Tax Buoyancy in Low-Income Countries

In the case of tax buoyancy, the government’s ability to mobilize tax revenues is responsive to changes in Gross domestic product and National income. It measures the efficiency of tax administration and determines whether it is achieving its objectives. A country that is ranked high on tax buoyancy has a higher response to growth in the economy. But how can we know which countries are performing better? Let’s examine some of the most attractive countries to invest in.

The first factor is the tax system’s capacity to support growth. In a low-income country, tax buoyancy may be as high as one-half the country’s GDP. The government’s ability to raise revenue in times of low growth or recession depends largely on its ability to stimulate spending. Thus, low-income countries often benefit from higher tax buoyancy in the short run. Nevertheless, the buoyancy effect of tax policies in these countries is not as large as in high-income economies.

The last time tax buoyancy was low was in 2008-09. The nominal growth rate reached 8.7% during this period. In the following period, tax buoyancy was at a high of 1.7, but this was mainly due to the tax reforms implemented during the 1999-2004 period. In the first half of 2019-20, the buoyancy was only 0.15, which is less than half the previous year’s level. However, if one considers the nominal growth rate of the economy of India, tax buoyancy will be lower than the desired level.

Moreover, the paper shows that the long-run tax buoyancy effect is significantly higher than the short-run one. Both short-run and long-run coefficients are lower than those of a good automatic stabilizer. Moreover, the short-run buoyancies of individual tax items show significant variation. Therefore, the results of this study are promising. So, the next time you are tempted to defy the tax administration’s policy advice, take note: reducing tax buoyancy can lead to a healthier economy and lower tax revenue.

However, there are many other factors that influence tax buoyancy. These factors include the size of the tax base, the tax administration’s friendliness, and the simplicity of tax rates. Tax measures have a delayed effect, and the best way to determine this is by examining the pattern of tax buoyancy over a longer period of time. Although tax buoyancy inside a year may be an indication of a negative event, a longer-term trend is usually indicative of policy changes implemented a few years earlier.

Despite the large differences between these two types of buoyancy, countries with large natural resource revenues tend to exhibit lower overall and tax-specific buoyancy than countries with less natural resource wealth. This is due in part to the fact that tax buoyancy in countries with unstable economies has been lower in recent years. In addition, countries that are fragile tend to have lower short-term buoyancy. These results suggest that the government’s tax system needs to be strengthened to prevent the impact of natural resource revenues on the economy.

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