The Determinants of Tax Buoyancy: An Experience from the Developing Countries

International comparison of fiscal efforts of developingcountries was a fascinating area of public finance in the 1960s and1970s. The famous studies in this area were Harley (1965); Lotz andMorss (1967); Raja (1971); Raja et al. (1975) and Roy (1979). Most ofthese studies used ordinary least square (OLS) technique to estimate thedeterminants of the total tax to GDP ratio and the most common exogenousvariables used by these studies were share of agriculture sector, shareof industrial sector, share of foreign trade and per capita income. Somestudies used the level of monetisation, somes used the. level ofeducation and other used the level of urbanisation as exogenousvariables in the estimation of tax potential of different developingcountries. The present study instead of exploring the determinants oftax to GDP ratio attempts to explore the determinants of buoyancy of thetaxes i.e. the total taxes, direct taxes and indirect taxes. Thebuoyancy of a tax measures the total response of tax revenue to changein income. The scope of the study also includes the ranking ofdeveloping countries on the basis of actual to predicted values of thesebuoyancies. The study would have been more useful if the study could fmdthe determinants of the elasticity of these taxes, but due tononavailability of data on the discretionary measures for each tax thiswas not feasible. The paper is organised as follows, Section I describesthe theoretical basis of the model, Section II gives methodology anddata collection, Section III gives results of the model and Section IVsummarises the main conclusions.