Tax buoyancy is a measure of the responsiveness and efficiency of revenue mobilization. It shows how well a tax system responds to the growth of the Gross domestic product and the National income. The higher the buoyancy, the better the tax system works. However, tax buoyancy is only an indicator. To get a complete picture, you should look at all the aspects of tax buoyancy.
Tax buoyancy depends on both direct and indirect taxes. It varies across countries, and the long run buoyancy of indirect taxes is higher than that of direct taxes. Although it is not a universal measure, it does provide a rough estimate of tax elasticities. However, panel techniques risk imposing an unwarranted homogeneity on the data, which can bias estimates of long-run buoyancy. For this reason, buoyancy estimates should be used with caution.
The size of the tax base, the efficiency of the tax administration, and the simplicity of the tax rates influence tax buoyancy. In addition, the effects of taxes measures are delayed, so the tax buoyancy in any given year may not be as large as it is in a different year. In contrast, the tax buoyancy in low-income and emerging economies is larger than that in advanced economies.
Increasing tax buoyancy is desirable for fiscal stability and economic development. If it is low, the government may need to make discretionary changes to compensate for the low buoyancy. However, the actual buoyancy may lag the long-run trend. For example, progressive taxes are expected to have higher tax buoyancy than fixed taxes.
The tax buoyancy of an economy is related to the GDP growth rate. The higher the GDP, the less likely the government will need to borrow to finance their schemes. Therefore, tax buoyancy is an important indicator for determining how well a government is performing economically. It can also help determine if the tax system is functioning as a good output stabilizer.
The GFC period provides an excellent comparison for studying the buoyancy of tax systems during recessions. The GFC period shows how AE and EME economies responded to a recession. This period is also useful for identifying large fluctuations in income. During the crisis, the advanced economies increased their discretionary fiscal policy, extending post-crisis tax breaks. This led to an overestimation of revenue.
The tax buoyancy of an economy is affected by various factors, including the central government debt and corruption index. The share of agriculture in the economy also has an effect. However, these variables are not statistically significant. Similarly, the effectiveness of revenue mobilization may suffer in countries with conflict. So, the overall tax buoyancy of an economy can vary widely.
This paper estimates tax buoyancy for 44 SSA countries using panel data techniques. It makes use of the Government Revenue Dataset and the latest cross-country revenue dataset to measure tax buoyancy. It also takes into account recent tax reforms in SSA countries.