Tax Buoyancy: Too Noisy for Signals

Abstract:

The true trend in tax revenues has been obscured by pandemic-related effects, inflation, and discretionary policy changes in recent years. These hinder accurate assessment of the state of the economy, a correct picture of which can only be had by stripping out these effects. In particular, the increasing deployment of additional revenue measures in succession for several years has masked information on the economy’s health that is observed from the automatic movement of tax revenues along with the GDP. This paper focuses upon tax buoyancy, which includes discretionary policy changes, to examine how the historical relationship of tax revenues with income may have been disturbed by exceptional shocks. Using early data and other evidence, it illustrates probable impacts of non-linear and asymmetric normalisation, the extraordinary price growth and uneven distribution thereof, and fiscal policy responses in the pandemic. It further compiles additional revenue mobilization measures for a longer period from 2011-12 to highlight how newer and fresher fiscal efforts have been used to complement a stagnant or shrinking tax base and how these can be distortionary in aspects beyond the diffusion of important macroeconomic signals.

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