Tax Buoyancy

Rasheed, F. (2006). An analysis of Tax Buoyancy Rates in Pakistan.

The paper presents an analysis of the estimates of tax buoyancy in relation to changes in various independent variables using an econometrics approach. The estimation of the buoyancy rates have been with tax revenue and GDP, money supply, inflation CPI, Gross Investment, Volume of Trade, Tax Evasion and Public Debt. The data for this paper was taken from IFS, SBP annual report and Economic Survey of Pakistan from 1980 to 2004. Statistically significant buoyancy rates were found for GDP, money supply and volume of trade. Tax revenues in practice differ significantly in terms of buoyancy rates for various factors. Developing countries make much less use of broad-based taxes, relying instead on excise taxes, tariffs, GST etc. Thus, these countries collect much less revenue as a fraction of GDP than is collected in developed economies. Corruption is quite common in such countries. This single factor of corruption is the major reason for low buoyancy rates in Pakistan. A weak financial sector also makes tax evasion easy. Tax reforms are also needed for improving tax revenue from the financial sector like stock markets of the countries. The elasticity method has the advantage of showing precisely how the different economic effects come into play for understanding tax revenues patterns. Thus, tax revenue optimizers must keep the results from this study in mind to put in any tax policy.