual modelling demonstrates that the corporate tax revenue elasticity does indeed display this property in the presence of regular cyclical fluctuations in profit growth, suggesting that much of the observed volatility is inherent to the corporation tax system.

Tax Buoyancy Estimates for Indian States

With the introduction of a destination-based VAT in all but eight states starting April 2005, there is need for a good baseline indicator of tax buoyancies in states in the period immediately preceding. This to provide such a base, with buoyancies estimated over a 23-year span starting in 1980-81. If estimated over a sufficiently long period of time, the buoyancy coefficient essentially estimates the underlying revenue-generating properties of the system with endogenised tax policy. A log linear trend fit over the entire period showed serial correlation, which is eliminated for all but one state, Assam, with the introduction of structural breaks. A third specification, including the log of the per cent share of industry in the domestic product, eliminates serial correlation for Assam, and improves the goodness-of-fit for some other states. In all but six states, the sign of the change in the buoyancy coefficient at the break is positive. Where the buoyancy-enhancing break occurs in the late 1990s, the spurt in tax effort might have been an endogenous response to the expenditure shock from implementation of the higher salary scales recommended by the Fifth Pay Commission.

Private Contribution for Public Projects: Government versus NGOs

This paper addresses the allocation problem faced by an individual while deciding his contribution to the government and to nongovernmental organizations (NGOs). A typical individual tries to evade taxes but also cares about the way the government spends its revenue. The paper characterizes the equilibrium allocation rule and the amount of evasion. It also derives some comparative-static results with respect to changes in the income of the individual and in some of the government-controlled parameters like the tax rate. It questions the efficacy of measures like tax buoyancy. (JEL: H 26, H 41)

The Determinants of Tax Buoyancy: An Experience from the Developing Countries

International comparison of fiscal efforts of developing countries was a fascinating area of public finance in the 1960s and 1970s. The famous studies in this area were Harley (1965); Lotz and Morss (1967); Raja (1971); Raja et al. (1975) and Roy (1979). Most of these studies used ordinary least square (OLS) technique to estimate the determinants of the total tax to GDP ratio and the most common exogenous variables used by these studies were share of agriculture sector, share of industrial sector, share of foreign trade and per capita income. Some studies used the level of monetisation, somes used the. level of education and other used the level of urbanisation as exogenous variables in the estimation of tax potential of different developing countries. The present study instead of exploring the determinants of tax to GDP ratio attempts to explore the determinants of buoyancy of the taxes i.e. the total taxes, direct taxes and indirect taxes. The buoyancy of a tax measures the total response of tax revenue to change in income. The scope of the study also includes the ranking of developing countries on the basis of actual to predicted values of these buoyancies. The study would have been more useful if the study could fmd the determinants of the elasticity of these taxes, but due to nonavailability of data on the discretionary measures for each tax this was not feasible. The paper is organised as follows, Section I describes the theoretical basis of the model, Section II gives methodology and data collection, Section III gives results of the model and Section IV summarises the main conclusions.