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

Abstract

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.

Economic Sectors Value Added and Tax Revenues: Empirical Evidence from Jordan

“…This result indicates that the increase in industrial sector production and increasing its efficiency will contribute in increasing tax revenues. the study result is consistently with the results of (Ayenew (2016); Basirat, Aboodi and Ahangari (2014); Castro and Camarillo (2014) and Ahmed and Mohammed (2010)).…”

“…Depending on a review of previous studies such as Zarra-Nezhad, Ansari Moradi (2016); Basirat, Aboodi and Ahangari (2014); Castro and Camarillo (2014); Ahmed and Mohammed (2010) and Gupta (2007) Tax revenue is expressed as a function of several variables. GDP per capita, agricultural sector as a share of GDP, industrial sector as a share of GDP, economic openness and the ratio of foreign aid to GDP, total debt to GDP ratio.…”

“…Moreover, non-conventional factors represented by rule of law and control of corruption are significant determinants of tax revenue. Ahmed and Mohammed (2010) investigated the determinants of tax revenues for 25 developing countries. They found that growth in import and industrial sector, services sector, budget deficit monetary growth had a positive impact on tax revenues.…”

Determinants of Tax Revenue in Ethiopia

“…The results also indicates that narrow tax base, more dependence on agriculture sector, foreign aid and low level of literacy rate are the reasons for low tax revenue in Pakistan. Ahmed and Mohammed (2010) attempted to search the determinants of tax buoyancy of 25 developing countries. Their study revealed that growth in import and manufacturing sector has positive impact on growth of tax collection.…”

Relationship Between Inflation and Real Economic Growth in Rwanda

“…Mawia and Nzomoi (2013) evaluated the tax buoyancy of different taxes in Kenya and found that tax revenue did not respond to economic changes except excise duty. Ahmed and Muhammad (2010) analyzed 25 countries for the period 1998-2008 and applied a pooled least squares analysis method. Their results show that growth in the agricultural sector had little impact on the efficiency of tax revenue and was also less responsive to revenue mobilization in the case of developing countries mainly due to difficulties in assessing the incomes generated and the low incomes that may not be taxed or may be under-taxed.…”