DEGREE OF TAX BUOYANCY IN INDIA: AN EMPIRICAL STUDY
International Journal of Applied Econometrics and Quantitative Studies, 2008, vol. 5, issue 2
An attempt is made in the present to provide an empirical content to differential coefficient of tax [revenue] buoyancy during post tax reform period in India by fitting a double-log regression model with an interaction variable to the stationary time series data based on Augmented - Dicky Fuller [ ADF ] and Phillips-Parron [PP] Tests . The period after 1992 is considered as post tax reform period to look at the prognostications of tax reforms that had been initiated by the government of India. The regression results illustrate that the estimate of constant gross tax buoyancy is positively significant and more than unity during pre tax reform period illuminating that gross tax is moderately elastic. From this upshot it can be comprehended that a one percent increase in income leads to increase the gross tax revenue by more than one percent, all else equal. Further it can be understood that the average propensity to tax [ratio of Gross Tax Revenue to Gross Domestic Product ] was increasing with the increase in Gross Domestic Product during pre tax reform period. The regression coefficient of interaction variable is significantly negative and stumpy showing a downward shift in the degree of tax buoyancy during post tax reform period. The estimate of the tax buoyancy, which was just above the unity during pre tax reform period, is less than unity during post tax reform period evincing the fact that the gross Tax is relatively inelastic. From this it can also be understood that the average propensity to tax is declining with the increase in Gross Domestic Product during post tax reform period. Thus the estimates of gross tax buoyancy during pre and post tax reform periods are not stable.
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