An analysis of buoyancy and elasticity in the local tax systems

There are two common ways of computing a progressive tax, corresponding to point—slope form and slope—intercept form of the equation for the applicable bracket. The tax bracket of the base year is then multiplied by thecorresponding base values and the products summed up.

Despite the vociferous objection, William GladstoneChancellor of the Exchequer fromkept the progressive income tax, and extended it to cover the costs of the Crimean War. The distinction between the tax elasticity andbuoyancy is very useful in analyzing and evaluating whether future revenues will be sufficient to meet the resource needs without changing the rates or bases of the existingtax.

Collected data is for GDP, total tax revenues and various tax heads. Educational attainment is often conditional on cost and family incomewhich for the poor, reduces their opportunity for educational attainment.

Tax buoyancy of less than one indicates that the rate of growth of tax collection has fallen below the rate of growth of GDP. This implies that on average the tax system was adjusting according to fluctuations in the national income.

In a progressive tax system, failure to index the brackets to inflation will eventually result in effective tax increases if inflation is sustainedas inflation in wages will increase individual income and move individuals into higher tax brackets with higher percentage rates.

It is also worth to note that some revenue being collected in the current years are as a result of operations taken by Authority to recover unpaid taxes and hence include penalty figures, which may not happen in the future as increased compliance is expected. Tax ratio has been traditionally used to measure tax performance of various countries.

IMF Working Papers

Individual tax head has reported a buoyancy statistic of 1. Economic inequality Progressive taxation has a direct effect on reducing income inequality. Parastatals in Zimbabwe The Government of Zimbabwe as a way of raising revenue and at the same time providing essential service to the general public runs several state enterprises and parastatals.

For the study periodboth methods have yielded a tax buoyancy statistic of 1. Usually, the average tax rate of a tax payer will be lower than the marginal tax rate. The study concludes that in as much as revenue is needed in Zimbabwe, almost all the needed revenue is collected by the Authority rather than other parastatals; as it is able to raise revenue in an efficient way that capitalize on the growth of national income.

In every piece tax bracketit must be computed cumulatively, considering the taxes which had already been computed to the previous tax brackets. However, the institutions have been reporting perennial losses which in some instances had to be met by government bailouts.

AOptimal Tax Theory: Moreover, the study of tax elasticity and buoyancy is also useful for revenue forecasting. This shows that using both methods of calculating buoyancy, have yielded same results. The investigations undertaken by ZIMRA on a number of State enterprises, parastatals and some local authorities have unearthed a number of irregularities in the areas of income tax, PAYE, withholding tax, among other tax heads.

The following table shows the revenue statistics by tax heads for the half year of January June against Ministry of Finance targets.

For policy purposes, it is usually useful to distinguish between revenue growth due to discretionary changes and revenue growth due to changing economic conditions. Taxation is an important instrument for attaining a proper pattern of resource allocation, income distribution, and economic stability, in order that the benefits of economic development are evenly distributed, Bonga The half year tax performance can be graphically shown as below; Figure 1: By comparing this amount to the amount that is collected in tax revenue, economists can get a rough idea of how much the economy of a specific government is fueled by its tax collection.

Progressive tax

Introduction No doubt that Zimbabwe is over-relying on tax revenue to sponsor government spending. Mitchell and Andrews noted that the knowledge of the elasticity of different taxes allows one to project the additional revenues that can be mobilized by the existing tax system as national income rises.

Although this measure was initially intended to be temporary, it soon became a fixture of the British taxation system.

The Sixteenth Amendment to the United States Constitutionadopted inpermitted Congress to levy all income taxes without any apportionment requirement. For example, some tax laws may ignore inflation completely. The maximum tax ratio experienced in Zimbabwe is In a system with refundable tax creditsor income-tested welfare benefitsit is possible for marginal rates to fall as income rises, at lower levels of income.

Journal of Economic Perspectives 23 4: As the economy is still struggling to heal from economic depression wounds, there is need to ensure efficiency in operations of various organisations. There have been few empirical studies done on estimating the buoyancy and elasticity of Zimbabwes tax system.

All the regression equations recorded Adjusted R-squared nearest to 1, implying that the specification was correct. Thus the tax elasticity is a hypothetical construct and measure what tax revenue would have been if last years laws continued to apply this year, Quazi and Sulaiman The overall tax system for the whole period has recorded a buoyancy statistic of 1.

MohammedDeterminant of Tax Buoyancy: The fiscal deficit is the core issue of most of the developing countries over the past several decades, and the reason behind the large increase in fiscal imbalance is the rapid expansion in expenditure and low revenue collection, Quazi and Sulaiman Estimation of Tax Buoyancy and Elasticity An important point to consider in any tax system is the responsiveness of the tax revenue to changes in income.

According to Mansfield (Majuca, ), this responsiveness is measured by the concepts of tax elasticity and tax buoyancy. The concepts of tax buoyancy and elasticity can generally be used to evaluate the performance of the VAT or any other type of tax or the whole tax system.

Tax buoyancy is defined as the ratio between the real growth rate of tax revenues and the real growth rate of GDP or GNP. measured using two concepts - tax elasticity and buoyancy.

While tax elasticity measures the response of revenue to income changes, net of discretionary tax measures, tax buoyancy measures the total response of tax revenue to changes in income.

The paper examined the tax elasticity and tax buoyancy of Center, State and Combine government during to The study has used log regression model with the help of E-views software. Estimation of Tax Buoyancy and Elasticity An important point to consider in any tax system is the responsiveness of the tax revenue to changes in income.

According to Mansfield (Majuca, ), this responsiveness is measured by the concepts of tax elasticity and tax buoyancy. Barreix has been the source of numerous good ideas and our valued colleague in the Tax Analysis and Revenue Forecasting Program at Harvard University since its inception.

Tax Elasticity, Buoyancy and Stability in Zimbabwe

Tax Elasticity and Buoyancy 35 Tax Buoyancy Tax Elasticity policy units also help ensure that tax systems are efficient, fair, and simple to.

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An analysis of buoyancy and elasticity in the local tax systems
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